Price Fixing in Korea: Will FTA's Lower Consumer Prices in Korea?

As booze and babies illustrate in today’s newspapers, the consumer price impacts by the EU & US FTAs may have been blown way out of proportions by both proponents and opponents of these trade treaties.

The big price inflators are, normally, not duties but distribution costs and sometimes excise taxes. In time, some of the new import price savings resulting from tariff reductions may be passed on to consumers as more importers and distributors provide Korean consumers with foreign goods. But that will happen only so long as the marketplace is competitive, free of price fixing. In the main part, however, probably the greatest consumption boosts may be found to be more psychologically than financially based.

That is, consumers come to expect foreign goods to now be cheaper and more affordable — and consequently begin shopping, often for the very first time. Those consumers already familiar with foreign products are likely to be disappointed in the lack of any significant price drops. But in time, experienced shopper, too, will be rewarded.

As the Korean consumer herd begins to start buying more foreign goods, a greater variety is more likely to be commonly found. As foreign goods move away from being considered essentially luxury items to more common commodities, more import/distribution channels will being created. That in turn creates retail competition, which will drive down upstream pricing as middlemen compete more on the high volume, low margin model rather than the low volume, high margin one.

We first saw this happen with the overall wine consumption market exploding, thanks largely to the Korea-Chile FTA in which cheap – but not necessarily cheaper – wines stimulated consumer interest and thereby created increased demand for wine.

In other words, the trigger is for naive consumers to believe they can now afford once-considered exotic or luxury goods and their increased mass purchasing eventually brings down prices – actually more than tariff reductions. On the other hand, without highly publicized free trade agreement support and opposition, the common consumer would not likely pay as much consideration to start purchasing imported goods.
Below are two articles that illustrate shortly after major free trade agreement implementations how imported goods can maintain or even increase prices regardless of the expected FTA benefits.

The baby buggy example may shows price fixing maintaining artificially high prices. But without the FTA implementations, I doubt this practice would have been highlighted by journalists. This is likely to also be the case with whiskey and other imports’ pricing in today’s and future media reports. And in turn this kind of exposure may eventually lead to lower prices. (Sean Note:  The Korean Fair Trade Commission has also been aggressive in finding tools to lower consumer prices - lawsuits and fines)

• Prices of top whiskies will be raised in mid-April
• Imported strollers for babies are a giant rip off in Korea
  Monopolies on the import, distribution results in hefty profits

by Tom Coyner.  Senior Commercial Advisor for IPG.  
___________
SeanHayes@ipglegal.com

Why are so Many Koreans Opposed to Free Trade Agreements?

We keep reading about the bizarre politics swirling around the ratification of the Korea-U.S. free trade agreement. Last week, I suggested that it all came down to an alienated public taking out its rage on the Grand National Party and, by extension, the FTA.

But there is more.

The often irrational opposition to the FTA is largely due to frustration of young people and their families over the lack of adequate employment opportunities for college graduates, who make up over 80 percent of the country’s younger population.

As I wrote last week, many people blame the ruling conservatives, the Grand National Party, for being more concerned about lining the pockets of their cronies and themselves than addressing the fundamental needs of the electorate when it comes to job creation.

While there is considerable corruption within the GNP, the problem is not significantly better or worse than when its opposition had been in power. And corruption, as destructive as it may be, is more of a red herring than the real cause for the current political problems and resulting unrest.

One may be tempted to blame the Ministry of Employment and Labor, but the problem is, at least superficially, the result of policies and programs coming out of the Ministry of Education, Science and Technology. To its credit, the Education Ministry is attempting, if belatedly, to address the imbalance of overly educated young Koreans by attempting to set up a meister program patterned after Germany’s trade schools.

The likely limitations of a Korean trade school program is that graduates will be stigmatized as being inferior to university graduates – even if many meister graduates later study in the evenings and complete their college educations.

Perhaps the Education Ministry will be able to better promote the virtues of the meister program and trade school graduates’ future contributions to society. But I can tell you, even if the government and schools manage to sell the meister program to some, most families will refuse to buy into the notion.
One can say that Korea, as the most Confucian of societies, wants as many of its children to get as good of an education as possible. That would be a good thing, but, in reality, many if not most Korean families could not care less about the actual quality of education. The purpose of a respected college degree is to get a good job that brings wealth, or in the very least, prestige, which may eventually lead to wealth.

