Speeches and Transcripts

A Decade of Growth in the U.S.-Korea Economic Relationship

Alexander Vershbow
U.S. Ambassador to the Republic of Korea

Korea University, Global MBA Program
Seoul – November 28, 2007

Thank you, Dr. Kim Jin-bae and Dr. Jang Ha-sung, for your kind introductory remarks.  And thank you to Korea University’s Global MBA Program for inviting me to speak to you this evening.

Tonight I’d like to share my thoughts with you about U.S.-Korea Economic relationship, and particularly how much it has matured and grown in the last ten years since the financial crisis of 1997.

A Longstanding Partnership

When many people think about U.S.-Korea relations, they think of our defense alliance, and our efforts together to promote peace and stability in this region.  But people sometimes overlook our economic relationship, which has in its own way been an important pillar of the partnership between our two countries.  The “miracle on the Han” that took Korea from poverty to the world’s 12th largest economy in a half-century was made in Korea; it was built on the sound policy decisions of the Korean Government and the hard work and sacrifices of the Korean people.  But the United States was pleased to play an important supporting role; helping create the climate for the prosperity we see around us in Seoul today was one of the United States’ longstanding alliance goals.

That support took many forms.  The United States was of course the biggest donor of economic assistance to Korea in the years after the war, and even today, many development experts in Washington look at Korea’s experience as the best demonstration of how effectively foreign assistance can be used to accelerate economic development.  The United States was a leading figure in the global institutions like the World Bank and GATT – the precursor to the WTO – that helped integrate Korea into the world economy.  Many leading U.S. companies have been here in Korea for decades, doing business, making money, but also increasing the skills and technologies of the Korean economy in the process.  

Finally, there has been trade.  We Americans are proud that our market has historically been the most open to Korean exports, and that many Korean companies have grown into successful, world-class competitors by supplying quality products to U.S. consumers.  For decades the United States was Korea’s most important export market.  In recent years, while Korea’s exports to the United States have continued to grow, Korean exports to China have grown even faster, so that now China is Korea’s largest export market.  I think that’s a natural phenomenon, due to both geographic proximity and the boom in Korean investment in China, which is prompting a lot of related Korean equipment exports.  But Korean businesses continue to tell me that no market is more important to Korea’s global competitiveness than the United States.  And I’m pleased to see that more U.S. companies – particularly in technology and telecommunications – realize that the Korean market is one of the most important global markets for them too.

While all the long-term trends in the economic relationship between our two countries have been in the right direction – growing trade, growing investment, growing prosperity – I won’t deny that occasionally there have been some frictions, mostly involving trade liberalization.  One of the ways the United States has been able to justify keeping our market open to Korean products was by assuring U.S. citizens that our products also enjoyed fair access to the Korean market.  But in some important sectors, the Korean government found it politically impossible to provide fair treatment to imports, and that sometimes led to high-profile negotiations over specific trade issues like agricultural products, intellectual property, or autos.  Those are important issues, and the solutions we reached helped both to ensure fair access for U.S. products and enrich the lives of Korean citizens.

It’s important to note, however, that even though those disputes may have received a lot of press coverage, they actually covered only a small fraction of the trade and investment between our countries.  I think it’s inevitable that when you have a highly developed and sophisticated trading relationship between two partners, you’ll see some frictions like that.

Dealing with the Asian Financial Crisis

That was the basic template for the U.S.-Korea economic relationship for several decades, which was based on several key assumptions: consistent growth for the Korean economy; growing trade and investment ties between our two nations; and a growing role for Korea in the global economy.  Ten years ago an event occurred that challenged those assumptions.  I’m referring to the Asian Financial Crisis, which reached crisis proportions here in Korea at the end of 1997.

Those were difficult times for Korea.  I know many Koreans refer to that as the “IMF Crisis,” and people have told me that, at the time, “IMF” stood for “I am fired.”  But it’s also increasingly clear that the important structural changes that were set in motion during that crisis have led to unprecedented prosperity for Korea, and helped Korea make the transition to a higher-wage, higher-skill, sophisticated economy.  I hope that with the distance of ten years, we can look back on that period with some historical perspective. 

