Old Habits Die Hard in the Hermit Kingdom

It looked like fat city to James Tessada, president of Ford Motor Co. of Korea. After U.S. and South Korean officials signed a memorandum of understanding to liberalize the auto market in 1995, South Koreans began snapping up foreign cars in a burst of spending that underscored the dazzling potential of Asia’s second-most-important consumer market.

Until last November. Panicked by rising imports and a swelling trade deficit, Seoul authorities swooped down with that most feared weapon--tax audits--on buyers and lessees of foreign cars. Sales instantly slumped.

“We hit still waters,” Tessada said. “This is in direct violation of the spirit of our memorandum. The government is trying to be more global . . . but they can’t have it both ways.”

Once known as the Hermit Kingdom, happy to shut out the world as the yangban ruling elite dallied over tea and mused over Chinese classics, South Korea has developed a world-class economy faster than any other country in Asia.

Its hungry ambition to play in the big leagues--and conform to global standards of free markets and fair trade--was symbolized by its recent decision to join the Organization for Economic Cooperation and Development, an elite club of advanced industrial nations.

While Japan, the OECD’s only other Asian member, began its modern industrialization 130 years ago, it took South Korea only three decades to transform itself from a backwoods farming nation with a per-capita annual income of $100 to today’s industrial giant churning out steel, ships, semiconductors and autos--and providing per-capita income of $10,000.

But experiences such as Tessada’s--part of an anti-import campaign that has pilloried both foreign firms and more than 50,000 South Korean consumers and dealers--illustrate the contradictory sides of Seoul’s brave new plunge into the rough-and-tumble big leagues of global competition.

“What the government gives with the left hand, it wants to take back with the right,” one foreign apparel maker said. His firm’s sales have plunged by one-third since it was excoriated in a news article last fall, in the anti-import campaign, for making “excessive” profits.

Under President Kim Young Sam’s globalization policy, South Korea has begun to accelerate the opening of its tightly sealed markets. But business executives say the markets are still riddled with regulations--and when imports surge too quickly, bureaucrats fall back into old protectionist habits stemming from the country’s not-so-distant past of scarce foreign reserves.

Yet the liberalizations are transforming Korean society, as a walk through Seoul’s trendy Myongdong district illustrates.

Young Koreans are flocking to foreign boutiques offering Esprit, Guess and Levi’s clothing. Women who are painting themselves with products from Estee Lauder, Lancome and Clinique have boosted the value of imported cosmetics to $181 million in 1995 from $19 million just four years earlier.

A new Tower Records store is jammed with shoppers such as Joong Ho Shim, 25, sporting red-wine hair and black leather as he bought a stack of American heavy-metal compact discs.

“I’m a rock fan, and Koreans don’t produce good rock,” he said, adding that foreign music makes up 90% of the 120 CDs he buys annually.

Many of the foreign shops here--and a whole breed of discount “hyperstores” such as Costco--have opened only in the past few years, after South Korea allowed foreigners to wholly own retail shops and loosened restrictions on bringing in foreign capital.

Round Table Pizza and other American eateries abound--one reason imports of California cheese and other dairy products have skyrocketed from $11 million in 1995 to an expected $43.7 million this year.

Imports of wine, seafood and oranges are also booming--and even greater gains are expected after July, when South Korea eliminates quotas on all agricultural products except beef and rice, said Philip Shull, U.S. agricultural trade officer in Seoul. South Korea is the United States’ fourth-largest agricultural export market after Japan, Canada and Mexico.

Foreign car sales were up by more than 35% every month until the tax-audit campaign began, Tessada said. Sparking the growth were South Korea’s 1995 commitments to give foreign auto firms access to television ads, allow them to provide retail financing, reduce tariffs and partially standardize what had been obtuse specifications unique to the country’s market.

Last year, Berlitz became the first foreign-language instruction firm to put out its shingle in an effort to tap the huge, hungry market for English instruction. Major conglomerates now insist on fluency in English as a hiring condition, and South Korea plans to introduce English classes into its elementary schools for the first time this year.

And international bankers are drooling at the prospect of Seoul opening its lucrative financial markets in the next few years, as the OECD requires.

“The environment has improved dramatically,” said Michael Brown, president of the American Chamber of Commerce in Korea. “Japan is a large market, so a little market share goes a long way, but it takes time. In Korea, if you do your homework well you can succeed quite quickly. There is a sense of urgency in Korea that you don’t sense in Japan.”

Brown said the type of foreign firms in South Korea is shifting from manufacturers, who came to take advantage of low labor costs in the 1970s and 1980s, to service, retail and technology firms flocking to tap the country’s increasingly well-heeled consumer market. Retail, auto components, electronics, silicon chips and medical equipment are areas of particular growth.

Although Singapore is richer and China larger, South Korea and its 43 million people--whose urban dwellers earn more than $20,000 a year, twice the national average--rank second only to Japan in the combined elements that create an attractive consumer market: size, wealth and developed distribution systems that ensure that goods reach store shelves, Brown and others said.

At the posh Lotte department store, Choi Sung Jin, 29, recently hunted through rows of mink coats carrying jaw-dropping price tags as high as $20,000. He and his parents were eyeing a more modest black mink--$5,800--for his fiancee, because “every Korean girl wants a mink coat,” he said.

