Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities. This article focuses on the conversation between Taehee Woo, Vice Chairman, Korea Chamber of Commerce and Industry (KCCI) and Former Vice Minister of Trade, Industry and Energy (MOTIE), Republic of Korea and Keith Rabin, President, KWR International, Inc.
Hello Taehee, how are you? It has been a while since we last talked. Before we begin, can you tell our readers about your background and current activities?
For thirty years I served at Korea’s Ministry of Trade, Industry and Energy in positions including Director-General of the Industrial Policy Division, Assistant Minister for Trade & Chief Negotiator for Free Trade Agreements (FTA), Deputy Minister for Trade, then finally Vice Minister. After leaving the government several years ago, I worked as a professor at Yonsei University before becoming Vice Chairman of KCCI in February 2020.
KCCI is the oldest and largest business organization in Korea. It is composed of 73 regional chambers of commerce and more than 100 major institutions and organizations. This includes approximately 180,000 member companies, ranging from big businesses to SMEs, manufacturing to services, and domestic as well as foreign-invested firms. KCCI is at the forefront of trade promotion by engaging in private-sector economic diplomacy with foreign governments and corporations. Every year we dispatch overseas business missions and organize business forums for visitors to Korea. Through these and other activities we work to expand trade and investment between Korea and other countries around the world.
The Republic of Korea (ROK)’s rise following the devastation of the Korean War was one of the 20th century’s greatest economic success stories. In little more than a generation, the nation advanced from being one of the poorest countries, to become an advanced modern economy enjoying one of the world’s strongest growth rates. Can you talk about the Korean economic miracle and what allowed this achievement?
The most important factor was the government’s choice of an open, export-led economy. Korea does not possess many natural resources and after the devastation of the Korean War, the government was the leading actor in initiating economic development. Major policies included the “5-year economic development plan” (60s~90s), the “Comprehensive National Physical Development Plan” (70s~90s), the “Saema’eul Movement (also known as the New Community Movement)” (70s) and “Heavy and Chemical Industrialization” (70s~80s). During this period, the government nurtured large exporters as part of its strategy. A trickle-down effect allowed economic growth to flow from large exporting companies to partner SMEs, then to ordinary Koreans. This allowed Korea to grow faster than other developing countries that had a similar start.
I also believe the pioneer spirit, vision and tenacity of early Korean entrepreneurs contributed significantly. There is an expression in Korea, “to serve the country through business”. This guided first-generation businessmen such as Lee Byung-chul (Samsung), Jung Joo-young (Hyundai), Koo In-Hwoi (LG), Choi Jong-gun (SK) in their efforts to bring prosperity to the Korean nation. These men led the “Miracle on the Han” which you reference, advocating “Have you tried it?” (Hyundai/pioneer spirit), “Change everything except your wife and children” (Samsung/innovative thinking) to drive growth forward. Through these efforts key industries including semiconductors, smartphones, automobiles, construction, shipbuilding and petrochemicals were born and enjoyed uninterrupted growth in overseas markets, giving rise and consolidating the position of a ‘Global Korea’.
The dedication and talent of the Korean people has also made an outstanding contribution. Our passion for education is one of the highest in the world. Korea ranks first among OECD countries, with 70% of the 25-34-year-old population holding a bachelor’s degree. The diligence and hard work of the Korean people is also important. Korea has the second-longest working hours among OECD members. During the high growth period centered on manufacturing in the 1970s and 1980s, the input of physical labor acted as one of the driving forces of economic growth.
Previously, the government used to decide which industries to nurture, then distributed resources and applied regulations accordingly. Now that we are past this rapid growth phase, such a strategy is no longer valid. Today, the trickledown effect of exports has declined significantly, and the manufacturing sector is experiencing a slowdown. For this reason, I believe the government’s role should be limited to two things: first, to help individuals spot business opportunities. Second, to ‘renew’ the legal and regulatory system so as to reorganize Korea’s industry around future-oriented service industries and convergence industries.
By the 1990s, China and other lower-cost competitors had emerged, just as ROK living standards were rising. This eroded the nation’s ability to compete on cost as the primary driver. Nevertheless, the ROK has not only maintained its competitiveness but expanded it to where it is now considered one of the world’s most innovative economies. That is true not only in semiconductors, shipbuilding, and automobile production where the ROK has shown traditional strength, but also in R&D, patent activity, smartphones, and other branded products. Now we are even seeing cultural exports such as K-Pop and film, with the ROK production Parasite being the first foreign film to win Best Picture Academy Award. How did the ROK avoid the “middle-income trap” that has affected so many other countries? What steps were taken to allow this continuing transformation?