While different Asian nations faced different economic challenges and crises in 1997 and 1998, the heart of the problem here in Korea was too rapid expansion of the corporate sector.  Korean financial institutions borrowed heavily from international markets on a short-term basis and loaned this money to overextended Korean chaebols on a long-term basis.  When the financial crisis hit, international banks increasingly started calling in the short-term loans and were reluctant to roll over the loans, creating a real possibility of the financial implosion of the entire Korean economy.  This forced the Korean government to pay these short-term international obligations out of its currency reserves.  Korean foreign currency reserves fell perilously low – a serious problem for a country as dependent on trade as Korea.

At this point, it became clear to the United States and other G-7 nations that the Korean government faced the real possibility of bankruptcy.  The United States knew that would be disastrous for our ally Korea.  It would also be disastrous for the global financial system, since even in 1997 Korea was an important player in the global economy.  For the United States, working to restore confidence in the Korean economy became our highest bilateral economic priority.

How did we do this?  We started by working to encourage foreign banks that had lent to Korea to roll over and extend the maturity of the short-term loans that were draining Korea’s foreign exchange reserves.  We pointed to the upbeat long-term prognosis for Korea’s economy, and explained that the crisis was a short-term challenge, not a fundamental weakness.  Ultimately our success in persuading some banks to roll over their loans prevented many Korean companies from defaulting – which would have made the economic situation even worse, and would have cost many more people their jobs and livelihood.  The United States wasn’t alone in this effort – we had the strong cooperation of other G-7 countries, who understood the seriousness of the problem.  But I think it’s fair to say that when the situation snowballed from serious to critical in December 1997, there was no country more actively involved than the United States in trying to persuade the leading global financial institutions not to make a bad situation worse.

We also worked closely with the IMF to put together a comprehensive loan package.   The $58 billion loan was the biggest package the IMF ever extended to a member.   The goal of this package was twofold.  At one level, it was to restore liquidity to the Korean economy, and, by accelerating the disbursement of IMF funds, to provide Korea with the foreign exchange to meet its financing needs.  But the IMF package also had a broader symbolic goal, which was to demonstrate to the broader global economy that Korea was taking the necessary steps to put this crisis behind it, and to ensure that crises like this didn’t happen again.  That meant changing the practices that led to the crisis in the corporate sector – specifically, implementing reforms to provide greater corporate transparency and restructuring of financial institutions.

I know there’s been an extensive debate about those reforms, and the transitional costs they entailed.  But forgotten in that debate is the fact that, back then, in 1998, the Korean government needed to demonstrate to world markets, immediately and firmly, that it was serious about reforming its economy to ensure that similar problems did not occur in the future.

Finally, the U.S. effort to stabilize the situation was not limited to jawboning commercial banks and international financial institutions.  Just in case the IMF package was not enough to turn the situation around, the United States, along with several other countries, pledged our own money as a “second line of defense” in emergency funding to provide additional financial security.  Fortunately, Korea never had to draw from these funds – and thus it was not widely known – but this “second line of defense” was vitally important to help restore confidence.  The U.S. commitment to this “second line of defense” was in the billions of dollars.

The Korean Economy Rebounds

The aftermath of that crisis demonstrated that America’s faith in the long-term prospects of the Korean economy was well-placed.  American observers were struck by the remarkable display of resilience, self-sacrifice, and unity of the Korean people.  We remember the images of thousands of Korean people waiting in line for hours in the cold weather to donate precious items and family heirlooms.  Equally striking was the sweeping reform of Korea’s corporate and financial sector, and the improvements that were implemented in financial regulation and corporate governance.  After one dramatic year of contraction in 1998, the Korean economy roared back with over ten percent growth in 1999, and has posted positive growth in every year since then.  Korea managed to repay its IMF debt by August 2000, nearly three years ahead of schedule.  Incomes have grown consistently since the crisis, by some measures even tripling, while Korea’s foreign currency reserves are, at $260 billion, currently the fourth largest in the world.