That appetite--and Koreans’ growing ability to satisfy it--helped boost fur coat imports by 135% last year. That’s good news for American mink producers, who ship 90% of their exports to South Korea.

But some Koreans believe that the rush of foreign products may be too much of a good thing.

Last year, Seoul’s trade deficit grew to $21 billion--a development so daunting that even Kim, the “globalization president,” asked his economic ministers this month to “save the country” from such economic difficulties as the “alarming” trade deficit and rising imports.

In the past year, newspapers have relentlessly trumpeted the evils of excessive consumption, commonly understood as a code word for imported goods. The leading Chosun Ilbo newspaper, for instance, has duly reported that imports of autos, golf sets, fur coats, TVs and seafood have all registered increases of 100% or higher. Tax officials have targeted 36,000 people running fancy restaurants, import shops and other bastions of consumption, along with 16,000 people who exceeded their credit card limits in spending during overseas trips.

Unlucky spenders are publicly pilloried in news reports, such as one Kim Dae Han, who was found to have spent $49,000 on casinos overseas, and a 37-year-old “Mr. Lee” who blew $25,000 in drinking joints during a 20-day trip to Osaka, Japan, and ran up $22,000 in credit card charges during more than 10 overseas trips to Hawaii and Australia.

The Korea Consumers Assn. gravely announced that women’s magazines such as Vogue and Harper’s Bazaar had crammed more than half their pages with advertisements for fancy foreign goods. And 40 religious and civic organizations of the National Headquarters to Eradicate Conspicuous Spending have gathered 200,000 pledges of frugality.

“When Korean groups go overseas, they buy fancy baggage and golf sets, expensive spirits, traditional herbal medicines to enhance their sexual prowess--and the men go on sex tours,” complained Park Chan Sung, Christian leader of the national anti-consumption group. “It is reported that Koreans are drinking all the whiskey stocks in the world and emptying local stores of all expensive products. Koreans are becoming the laughingstock of the world.”

The group kicked off its campaign in August to cool the buying fever of wanton men, fashion-crazed young women, nouveau riche homemakers and other so-called undesirables Park calls “upstart high-class people.”

His group held a rally in September to criticize excessive spending by national legislators, who in turn formed their own committee to investigate the problem. Park says his group received no nudges from the government or industry to launch the anti-import campaign, which he says targets cigarettes, liquor, clothing, sporting goods and furniture.

Even South Korea’s major business conglomerates, which live and die on foreign trade, have announced that they will reduce their imports of foreign goods. Daewoo Group spokesman Lee Jung Seung says the conglomerate plans to reduce by $30 million its purchases of radios, software, electronics, motors and frozen fish.

The plight of toy maker So Jae Kyu illustrates the conflicting forces at war in today’s South Korea.

During the fat and happy days of closed markets, So blithely admitted, he shamelessly ripped off superior foreign designs from Fisher-Price, Lego and others to sell under his own brand name here. But in 1993, Korea joined the World Trade Organization and liberalized the market.

Suddenly, Japanese Sun Guard robots, Power Ranger dolls, Mickey Mouse stuffed animals, Sesame Street musical gyms, Sega video games and other imported toys flooded store shelves. Half of the nation’s 600 toy makers went belly-up as imports grabbed the majority market share last year, and So has cut his staff from 250 employees to 35 amid dropping profits.

“Because of liberalization, everyone collapsed together,” So said. The toy makers appealed for protection--and got officials to raise tariffs on imported toys to 13% from 8%.

To Confucian scholar Cho Sung Woo, such economic hardship isn’t the only thing that liberalization is bringing the country. He claims that it is opening his pristine nation to malevolent Western values, which he blames for a series of recent social woes: an average of 3.2 cases of beatings and eight abandoned babies every day; 42 parents killed by their own children in 1995 alone; and pornography showing up in films, videos, books and computer games.

“We think this is because Korea is opening its culture and mixing with foreign cultures,” Cho said.

The liberalization backslides and anti-import campaign have provoked complaints from the U.S. government and raised questions on the value of Korean commitments. The question was raised last month when the OECD rapped South Korea for failing to “fully” meet its commitment to guarantee union rights in a controversial labor law rammed through a semi-secret parliamentary session.

Outgoing U.S. Ambassador James T. Laney said he is “deeply disappointed” by the anti-import campaign, saying it effectively undermines the world trading system on which South Korea has prospered, and he warned that it could fuel protectionist sentiment in the United States.

But not all Koreans support the anti-import campaign. Even as he donned the bright purple kwanbok and black samo hat of the traditional Korean wedding ceremony, Hwangbo Sangyoon, 37, said his nation could prosper only by opening itself to the exacting forces of global competition.

His uncle added that Korea learned a bitter historical lesson about the price of shutting out the world. In the late 19th century, he said, Korea rejected Western overtures while Japan opened to them, learned from them and, thus strengthened, proceeded to colonize his homeland.

And Lee Kark Bum, senior presidential secretary for policy development, said that anti-import sentiment is limited to low-level bureaucrats and that the national direction toward liberalization is clear.

“We cannot turn back,” Lee said. “We have reached the bridge of no return.”

Chi Jung Nam of The Times’ Seoul Bureau contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

South Korea’s Rising Economy

President Kim Young Sam’s globalization policy has opened the nation’s markets and led to a rise in imports. But when imports surge too quickly, protectionist habits reappear.

Sources: The Economist, Bloomberg News