Opinion Leaders' Digest 99-11
Date: Mar 26, 1999
Author : Yong-Duck Jeon, Professor, Taegu Univ.

Free Trade and Demands of The AMCHAM

Due to the intensified trade protectionism including revival of Super 301 as a measure to cope with its continuous trade deficit, the US's more harsh pressure on market opening is widely expected for the future. It is true there are numerous ongoing and pending trade disputes between Korea and the US.

On March 15, the American Chamber of Commerce (AMCHAM) in Korea issued its annual report on Korean economy strongly demanding market opening of 23 sectors including accounts, tourism, etc. About the contents of the report, the press has shown different responses. It is better to understand the basis of trade policy, competition policy, and regulation policy of Korea before we start to evaluate the report.

Free trade can guarantee mutual benefit

In free market economy, theoretically there is no need to differentiate international trade from domestic trade. Both trades are actually same except that the trade partner is foreign company or foreigner and instead of domestic currency the foreign currency is used for trade accounts settlement. Basically, like domestic exchanges, international trades exist for both countries' profit and high productivity by division of labor generates mutual interest.

There are broadly three sources to make possible exchange profit. Firstly, exchange makes goods and services reach to whom those are most valuable. Secondly, exchange raises profit by making the concerned personnel specialized. Specialization expands production and the cost goes down under the given production. Thirdly, exchange let us enjoy the profit of mass production through division of labor and specialization. For these reasons, undoubtedly the 'free trade' should be the keynote for trade policy for every country.

Causes and evil influences of trade protectionism

Despite of such benefits of free trade, the origin of trade protectionism traces back almost human history. This shows clearly the strong desire of individual or company for trade protectionism. Although free trade can bring us wealth and prosperity, trade protectionism still exists. Why?

Since trade protectionism is the typical example of government regulations, it is helpful to study the cause of government regulations so as to understand development of protectionism. The special interest groups organized by individuals or companies who can profit from regulations try to lobby public officials for their needs.

This kind of explanation on the cause of regulations is called 'capture theory' and it is exactly applied to trade protectionism. That is, individuals or companies who need trade protectionism organize their own interest group and achieve tariffs or non-tariffs as they want. They block or restrict imports from abroad or foreign competitor's production activities within the country, and can make profits by excluding pressure of competition. We can easily understand both evil influence and attractiveness of trade protectionism by simply remembering we are paying 5 to 7 times higher for rice in domestic market.

There would be many justifications for driving protectionism but the very nature of it will be to eliminate competition and to desire monopolistic profit. The producer who benefits by exclusive position would be perfectly happy, but such benefits are gained upon consumer's burden. Trade protectionism is against the broad principle of free market economy that the only way to pursuit benefit should be to provide what the comrades want.

Moreover, when a certain area is guarded by trade protectionism, the capital is continuously input on it regardless of its inefficiency, then the merit of free market economy, which is effective distribution of sources, will be lost. And it goes without saying that restriction on effective distribution of sources limits the size of national wealth.

Government regulations should be abolished

Trade protectionism is wrong because it raises a barrier to approaches and eliminates competitions. Then the key to the solution of the problem is the fair competition policies including anti-monopolistic policies and regulation policies. In order to promote competitions, monopoly is to be defined and accordingly anti-monopolistic policies are to be adopted.

Monopoly means various privileges or interests permitted by the government. Then we can easily see those anti-monopolistic policies or promotion of competitions can be achieved by abolishing such privileges or interests given by the government. Competitive policies to dissolve monopoly, that is anti- monopolistic policies, must be strongly driven. All the barriers to approach should be abolished immediately because those are the typical rights and interests obstructing competitions. Trade protectionism is a typical example of approach barrier.

Such a competition policy accords with the regulation policy. Tariffs and non-tariffs are the typical cases of regulation, and whatever restricts the life of individual or company can be called regulation. The approach barrier is also kind of regulation, of course. It is natural consequence that regulations must be eliminated because they pass on the cost to the people.

Now reflecting on trade policy, competition policy, and regulation policy, we can try to evaluate the various demands of the AMCHAM. The report includes both desirable demands and unreasonable ones. Let's examine the desirable ones first.