Looking around Korea today, ten years later, it’s clear that while the financial crisis and its aftermath were a tough adjustment for Korea, Korea has emerged stronger than ever, as it put in place policies more appropriate for an advanced economy, as Korea has undoubtedly become.  Rather than try to do everything, Korean companies got out of businesses that they couldn’t do well, and freed up financial and human resources for other competitive businesses to draw on.  Well-managed companies continued to flourish, and expanded their presence in international markets; but Korea also opened more of its markets to foreign competition, enhancing consumer welfare, introducing new technologies and services, and creating competition for domestic companies.   Less visibly, financial regulation grew stronger and more transparent, helping the Korean economy make the transition from a dynamic mid-level economy to one of the leading technology centers of the world.  While challenges remain, Korea is perhaps the star pupil among all the countries that experienced financial turmoil a decade ago.

Looking at the way Korea rebounded from the financial crisis of ten years ago, I think it’s no exaggeration to talk of a “second miracle of the Han River.”

The Tone of U.S.-Korea Economic Relationship Matures

The reforms that Korea implemented following the financial crisis were intended principally to make Korea stronger.  What is interesting is one of the side-effects of those policies has been a generally smoother trade relationship with the United States as well.

One sees this in a number of different areas.  For example, on intellectual property, Korea has now become an important generator of patents and trademarks, as well as a major exporter of copyrighted film and music.  As a result, we are seeing much greater Korean interest in ensuring that Korean laws covering intellectual property rights keep pace with the changing technology environment and are fully enforced.  Intellectual property has gone from being one of the problem areas of the U.S.-Korea trade relationship to an area where there is increasing convergence, and where our two countries work closely together in regional and multilateral fora.

Similarly, as Korean policymakers have tried to deepen Korean financial markets, their goal of introducing more players with more innovative investment products has coincided with U.S. financial service providers’ desire to get into the increasingly important Korean market.  And so in financial services, market access and regulatory impediments have largely ceased to be a bilateral problem.  Similarly, Koreans have reformed telecommunications regulations, corporate governance, and administrative procedures – in each instance making the Korean market more open, more transparent, and more sophisticated.  More generally, we see a greater readiness by Korea to use global standards, adopt global best practices, and understand that greater competition – even from foreign suppliers – makes an economy more competitive.

Another change we’ve seen in the past decade is a greater eagerness by U.S. companies to invest here in Korea – not just as a market, but as an integral part of their global operations.  For a long time there was uncertainty among some foreign investors whether they were truly welcome in Korea, and I think that accounts for why Korea still attracts less foreign investment than it should.  But the reforms set in motion after the financial crisis demonstrated that the Government understood the benefits that foreign investment could bring to Korea, and I think the Korean people are beginning to realize that too.

The experience of General Motors is an excellent example.   After Daewoo Motors went bankrupt in the financial crisis, GM bought a controlling stake in Daewoo and formed GM Daewoo, which is now, after Hyundai/Kia, the second largest automaker in Korea.  Not only did GM Daewoo preserve all the jobs at Daewoo Motors, but it recently hired back all 1600 employees who were laid off by Daewoo during the financial crisis.  And now, with billions of dollars of new investment and facilities behind it, GM Daewoo here in Korea has been designated by GM headquarters in Detroit as the home of GM’s Global Mini and Small Car Development Programs, opening up worldwide opportunities that would never have been available to Daewoo Motors as a struggling standalone company.

And there have been billions of dollars in other U.S. investments – from Citibanks and Starbucks on Korean street corners, to plants out in the countryside for manufacturers like 3M, to research and development facilities for technology companies like Texas Instruments and Google.  I should also note that the flow of investment has not been one-way:  many leading Korean companies like Samsung, Hyundai and Kia have begun to make major investments in the United States as well.