What makes the situation almost pathetic is that many Korean families are not blatantly materialistic, but they constantly feel social pressure that if their children falter in educational advancement then the entire family will be left behind.

And ultimately, that is what is behind the opposition to the FTA. Widespread anxiety, in some cases bordering on quiet panic, is fomenting among families out of fear that they are being left behind as their college-educated children find themselves unable to find the expected career opportunities. At the same time, a small minority of recent college graduates, who get those few, treasured white-collar jobs, unintentionally rub society’s disparities in the faces of the majority.

Perhaps all of this is the result of a nation that has grown economically too fast. In the past, only a small percentage of families could send their brightest offspring to universities. That group made up a ruling oligarchy. Today, the masses have been suckered into believing that they have the same opportunities for their children via a college education.

The truth is that only the very brightest students are admitted to the very few universities that are seriously considered by prestigious employers. And only certain disciplines at the top universities have high, immediate post-graduate employment rates.

In short, many families feel they have been sold a bill of goods by a society that is represented by the government. Right now, the GNP is taking the hits and, by extension, so is the FTA. But when the GNP is replaced by another party, as is almost certain to happen 13 months from now, the overall situation will not improve. It can’t improve by a change in government. The problem is a social or spiritual one, which no political party can easily fix.

Where all of this is going is virtually impossible to predict, but ultimately, most of the ongoing and future political turmoil will continue to stem from desperate, overly competitive families that make up Korean society.

It is only human nature for the disadvantaged and frustrated to look for enemies and scapegoats. Some years ago, during another time of political turmoil, America’s comic strip cartoonist, Walt Kelly, had one of his characters famously declare, “We have met the enemy and he is us!”

Because of my inadequate Korean-language abilities, I have yet to discover a well-regarded Korean who has made a similar public observation. If such a person exists, he or she needs to be loudly and repeatedly quoted. If such an observation has yet to have been made in Korea, it is overdue for someone of note to stand up and make a similar declaration.

Otherwise, I cannot see how this overly competitive society will have a chance to heal itself.

by Tom Coyner.  Senior Advisor to IPG.
__________
SeanHayes@ipglegal.com

What can Korea Learn From Ireland? by Senior Advisor Tom Coyner

My recent essay, “Denuclearization – Korea’s Red Herring,” stirred much discussion. Most reaction was favorable, but there was also some heated controversy. I had a chance to engage at depth with two ambassadors to Korea. Both diplomats were quite familiar, of course, with North and South Korea.

I will try to fairly represent both ambassadors’ perspectives since one man was skeptical and the other was encouraging of my ideas. Readers may draw their own conclusions.

The first ambassador is from Eastern Europe. He began his career under a socialist government and is therefore in a privileged position of viewing North Korea both from the perspective of a once sympathetic ally and from what may now be assumed to be a more balanced vantage point. This ambassador’s argument was that my recommended shift in diplomacy attacks the political ideology of North Korea. In any country, he maintained, “that is the last to go.” In other words, my approach would have to be a nonstarter.

And, in general terms, I’m sure he is right. But negotiators have been tiptoeing around Pyongyang’s refusal to accept the legitimacy of South Korea for some 60 years – roughly the time covered by two complete generations. The obvious question is: given the glacial pace of change in the North, shall we allow for three or four generations to pass before the matter is properly addressed? Meanwhile, be it a red herring or not, the North Korean nuclear program will continue to develop “defensive” weapons capable of wrecking global mayhem should matters get desperately out of hand.

Today’s enlightened perspective, held by many, is to recognize that North Korea is changing. The theory goes that constant exposures to the outside reality are needed to eventually cause internal reform. That approach comes across as entirely sensible. But, this same strategy has been tried for multiple decades, and the results have been and continue to be remarkably uninspiring. It is like different nations and organizations have been building bonfires in front, around and on top of a glacier. These fire builders are quick to point out the minor indentations that have melted away. Yet, when these efforts are viewed in their totality, one is likely to ask, “So what?”

