Korea Says It May Retaliate in Kind if U.S. Limits Imports

With their export-reliant economy already in trouble, South Koreans breathed a sigh of relief recently when President Reagan decided against imposing restrictions on imports of shoes into the United States.

But their gratitude is tempered by worries about even more serious American threats to their economy. Topping the list is a proposed textile and apparel trade enforcement act, which U.S. congressmen have predicted will be enacted this fall. Another is a proposal that the United States impose a 25% surcharge on all imports from South Korea, as well as those from Japan, Taiwan and Brazil.

South Korea’s trade relationship with the United States assumed an even higher profile over the weekend. Reagan announced Saturday that Korea, along with Japan and Brazil, would be the target of an investigation into alleged unfair trade practices. White House officials said that foreign firms are prohibited from selling life and fire insurance in Korea’s $5-billion market.

Kim Chul Soo, an assistant minister of trade and industry in Korea, said in an interview that either an import surcharge or restraints on textile and apparel imports “would invite retaliation by America’s trading partners.” Asked if that included South Korea, he replied, “Yes, of course.”

Kim said the textile quota bill would reduce South Korea’s textile exports to the United States by 35% and would cost South Korea about $900 million.

“That’s 1.1% of our gross national product,” he said. (South Korea’s GNP last year was $81 billion.) “The textile industry is the major employer in South Korea. Not only would the economic damage be great but the impact in a social and political sense also would be large.”

The effect of a 25% surcharge has not been calculated, Kim said, but it “clearly would be disastrous.”

“I don’t see how that bill can pass,” he said. “It negates every international trading principle.”

Kim refused to specify which American goods would be subjected to retaliation by South Korea but a U.S. diplomat, who asked not to be identified, said agricultural products would be a likely target.

“They could hit us where it hurts,” the diplomat said.

In 1984, South Korea bought American farm products valued at $1.8 billion and relied on American suppliers for all its soybeans, 86% of its corn imports, 79% of its raw cotton imports and 74% of its wheat imports.

Another American diplomat, who also asked that he not be identified, mentioned aircraft and nuclear power plants as “big-ticket items” that South Korea might buy from non-American sources to show that “we can hurt you, too.”

The Ministry of Trade and Industry has already warned, in a position paper on the textile issue, that U.S. restrictions on textile imports “may (make it) politically and economically impossible for Korea’s market-opening measures to continue.”

The U.S. diplomats agreed with that assessment. One of them said, “Textile penalties would seriously undermine efforts to get South Korea to open its markets.”

Korean officials are worried that Congress may now try to impose quotas on shoe imports, but they expressed gratitude to Reagan for his decision against restrictions. It prevented, for now, the loss of an estimated $108 million in shoe sales to the United States.

The shoe industry here, which sends about 60% of its production to the United States, provides employment for 115,000 people, most of them young, unmarried women who earn slightly more than $3,000 a year. This is only about a fifth of what the average American shoe worker is paid, but it provides a vital supplement to the incomes of Korean families and is regarded as an important factor in the stability of President Chun Doo Hwan’s government.

Three years of mounting American bilateral trade deficits have helped bring South Korea into the congressional spotlight. This year’s deficit with South Korea has increased by only 20% in the first six months of this year but last year it more than doubled--to $4.1 billion.

The tightly controlled South Korean market is a natural target for disgruntled American congressmen. Since Chun took over here in 1980, the government has increased the number of items that may be imported without license, but 970 import items remain either banned or restricted.

Further, only licensed firms are permitted to obtain import licenses. A license to import cosmetics, for example, may be obtained only by Korean cosmetics manufacturers. In January, imports of cosmetics are to be freed, but already a tariff of 60% has been assessed in preparation for the “liberalization.” Last year, South Korea exported cosmetics valued at three times the value of cosmetics imports: $1.7 million in exports and $643,000 in imports.

Even for the imports that South Korea permits, there are tariffs that average 26%, nearly nine times higher than Japan’s tariffs. Under present market-opening plans, the average tariff will decline only to 16% by 1988.

