U.S.-Korean Trade: An Update

 Despite the passage of 50 years since an armistice ended military hostilities, the Korean peninsula remains divided, a Cold War vestige that seemingly has been unaffected by the evolution that has occurred elsewhere.

 Despite the passage of 50 years since an armistice ended military hostilities, the Korean peninsula remains divided, a Cold War vestige that seemingly has been unaffected by the evolution that has occurred elsewhere. If anything, U.S. confrontation with North Korea --a charter member of the "axis of evil"-has intensified in recent years. Yet today, increasing numbers of South Koreans, accustomed to living for decades in the shadows of the North's forward-deployed artillery, do not regard the North as a serious threat. Growing prosperity and confidence in the South, in marked contrast to the North's isolation and penury, have transformed fear and loathing into pity and forbearance. Instead, it is the United States , an ocean away, that regards the North and its nuclear weapons program with alarm. As the United States has focused on the nuclear program, its ally, South Korea , has observed the North Koreans' nascent economic reforms and heard their talk of conventional forces reduction, and the gap in the two countries' respective assessments of the North Korean threat has widened dangerously, threatening to undermine their alliance.  

The divergence in threat perceptions has been reinforced by the course of the U.S.-Korean economic relationship.  In 2002, total trade turnover between the United States and South Korea was $58 billion, up slightly from the previous year but well below its peak of $67 billion in 2000. For several years, South Korea has been America 's sixth largest export market (behind Canada , Mexico , Japan , Germany , and the United Kingdom ) and its fourth largest market for agricultural products. Last year, the United States ran a $13 billion merchandise trade deficit with South Korea .

From the South Korean perspective, the share of merchandise exports to the United States has fallen dramatically from more than 40 percent in the late 1980s to less than 20 percent in 2002, with China actually surpassing the United States as South Korea 's number one export destination in some recent months. Similarly on the import side, after briefly supplanting Japan as South Korea 's primary supplier of imports in the late 1990s after the Asian financial crisis, the US share of South Korean imports has once again begun drifting downward, and in 2002 the United States supplied less than 15 percent of South Korea 's merchandise imports.  

Bilateral trade in services, cross-border investment, and local sales by majority-owned foreign affiliates have grown more robustly than merchandise trade. The share of services trade in South Korean GDP doubled to 15 percent over the past decade, and the United States is the major supplier of services to the South Korean economy, running a $3.3 billion bilateral surplus in 2002.

The provision of services generally requires investment-if only to establish a local presence. Historically, South Korea maintained an unwelcoming stance toward foreign direct investment (FDI)-indeed, South Korea and India were the only countries in Asia where the primary mode of US investment was minority-stake joint ventures rather than majority-stake joint ventures or fully owned subsidiaries. The flow of US investment into South Korea increased much more rapidly than trade after the Asian financial crisis.  It peaked between 1999 and 2001, and then declined, though it remains significant. (Indeed, according to US government figures, the stock of US investment in South Korea grew by more than 10 percent in 2002.) In recent years, the United States has been the single largest investor in South Korea .  

The increase in investment is also intimately tied to the growth of services trade, as well as local sales of South Korean affiliates of foreign firms. In 2000, the most recent year for which data is available, majority-owned affiliates of US firms racked up sales of $1.7 billion in South Korea (while South Korean affiliates in the United States had sales of $385 million).  

In sum, the United States remains an important economic partner for South Korea , though the character of that relationship is changing. South Koreans perceive that American prominence in merchandise trade is eroding, especially in comparison to China . However, in the emerging areas of services and investment, the US role is growing. In essence, the United States is losing its relative prominence in the older, more slowly growing parts of economic life and is building an increasingly prominent position in the newer, more rapidly expanding areas.  

Despite ongoing sources of friction, economic relations between the United States and South Korea appear to be less contentious than they were 10 or 20 years ago. One can point to three reasons. The first is changes in the composition of trade. The increasingly intra-industry nature of bilateral trade would be expected to create less of an adjustment burden for import-competing sectors.  

Secondly, economically rational or not, the single best predictor of US trade policy actions is the rise of the bilateral trade imbalance. The United States has recently been through a period in which it ran surpluses or relatively modest deficits with South Korea . The counterpart to the rise of China in South Korea 's trade pattern is the growing prominence of China in the United States . In effect, South Korea has fallen off the radar screen, supplanted by China , together with the perennial foci of US trade policy complaints, Japan and the European Union.