Negotiating and Signing the FTA

It was this growing convergence of views between the United States and Korea on trade and economic policy issues that made the Korea-U.S. Free Trade Agreement, or KORUS FTA, possible.  A few years ago, the bilateral trade and investment frictions between our two countries were diminishing.  In multilateral and regional fora like the World Trade Organization and the APEC Forum, Korea and the United States were increasingly finding ourselves on the same side of the issues.  And both our countries had been pursuing ambitious bilateral FTAs that went beyond multilateral commitments with like-minded trading partners.

As the United States and Korea considered possible new FTA partners, we came to realize we both shared a basic approach: that expanding trade creates benefits for both sides, and that comprehensive, high-standards FTAs generate the greatest benefits.  That led to some preliminary discussions in 2005, which in turn led to the launch of FTA negotiations between our two countries in 2006, and the signing of the agreement on June 30 of this year.  So it’s important to understand that the KORUS FTA didn’t come out of the blue, but rather was a logical outgrowth of positive trends in our economic relationship that had been developing for nearly a decade. 

The KORUS FTA has been widely discussed and debated already, so I’ll just touch on some of the highlights here.  First of all, this is a huge agreement in terms of the size of our bilateral trade relationship, which is already over $70 billion (in two-way trade) each year.  KORUS is the largest FTA Korea has ever negotiated, and the largest FTA for the United States since we negotiated NAFTA with our neighbors Mexico and Canada 15 years ago.

Second, it’s a very ambitious agreement in terms of what we agreed to cover.  Within three years of its ratification, the KORUS FTA will eliminate 94 percent of tariffs on industrial products traded between the United States and Korea.  It will also eliminate tariffs on billions of dollars in agricultural trade, albeit within a longer timeframe.  The KORUS FTA will also open new sectors of the economy to services – both trade and investment.  And additional chapters of the FTA will establish fair rules in such areas as intellectual property, competition policy, and government procurement.

Third, the economic impact of the KORUS FTA is expected to be huge.  Here in Korea, the government’s think tanks estimate that over the coming decade, the KORUS FTA will add six percentage points to GDP growth, lead to the creation of 340,000 new jobs, and boost foreign investment by $2-3 billion each year.  In the United States, our International Trade Commission has estimated that the FTA will boost U.S. GDP by $10-12 billion each year – the largest estimated impact of any FTA the United States has negotiated in the last five years.  And history has shown that if anything, the initial estimates of economic impact tend to understate an FTA’s economic benefits, because they focus primarily on the direct, quantifiable impact of tariff elimination but not the business impact of regulatory changes like stronger IPR protection or greater market access for foreign service providers.

Fourth, this bilateral agreement between our two countries will have a much broader regional and global impact.  By providing preferential access for Korea to the U.S. market, and preferential access for the U.S. to the Korean market, the FTA will help our two countries build our competitiveness vis-à-vis other countries in the region, and avoid being sandwiched.  And we can already see that the KORUS FTA is having a profound impact Korea’s other major trading partners, who are all lining up to see if they too can negotiate an FTA with Korea.  

Beyond the economic impact, which should benefit all of you, I think there are some additional lessons from the KORUS FTA process.  First of all, I think the KORUS FTA demonstrates that the governments of Korea and the United States continue to work very well together.  There were many skeptics who said this FTA agreement was too ambitious, and that the United States and Korea could never complete the negotiations within ten months.  But we did, and even if it involved some long nights – for me too – it reflects the very productive working relationship our two governments share.

Another important lesson from this experience is that when it comes to international economic policy, Korea really has changed.  When the FTA negotiations were concluded, the polls showed that 60, 65, even 70 percent of the Korean public believed that the FTA – even with all the changes it will require – would be good for Korea.    There still remain some anti-trade protesters here; we have them in the United States too (although they don’t seem quite as passionate).   But this strong support rate shows that a majority of Koreans understand the benefits of trade, that it makes their lives richer and creates greater economic opportunities, for them and for their children.  That’s quite a dramatic transformation when you consider that, less than a generation ago, many Koreans felt it was their patriotic duty to buy only Korean goods.