Back in the 1960s, ’70s and ’80s, there was merit to the current approach. But, the current strategy, to put it kindly, is getting rather long in the tooth. At the same time, there has been little creativity other than to do the same strategy over and over again.

And, I would guess by now, the North Koreans may have caught on to what the West is really up to. The Germans recently closed their Pyongyang branch of the Goethe-Institut upon realizing that the North Korean authorities were intimidating its citizens from entering those facilities.

Some diplomats may declare: “Small sparks of light are better than none in the darkness!” Perhaps so, but I can’t help wondering who is actually fooling who when one party is controlling the entire game.

Before I move on to the second ambassador, I need to relate that other readers noted that the South has never made any public move to formally recognize the North. But, since the end of the military governments, particularly from the time of Kim Dae-jung, there has been open discussion in South Korea about a federation of two governments on the peninsula, which I assume would require mutual recognition. In earlier times, such discussion would have landed advocates in jail. Today, such ideas are openly aired. All of this suggests much greater flexibility on the part of the South Korea’s government.

I had a long discussion over lunch with another EU ambassador. It turns out he spent several years contributing to the successful Northern Ireland peace accord. While I was aware that the accord took several years of negotiations, I was surprised at how long it took to be fully implemented – almost a decade in fact. In other words, peace building is obviously a very difficult and tedious process, but only when an agreement is signed does the real work begin.

The diplomat cautioned about applying lessons from one conflict to another, but said that there were clear lessons learned from the Northern Ireland peace process. In essence, the Northern Ireland peace process was based on multiple, related negotiation tracks done in full concert with each other. All issues were put on the table and addressed. There were negotiations between Catholics and Protestants; Northern Ireland and the Republic of Ireland; and the U.K. and the Republic of Ireland. The U.S. played a critical broker role as a friend to all parties. In any event, no one negotiation tracks could have ever been truly successful without the successful conclusions of the other two.

In all three tracks, the cornerstones were mutual respect and prolonged meetings leading to personal friendships and empathy, all of which led to mutual acceptance and understanding. But, without achieving these qualities, ancillary issues could not be effectively addressed.

If we may learn from the Irish example, what could be possible?

First, there needs to be an open discussion, such as in forums jointly sponsored by South Korea, the EU and the U.S. to discuss whether a similar approach may work with the North. Rather than focus on resulting issues such as human rights and nuclear proliferation at six-party talks, perhaps multitrack negotiations could be more effective. Confidence building measures would be needed, not least a verifiable freeze on the North Korean nuclear weapons program.

Specifically, there may be the following negotiations: South-North cooperation, which would include humanitarian and commercial matters, bilateral relations, which would address diplomatic and military matters, and Korean foreign relations, which would result in a comprehensive peace treaty involving all parties, including the U.S., the UN, the South and the North. But, it would need to be clear that all three negotiations would have to show substantial progress.

Upon the development and agreement among South Korea and its allies to something similar to the above, this approach would be brought to the UN for further discussion and introduction to North Korea.

To conclude with the obvious, we know what has not been working. Perhaps the powers that be could do better by emulating something that has proven to be successful.

The article appeared in the Korean Joonang Daily and can be found at:  What Can Korea Learn From Ireland?
__________
SeanHayes@ipglegal.com

Benefits to Korea in Free Trade Agreements with EU, ASEAN, US and Chile?

Liberals, in Korea, have been claiming that Free Trade Agreements with the EU, Chile, ASEAN and the U.S. are hurting Korea.

However, the Korean trade statistics show a vastly different reality.  The Chuson Ilbo posted a decent article analyzing these trade statistics.  The article, however, fails to detail the effects of FTAs on consumer prices.  Invariably, FTAs, also, lead to a decrease in consumer prices, thus, a decrease in inflation.

The article notes, in part, that:

From July last year, when the Korea-EU FTA went into effect, until November, exports to the EU rose 14.8 percent compared to the same period a year earlier in terms of products that saw tariff reductions, the Korea International Trade Association says.

Total exports to the EU declined 8.5 percent over the same period, but that was due to a 30 percent drop in shipments of electronics products and ships in the wake of the European fiscal crisis. Electronics and ships were subject to zero tariffs even before the FTA between the two sides, "so the FTA played a key role in cushioning the shock as seen in the 50 percent increase in EU investment in Korea during the second half of last year," according to Myung Jin-ho at KITA.