Desirable recommendations

The following demands of the AMCHAM are desirable ones in my opinion: abolishment of the government-regulated severance payment system, abolishment of the obligation to hire government-designated persons (such as those involved in the independence movement, the Korean War, and the Kwangju uprising, and their direct descendants), abolishment of the restrictions on import passenger vehicles, market opening for the installment business on auto, abolishment of the obligatory items to encourage home-made products, protection of the confidentiality of foreign firms, abolishment of the banking measures against foreign banking community, abolishment of the taxation on e-commerce transactions, removal of the Korean government's subsidies, etc. Actually our government should take the initiative to work out solutions for these issues before the AMCHAM demands, because these are absolutely for the benefit of Korean people and companies. Of course, non-Korean people and companies including US will profit, too. That is to say, we can possibly achieve "mutual" interest by free trade.

Nevertheless, the demands made by a US organ, not by Korean government, admitted arguments on intrusion into Korea's internal affairs to provoke a race feeling. There is one thing reliable that we must clearly understand which is the way to promote benefit for Korean people and companies before we react with national sentiment.

Unreasonable demands

The AMCHAM also suggested unreasonable recommendations. Firstly, it concerns about internal transactions. In the section devoted to the information and telecommunication, the report indicated the largest chaebols' using products of their subsidiaries within one conglomerate is a barrier to market access. That is to say, internal transactions function as approach barrier and limit competitions. Basically internal transactions are conducted to reduce trade costs. Actually internal transactions made on purpose to avoid competitions have no effect. This is well shown in the survey by the Fair Trade Commission. The current law for fair trade prohibits internal transactions by treating it 'unfair', but the law itself committed a fault by ignoring economic rationality.

Secondly, in the section of agriculture and food, the report cited the practice of shelving imported items in separate areas and the agricultural co-ops which do not accept any imported items, for discriminatory practices. But everybody has the right to display the goods as he wants and the right not to accept something. This is the very natural right of supplier in free market economy. If those rights are regarded as discrimination, there would be no single right without discrimination.

Thirdly, the AMCHAM recommended that public announcements made by listed companies at the stock market be done in English as well as in Korean, and also demanded that government offices in Korea set forth regulations to protect the confidentiality of foreign firms and train public officials for that purpose. In this regard a plain truth must be considered that human behaviors always cost something. Making public announcements in English and training public officials accompany expenses obviously. The voluntary decision will be made by the payer's side only if the output is greater than the input. The outsider's request for such expenses doesn't seem to be desirable.

Fourthly, according to the AMCHAM's report, foreign car buyers are afraid of investigation by tax office. The AMCHAM should understand such investigations are based on people's negative understanding of the well- off class in Korea. Some of the wealthy class made money by illegal means or tax evasion, so those bad cases strongly and negatively influenced the general public's impression on the rich. Therefore, the AMCHAM had better try to eliminate Koreans' negative feelings against the wealthy people. Though it is naturally Korean's job to get over such a prejudice against the rich, the AMCHAM's direct efforts will be more effective in the long run than asking Korean government to do anything with that.

Fifthly, in relation with intellectual property rights, the AMCHAM report called for increase of the protection period from the present 50 years to 70 years and more severe punishment on violation. Actually the protection period should be carefully deliberated for economic effectiveness. Furthermore, if they do not agree with judgements by our judicature, it is better to go through due formalities to appeal. It is not normal that an outsider requests for the extent of punishment.

Policies should be based on mutualism

Policies or behaviors grounded on mutualism are most natural and bring about less conflict. Based on mutualism, the AMCHAM must raise a question on the US trade protectionism. The US stands for free trade on the principle, but the US also tries to protect the less competitive domestic industries such as steel, automobile, textile and clothes, shoes, some of agricultural and manufactured goods, jewelry, etc. by taking advantage of tariff and non-tariff policies. Based on mutualism, the most effective way to reach agreement and cooperation will be needless to say that the US must clear trade barriers on its side and call for trade partner's market opening. In this regard, a free trade pact between two countries is worthy of consideration.

Lastly, I would like to indicate that demands of the AMCHAM, though somewhat offensive, deserve our broad-minded acceptance if those are helpful to the Korean people and economy.

(The view expressed here is the author's personal view. It is not the official view of the CFE.)