The next job ahead of us is to get the agreement ratified by both countries’ legislatures as quickly as possible, so that citizens in both our countries can begin to enjoy the benefits.  These benefits include lower prices and greater choice for consumers, enhanced export opportunities for businesses – not just the big corporations, but also small and medium-sized businesses – and a more predictable, business- and investment-friendly regulatory environment for both Korean and U.S. companies.  All these benefits and more are in the signed agreement, awaiting only ratification to take effect. 

I think the ratification process is a little further along in Korea than in the United States right now, in part because the United States has three other FTAs that we signed before the KORUS FTA that are still awaiting Congressional ratification.  People tell me President Roh hopes to get the KORUS FTA ratified by Korea’s National Assembly before he leaves office on February 25. 

Compared with the situation here in Korea, where people have been discussing and debating the FTA for over a year now, in the United States the public debate over the FTA is really just getting started.  While there is broad support for the FTA in the U.S. business community, there are a few vocal opponents of the agreement, and just like here in Korea, they’re the ones who get most of the press coverage.  But I urge you not to attach too much significance to the debate as it currently stands.  The Administration has been increasing its outreach to Congress and the public in recent weeks – earlier this month, President Bush called the KORUS FTA “an historic deal with a vital democratic ally” – and I am confident that as the American public learns more about this huge trade agreement with an important ally, the votes will be there to ratify the agreement.  We hope to get as many votes as possible, but at the end of the day, we need only a majority to ratify the FTA.

One thing that will help move that process along is prompt action by the Korean Government to implement President Roh’s pledge to re-open the Korean market to U.S. beef in a manner that respects international science.  The World Animal Health Organization has ruled that U.S. beef is safe, and we know that nearly 800,000 Korean travelers to the United States eat beef each year.  So I hope we can resolve this issue quickly, and get safe, affordable U.S. beef back into the stores for the Korean consumers who want to buy it.  That will demonstrate that Korea is a country that is prudent but fair – a country that abides by international standards – and it will help make the ratification process easier.

I’ve focused today on the economic relationship between our two countries and its dramatic evolution over the last decade.  But I don’t want to leave you with the impression that the KORUS FTA is the only area where U.S.-Korea relations are undergoing a transformation. 

The U.S.-Korea security alliance has been undergoing some fundamental changes in recent years, capped by the upcoming relocation of U.S. Forces Korea from Yongsan Garrison to Pyongtaek as part of the return to the Korean Government of sixty U.S. bases here in Korea.  Our security alliance will be further enhanced when we transfer wartime operational control over Korean forces to the ROK in 2012.  These changes will not only harmonize our shared responsibilities as military partners with Korea’s status as an economic, political and military leader in the twenty-first century, but also create a combined deterrent force that is better trained and equipped to keep the peace on the Korean Peninsula and in the wider region. 

Our joint efforts to promote stability in the region are also proceeding under the aegis of the Six Party Process, where the United States and Korea are working with other regional partners to rid the world of the threat of North Korean nuclear aggression and end North Korea’s isolation from the international community.  At the citizen-to-citizen level, we are taking the already robust exchanges between our countries – Korea already sends more students to the United States than any other country, including China and India – and trying to expand them by getting Korea added to the Visa Waiver Program for visa-free travel to the United States. 

While challenges remain – most immediately the ratification of the FTA – it is abundantly clear that the U.S.-Korea economic relationship has come a long way over the past decade.  In 1997, during the financial crisis here, one would have been accused of being delusional to suggest that in ten years time, Korea and U.S. would conclude a sweeping free trade agreement to expand the $73 billion in bilateral trade that our countries benefit from now.

The road that we have walked together as allies has led us to this point; we are now linked as partners for future prosperity and growth, like two hands clasped together, being stronger together.  Once the KORUS FTA is in place, with its binding commitments on both sides, it will complete the transformation of the U.S.-Korea economic relationship into a partnership of equals.  This remarkable accomplishment owes much to the hard work of the Korean people in building this remarkable economy and overcoming the challenge of the Asian Financial Crisis.  It also owes much to our shared history of decades of work together to bring peace, prosperity and democracy to Korea.  I am confident that we have only begun to see the full potential of that partnership.