The first key to avoiding the middle-income trap is innovation and technology, mainly through the adoption and utilization of information and communications technology (ICT). Korea invested extensively in ICT in the late 1990s and early 2000s, building on our earlier success in electronics and semiconductors. This laid a foundation for Korea’s top tier ICT infrastructure, which now includes one of the highest internet penetration, speed, mobile network and cell phone distribution rates in the world. It provided the basis for businesses to build new industries including next-generation semiconductors, cellphones, displays, etc.) as well as advances in conventional manufacturing such as automobiles, shipbuilding, home electronics, and petrochemicals, etc.
Korea also took advantage of the Asian Financial Crisis and the Global Financial Crisis to enhance our capacity and the nation’s economy. Problems such as industrial and financial restructuring and mass unemployment were turned into opportunities to strengthen the competitiveness of our businesses and to catch up to global standards. Not only did Korean businesses achieve technical innovation and accelerate their overseas expansion, but they completely overhauled their practices in accordance with global standards by expanding ethical, transparent management practices, strengthening fair trade and mutually beneficial cooperation.
There are two tasks ahead for the Korean economy to take the next quantum leap. The first is to give a big push to industries of the future by revamping obsolete laws and institutions that were created during Korea’s earlier era of rapid growth. Vested interests became increasingly protected while Korea’s industrial sector was taking root. This legislation now acts as a barrier to business, blocking new initiatives to the point that creating a start-up or venture business in itself is an accomplishment. It seems that due to the COVID-19 outbreak, a social consensus has formed about the importance of the ‘untact economy’ – where face-to-face contact is not needed – and on the need to develop ‘ICT convergence technologies’, which will help serve as the basis for a transformation of our industrial structure.
The second is to build a high-level social safety net. Korea’s GDP per capita exceeds US$30,000. In contrast, social benefit spending as a percentage of GDP is around half (11.1% in 2018) the OECD average (20.1% in 2018). I believe that social benefits can only contribute to economic growth. If the government dedicates state finances to guarantee the basic livelihood and employment stability of the weakest social groups, there will be less resistance toward innovation and change. This change will in turn contribute to job creation and the transition towards future industries. It is imperative we adopt a holistic approach.
We began working together in the early 2000s when you served as Commercial Attaché in New York and our firm represented much Korean government and corporate clients in their efforts to expand trade, investment and targeted transactions including the development of Incheon Airport, New Songdo City and several Special Economic Zones, as well as US firms with an interest in Korea. At the time much of our Korean work focused on overcoming the “perception gap” between Korea’s achievements and a belief its strength was still largely based on OEM production and cheap, substitute products. This served to diminish the value of Korean brands in comparison with their competitors, constraining margins and pricing while introducing a “Korea discount”, which raised borrowing costs and the returns required by investors. Why was it important to raise perceptions of Korea from being a “developing” to an “advanced” nation? How did Korean companies elevate themselves to where firms such as Samsung, Hyundai, and others now possess some of the most competitive brands in the world?
In the early 2000s, Korea’s economic growth was largely based on manufacturing and export of low and medium-priced goods that were useful though without high value-added and we were highly dependent on OEM production for foreign markets – as domestic demand was weak. While Korea’s compounded annual growth rate exceeded 4% for 10 years starting from 2000, geopolitical instability due to North-South relations, the rigidity of the Korean labor market and a need to overcome the effects of the Asian or IMF financial crisis of the late 1990s threw a spanner in the works. This gave rise to the ‘Korea discount’ you mention, which undermined the brand value of Korea, Korean businesses abroad and our borrowing costs.
As a result, we faced a ‘nutcracker’ crisis, where our products were stuck between developed nations and developing countries, and exports of low and medium-priced goods no longer yielded the high growth they delivered in the past. In fact, Korean products were at a disadvantage, from both a price perspective compared to China and an efficiency perspective in comparison with Japan. In other words, Korean goods lagged behind Japanese products in terms of quality and technology and were less price-competitive than Chinese products. Korean brands were also not held in high regard overseas. At that time we would often see Korean products command higher prices as OEM products than under Korean brand names.