The FTA with Chile was sealed in 2004, and bilateral trade surged from US$1.85 billion the year before to $7.17 billion in 2010. Exports to the South American country rose a whopping 462 percent, while imports from Chile grew 218 percent. Excluding copper, which accounts for around 70 percent of imports from the country, Seoul has achieved a trade surplus every year, rising from $200 million in 2003 to $1.7 billion in 2010.

The average tariff rate of Korean exports to Chile was 6 percent before the FTA but fell to 2.9 percent in the first year the deal went into effect and dropped even further to 0.5 percent last year.

According to a Foreign Ministry report last year on the concrete economic effects of FTAs, Korea's trade with Chile, Singapore, the EFTA, ASEAN and India in 2010 stood at $153.9 billion, leading to a trade surplus of $18.8 billion for Korea. That accounted for 17.3 percent of Korea's total trade volume and 39 percent of its overall trade surplus.

Compared to pre-FTA days, Korea's trade with those groups rose 60 percent, while the trade surplus increased 168 percent.  

The full article may be found at:  What are the Benefits of Korea's FTA?
__________
SeanHayes@ipglegal.com

Australia Beef-Livestock Hit by Korea-U.S. FTA: Will Korea pen a FTA with Australia?

Our Australian clients have noted that they hope that Australia and Korea can complete an FTA soon, since they are now at a stark disadvantage to lower cost and now lower tariff American products.

Australia has been benefited greatly by the Mad Cow Farce and  it aggressive advertising in Asian markets, including Korea.   Korea is, now, Australia's third-largest importing country of beef and a major importer of dairy, agricultural and wine products.   Many of the beef cuts exported to Korea are high-margin cuts with low value in the West and in the Pacific, because of Korea's unique valuation of cuts.

The implementation of the KOR-US FTA has led to the reduction in the 40% tariff on beef by 2.5%.  The tariff will be further reduced over the next five years. 

What do you think - will Australia pen a FTA with Korea?
__________
SeanHayes@ipglegal.com

Importing and Selling Wine in Korea Just got a Little Easier

The Korea Times has posted an article about changes in the Korean wine market because of changes in Korea's distribution law and the implementation of free trade agreements with the United States and the European Union . 

We have seen more interest from major wine producers in the Korean market and we expect to see a few of the major players in the market enter the market soon. 

The Korea Times notes that:

Korea’s wine boom peaked in 2008 when $166.5 million worth was imported. However, since the economic downturn, the country’s imports fell by 32.5 percent the following year to $112.45 million. Imports improved moderately last year to $132 million.

Industry people here believe that the wine market is ripe for a rebound. The Italians, however, could prove to be the casualties of the renewed wine wars. Korea’s wine market has been dominated by products from France, Chile and Italy, but the United States could threaten to overtake Italy for third place in the sales hierarchy, market sources say.

“The strength of Italian wines has been based on sweet wines like Moscatos, but the popularity of Italian table wines in the 20,000-60,000 won price range has been poor. This lack of diversity is beginning to hurt Italian wines here,” said an official from one of the importers.

“The so-called new world wines from countries such as the United States, Chile and Australia continue to challenge old world wines made in Europe. France’s top spot continues to be undisputed and Chilean wines have been building a reputation for providing high quality at moderate prices, but it remains to be seen how American wines attack this status quo.” 

The complete Korea Times article may be found at: France, Chile, U.S. Wage Wine War in Korea.
__________
SeanHayes@ipglegal.com

Denuclearization of North Korea: Korea’s red herring by Tom Coyner (IPG's Senior Advisor)

During the past couple of weeks the North Koreans have once again pulled the red herring across the trail in an attempt to distract the rest of the world from the fundamental Korean issue. Dutifully, commentators and government officials have editorialized and issued statements about terms and conditions for yet another possible round of negotiations.

Please, would someone give us a break? Could someone in any concerned government service come out and state what’s really going on?

Allow me to call out the emperors are not wearing any clothes. The problem that is at the core of the six party talks is not North Korea’s atomic weapons. The real issue is that the North cannot bring itself to recognize the legitimacy of another government on the Korean Peninsula.