Last year, Korea exported auto tires valued at $470 million, or 72% of the country’s production, while tire imports were valued at $6.5 million. Yet South Korea maintains a 30% tariff on tire imports.

As other important barriers to the South Korean market, American businessmen point to “emergency tariffs,” an ever-changing “import surveillance list” and unpredictable moves by the government to reimpose restrictions on liberalized items.

Little Protection

Also, South Korea has provided virtually no protection for so-called intellectual property--books, music and the like--and although it has promised reforms, there have been none so far.

Lee A. Iacocca, chairman of Chrysler, found in the course of a visit here in April that 100,000 copies of his best-selling book, “Iacocca,” had been sold in South Korea. But he received not a penny in royalties.

“In the East Gate market (in Seoul), you can find packages of American (computer) software on sale for $8 which sell for $350 in the United States,” an American here said. “It’s all stolen, all pirated. It’s an outrage.”

South Korea recently banned imports of high-grade beef from the United States in an effort to appease farmers suffering from sharply lower prices for domestic beef. This, an American diplomat said, “may be a step the South Koreans will come to rue.”

Lack of American effort and competition from Japan also play a role in the growing U.S. deficit with South Korea.

President Reagan, while on a visit here in 1983, asked the South Koreans to remove restrictions on imports of 31 products. The government complied, and a year later Kum Jin Ho, the minister of trade and industry, complained that American producers had managed to provide only 16% of South Korea’s imports of those 31 items, compared with 44% for the Japanese.

Losing Out

One of the 31 items was machine tools. Americans provided 3.3% of South Korea’s imports of such tools, compared with 75.1% for Japan, Kum said.

American makers of nuclear power plants are losing out to Europeans here, an American analyst said, because of a lack of sufficient effort.

A U.S. diplomat said American negotiators have achieved some progress in persuading the South Koreans to open their market but have said little about it in order to avoid further upsetting Korean businessmen, who have been highly critical of moves in this direction. Still, the diplomat acknowledged, the progress has not been enough to “make a convincing argument to Congress.”

Any American protectionist steps against South Korea could hardly come at a worse time, from the Korean point of view. After posting a growth rate of 7.5% last year, the economy is heading toward its worst performance since 1982. The growth rate in the first half of 1984 was more than 10%, but it grew at only 3.2% for the same period this year, largely as a result of sluggishness in the American economy and a 3.9% decline in exports to the United States.

Worse still, growth in the April-June period fell to 2.7%, the lowest since 1980 and the fifth straight quarterly decline. Present growth, then, is about half of what South Korea needs in order to create jobs for its expanding work force.

American diplomats concede that there has been a logical reason for South Korea’s protectionist attitude. South Korea’s reliance on exports is far greater than Japan’s. About two-thirds of annual economic growth, a third of the GNP and a sixth of all jobs are directly related to exports. Exports to the United States alone, which account for 37% of all South Korean sales abroad, make up 13% of the GNP.

Principal and interest payments on South Korea’s foreign debt amount to $6.7 billion a year, or about 8% of the GNP. This, the Trade Ministry’s Kim pointed out, is larger than the 6% portion of the GNP allocated to defense against Communist North Korea.

South Korea’s foreign debt is expected to total $45 billion--the fourth largest in the world--by the end of the year and at least 30% of it is owed to U.S. banks.

“If things really get wild in Congress, South Korea might face problems in repaying its foreign debts,” one of the American diplomats said.

Has Yet to Show Surplus

On top of these burdens, South Korea has yet to show a surplus in its trade and current accounts. (Current accounts include trade transactions, earnings from tourism and payments for such services as shipping and insurance.)

However, things are expected to change dramatically by 1987, when Hyundai Motor Co., Daewoo Motors and Kia Motors are expected to export as many as 385,000 cars to the American market. Up to now, none of South Korea’s auto makers has exported to the United States.

This year, passenger cars sold abroad are returning an average of $4,400 per unit. At that rate, car exports to the United States would bring in nearly $1.7 billion in additional export revenue, and that would be more than enough to wipe out South Korea’s global deficits in trade and current accounts, both of which the government expects to fall below $1 billion this year.