Upgrading the national brand was essential in breaking the perception that Korea specialized in low and medium-priced products. To achieve this goal we invested in R&D and technology development so that Korean companies were not undervalued in overseas markets. Building recognition, brand, and both national and corporate images were also of paramount importance, raising awareness and the credibility of Korean products in foreign markets. This had a significant economic impact by improving the competitiveness of our goods. As a result, Korean products now command a premium and according to Brand Finance’s 2019 Nation Brands report, Korea’s brand ranked 9th in the world, higher than that of Switzerland or Italy.
The strength of Korean companies is based on factors such as active R&D investment, technology development, globalization strategies, and human resources development. Korea ranks 5th in terms of global R&D investment volume (85.7 trillion KRW), and 1st in terms of R&D/GDP ratio (4.8%). Our businesses are strengthening Global Korea’s reputation by improving its fundamentals in accordance with global standards. For instance, Samsung’s foldable phone line-up, LG’s Signature TV, and many other Korean products are consolidating a dominant position in the premium market.
When Hyundai Motors first entered the American market in 1986 with its Pony Excel, people thought of it as a ‘cheap car maker’. Now, the company has raised its market share and profile significantly thanks to its continuing ‘quality management’ strategy. Currently, their premium Genesis, Kia, and Hyundai brands occupy the 1st, 2nd, and 3rd position in terms of quality, even before Porsche, according to J.D. Power. Furthermore, Samsung Electronics and Hyundai Motors now own production facilities across the world – with 80% of their total sales coming from international markets. Samsung Group is also actively pursuing global outsourcing of talented individuals to create a more diverse, competitive workforce in recognition of the owner’s awareness that “1% of the talent feeds ten thousand”.
With China and other less-developed countries on our tail, continuing regulatory reform based on public-private partnership is essential to staying competitive. It is important for the government and the business community to work together to reform legislation and institutions that were created in the past era of rapid growth, so that we can give future industries a strong push forward. With the new ‘untact’ economy propelled forward by COVID-19, businesses need to develop innovative Industry 4.0 technologies such as 5G, AI, Big Data, and the government should support these endeavors through regulatory reform.
By operating the Public-Private Joint Regulation Advancement Initiative (PPJRAI), directly housed under the Prime Minister’s Office, KCCI is not only striving to reform regulations but to support technology innovation of start-ups by cooperating with the government through a regulatory sandbox system. This grants waivers and exemptions from regulations that unreasonably hinder the market launch of innovative goods and services.
The ROK was an early proponent of globalization and over time it became a leader in negotiating free trade agreements (FTA), which the nation now has in effect with almost every region including ASEAN, the EU, and Latin America as well as the US, China, India, Australia, and Turkey. How important are these agreements and why has the ROK succeeded where others have failed? What have been the challenges of opening up the ROK economy which has traditionally been viewed as a relatively closed market? Further, given the rise of populism and retreat from globalization seen in recent years, and reliance on trade wars and tariffs as a remedial solution, compounded by a growing belief the US needs to start bringing production back home – a trend which is now accentuated with the coronavirus – how do you view the current trade environment and what do you see moving forward?
Free trade has made great contributions to economic growth and peacekeeping worldwide. Especially over the past 30 years, FTAs have significantly raised individual welfare and living standards. They have not been without side effects, such as the loss of jobs and inequality. Nonetheless, while these negative impacts need to be addressed, the benefits of free trade have been introduced and expanded thanks to the rapid adaptation capacity of the Korean people and businesses, as well as the bold initiatives taken by the government, including multiple, comprehensive FTAs and other mechanisms of bilateral and multilateral cooperation.
The biggest obstacle to opening up Korea, which had been a relatively closed and self-reliant country, has been to convince stakeholders with conflicting interests, especially in the agricultural sector, which is deemed vulnerable to international competition. Still, differences were overcome thanks to a sustained dialogue and efforts to address their concerns and to persuade these entities with national interests in mind and various support systems.
Structural changes that served to slow, and in some cases seek to reverse, global integration were put into motion long before the COVID-19 outbreak. This includes increasing protectionist tendencies, hegemonic rivalry reflected in US-China trade tensions, the crisis of the WTO-led multilateral trade system, transformation of the industrial environment caused by the Fourth Industrial Revolution, and digitalization of the world economy. Among these elements, the evolution of the global value chain and transition from trade in goods to trade in services are of primary importance.