Everything else has been cascading down from this sticking point since the end of World War II, up to and including the North Korea-related issues of this week. Meanwhile, remarkable time and effort have been devoted to secondary issues with totally unrealistic expectations that by solving these lesser issues, the overall tensions on the Korean Peninsula may somehow be resolved.

Beyond any controversy, the smartest thing Pyongyang has done has been to develop an atomic weapons program as a way to repeatedly get the world’s (read: America’s) attention and to distract diplomatic focus from the core issue, which is the North’s refusal to recognize the Republic of Korea as a legitimate government.

Within the North’s ideology, there is but one government, which in turn necessitated the Korean War. Given the absence of victory, the North has had no choice but to continue to find schemes to bring the U.S. back to the negotiating table on one pretext or another. The masterpiece alibi has been the nuclear weapons issue. With the ongoing turnover of “Korea hands” in Washington, it has been relatively easy for Pyongyang to force American-Korea desk officers to focus on the pending and immediate nuclear threat from North Korea.

In the process of one North Korean-manufactured mini crisis after another, Pyongyang has been able to achieve three objectives. First, the North Koreans have made sure that North Korea matters in spite of its political, diplomatic and economic bankruptcy. Second, by playing Washington and its allies like a yo-yo of promises and provocations, the North has been able to extract foreign aid from its sworn enemies. Third, by achieving the first two goals, the key issue of Pyongyang’s refusal to recognize Seoul is never adequately addressed.

When one looks at Seoul’s repeated demands for Pyongyang to apologize for last year’s military episodes that resulted in the needless deaths of islanders and sailors, it is readily apparent why North Korea refuses to do so - when viewed from the North’s perspective. To apologize would in effect recognize the legitimacy of the Seoul government having intrinsic rights and responsibilities as a sovereign state - as opposed to being a puppet government that can be cajoled into coughing up cash and aid whenever it suits Pyongyang’s purposes.

At the risk of making too fine a point, just what in blazes does the U.S. have to offer in negotiating a “denuclearization of Korea?” Decades ago, the U.S. withdrew tactical atomic weapons from Korea. What’s more to be demanded from Pyongyang? Is the North suggesting the removal of the U.S. Navy from Yokosuka with its potential nuclear capacity? A no-go zone for American submarines in the east Pacific? America’s removal of ICBMs from North Dakota? Or, does anyone genuinely expect the U.S. to build nuclear reactors in North Korea?

It’s all nonsense. The North knows it, and many American government officials know it. And yet there is a good deal of resources being expended towards a possible next round of denuclearization talks. It may be cynically said that all another round of talks may produce are opportunities for American government officials to upgrade their CVs as having represented or supported American diplomacy “to reduce nuclear tensions in NE Asia.”

So, given all of this, what may be the alternative?

As an American business professional, here is my suggestion from my years of negotiating business deals with Koreans and others. First, change the game. Inform North Korea that the U.S. is no longer interested in a continued discussion on a dead topic. We will not recognize North Korea as a nuclear power for two reasons: One, to do so would be a bad precedence for other dictatorships; and two, to do so would to recognize the overriding legitimacy of the issue. In other words, denuclearization is a non-negotiable issue as it is not a matter of possible discussion with the United States.

At the same time, what is the first and foremost concern to the United States and its allies is the formal recognition of South Korea by the North. If this cannot be achieved, after all these decades, there is essentially nothing more to be expected from the United States and the rest of the world. All other matters are off the negotiating table until Pyongyang formally recognizes the legitimacy of Seoul as the government. Only after that has been achieved to the mutual satisfaction of Seoul and Pyongyang will Washington enter into serious peace talks with Pyongyang.

After a half a century and more, with South Korea achieving its political, economic and diplomatic overwhelming dominance, the North must be forced to come to grips with reality. Otherwise, it is total nonsense for Washington to play along with Pyongyang’s fantasies, which includes providing humanitarian and other assistance, as unintended tribute to a delusional regime.

Tom Coyner is a Senior Advisor to IPG and the President of Softlanding Korea.
The article appeared in the Korea Joonang Daily in August of 2011.
__________
SeanHayes@ipglegal.com