COVID-19 will act as a trigger that accelerates such change and intact business and a stable global value chain will become increasingly valuable. Production reliance on specific countries such as China will diminish, which does not mean supply chain efficiency has become irrelevant. It is possible however to contemplate new supply chain options emerging, that take into account both efficiency and stability, based on country risk. Deglobalization will have the upper hand for a while, which will eventually lead to further digitalization of the global economy in an atmosphere of discord and uncertainty.
The ROK has been credited as having had one of the more effective responses to dealing with the Covid-19 Coronavirus. How is it affecting the ROK’s economy and the domestic and international activities of Korean firms? What is the current situation and what lessons can the US and other nations learn from the ROK’s experience?
The success factors that underly Korea’s COVID-19 response include government efforts, high civic awareness, and dedicated medical staff – who have all contributed to deliver positive results. I believe using the analysis from the MERS outbreak in 2015 to update our prevention system proved particularly useful. Every actor from the field to the control tower moved as one, sharing information in a speedy and transparent manner. This included collaborating among different departments, including the operation of screening centers. Korea’s outstanding health insurance system, which allows for minimal check-up and treatment costs, also played a critical role in containing the outbreak.
Korean test kits and our testing abilities made great contributions not only to the successful prevention of COVID-19 but also to the promotion of Korean medical technology. In April, the Korean healthcare industry exports increased 20% YoY, led by biopharmaceuticals, prevention goods, and test kits. The sales of pharmaceuticals and medical equipment increased by 640 mil. USD (23.4%) and 490 mil. USD (50.8%) respectively.
We also recently experimented with phone consultations and received very positive feedback, which convinced us to implement telemedicine in earnest. We started a little late in this area, but believe Korea will deliver outstanding products in this field based on our unique IT capabilities. K-Bio is also expected to be an important pillar of the Korean industry in the post-COVID era.
China’s emergence as the world’s second-largest economy and its desire to exert more global leadership and power is having profound economic and security implications – not only within Asia but around the world. How do you view the rise of China – both from a geopolitical and policy perspective, as well as in terms of technology, trade, and investment? How is it affecting the activities and plans of the ROK government and other countries in the region? Similarly, how is it affecting Korean firms and their supply chains? What opportunities and concerns do you see developing as a result?
It is true that as the factory of the world, China’s growth has contributed to global economic growth for the past ten years, based on a close-knit relationship with Asian nations. Increased exports to China was also crucial in Korea surmounting the 2008 economic crisis. As an important market and production plant, China will maintain its value in the eyes of Korean businesses and remain part of their business and supply chain base.
At the same time, the global supply chain of various countries took a considerable hit due to the recent surge of protectionism and there is a critical need to diversify to allow more options and less dependence on anyone center of production. As a result, changes in the global value chain and development of the digital economy will likely reduce dependence on China, leading to many new opportunities for additional supply and production destinations.
While the ROK has been a strong ally of the US, with close economic ties since the end of the Korean War, President Trump’s efforts to “Make America Great Again” has caused many changes in US foreign policy and a shift in its focus from multilateral to bilateral dialogue. How have these developments impacted the ROK and how are they changing their relationship with the US? Similarly, how do you view the US administration’s Indo-Pacific strategy as well as its current policy toward North Korea?
Currently, Korea and the US are trying to find a new equilibrium in their relationship with each other. There is still progress to be made regarding the special measures agreement negotiations covering cost-sharing of the US military presence in Korea, but I am confident the two countries will eventually come to an agreement.
In any case, the Korea-US alliance was the foundation of peace and security on the Korean peninsula for more than 60 years, and my firm belief is it will continue to remain so in the future. On May 7th, Secretary of State Pompeo asserted “the US-Korea alliance was the linchpin of peace in the Indo-Pacific region and the world”. The day before our Foreign Minister Kang Kyung-Wha also asserted the government’s intention to “continue collaborating closely with the US on various issues, including COVID-19, based on a strong Korea-US alliance”.
North Korea-US negotiations have been playing a leading role in improving inter-Korean relations, which is why we need to resume dialogue between North Korea and the US. Progress has been slow on the denuclearization front after the Hanoi summit ended without a deal. Nevertheless, the two leaders are still in communication, mainly by exchanging letters.
According to a statement by North Korean leader Kim Yo-jong on March 22, “President Trump sent a personal letter to lay out his plans for stimulating the North Korea-US relations”.
I also hope “COVID prevention cooperation” between the two Koreas among others will provide a new momentum for improving the relations between North Korea, South Korea, and the US. During his May 10th address on the 3rd anniversary of his inauguration, President Moon also mentioned his “[hope] that South and North Korea will move toward a single community of life and a peace community by cooperating on human security”.
Korean firms – large and small – have been very effective in establishing operations around the world – in both emerging and frontier, as well as developed, economies. What can US companies learn from Korean firms in terms of competing internationally, in particular with developing countries, which despite their problems, will remain a primary source of global growth? Further, what are areas of potential cooperation between US and Korean firms? Should US companies view Korean companies as potential business partners or competitors? Additionally, what kinds of opportunities exist for US firms in Korea and what should they keep in mind as they evaluate and enter this market?
US firms should understand Korea’s success in emerging markets, was not just because their products were affordable, but also because they were customized and localized. You need to establish a presence and research the intricacies of these markets and not treat them as an afterthought. You also cannot talk about Korea’s success story without mentioning the construction boom in the Middle East. Korean businesses blew their clients away – not only with their competitive pricing but by significantly reducing the construction period. In other words, price-competitiveness and speed were the strength of Korean businesses.
Moving forward, I believe Korea and the US can collaborate on areas including building digital infrastructure around the world – with a particular emphasis on the developing economies that are likely to drive global growth moving forward. American platform businesses, Korean start-ups, and our capacity to work in these markets seem a winning combination. Not only to help these countries develop but to provide new high growth opportunities and increases in consumption that do not exist in our own more mature economies. The same could apply to infrastructure such as transportation and construction. This includes cooperation to expand business, trade, and investment into Central and South America, ASEAN countries, Africa, the Middle East, and other regions around the world.
When I was last in Seoul, I was asked to speak on the implications of the Fourth Industrial Revolution, a concept that is rarely discussed or addressed in the US, but gets a lot of attention in the ROK. What are your thoughts on the Fourth Industrial Revolution and how is the ROK and Korean firms preparing to meet the challenges of a rapidly changing business and economic environment?
Korea has achieved great success using a fast follower strategy for growth. Recently, however, the Korean economy has been showing less dynamism, as major industries have been declining while the transition to industries of the future has been slower than we would like.
The Fourth Industrial Revolution is a concept introduced by the World Economic Forum, which calls for a new stage of industrial development that combines the real with the technological world. This is leading to advances, breakthroughs, and convergence in fields such as robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the internet of things, decentralized computing, 5G wireless technologies, 3D printing, and autonomous vehicles.
Some worry if we do not embrace the Fourth Industrial Revolution, and China catches up to us, it will only take a split second for Korea to lose its competitiveness. Whether this is the case, Korea’s evolution into a manufacturing powerhouse and shift toward swift informatization and adoption of ICT has prepared us for dramatic change. Building on such experience, the shift toward Industry 4.0 can help introduce a new momentum for innovative growth, provided that Korea is well prepared and we move to address this challenge.
With this in mind, Korea is concentrating its efforts to build an innovative ecosystem and industrial base, so that our strength in manufacturing and advanced ICT can lead to a successful transition that will position us to become a key player in the Fourth Industrial Revolution. Policies and institutions are currently being overhauled to utilize Big Data and foster AI, the core of the Fourth Industrial Revolution. An “AI national strategy” was announced on December 2019 to bridge the gap with leading countries in AI. In addition, the National Assembly passed “Three Data Bills” in January 2020. This will initiate the Big Data industry in earnest through the safeguard of de-identified personal information.
Great strides have also been made in terms of institutional reform. However Korean businesses need to cultivate their adaptive capabilities to allow maximum open innovation. This means moving away from closed down, internal R&D practices, and other practices of the past. While these helped us to develop in the past they now constrain us, and change is needed to allow ideas and technologies to move freely beyond company walls to foster innovation.
Thank you Taehee for your time and attention. I look forward to following up soon.
Keith Rabin serves as President at KWR International, Inc., a global consulting firm specializing in international market entry; trade, business, investment and economic development; site location, as well as research and public relations/ public affairs services for a wide range of corporate and government clients.