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PARK Bun-Soon

Let Business Override Politics

PARK Bun-Soon

Mar. 30, 2005

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This year is the 40th anniversary of diplomatic relations between Korea and Japan, but they are hardly in a mood for celebration. The landmark year of their rapprochement has been poisoned by Japan's Shimane prefecture laying claim to Korea's Dokdo Island off the southeastern coast of the Korean peninsula.

The rise of rightwing political currents in Japan, as demonstrated by Japanese Prime Minister Junichiro Koizumi's high-profile visits to the Yasukuni Shrine dedicated to Japan's wartime heroes, has long fired passions all over Asia that had once fallen victim to Japan's aggression in the last century. Japan's claim over Dokdo, combining with this regional sentiment, has triggered renewed anger on the part of the Korean people. They hold the suspicion that the Koizumi government is behind the recent territorial claim over Dokdo.

In Korea, the wave of animosity against Japan has sparked demands for a review of the validity of the 1965 treaty that normalized relations between the two neighbors. Not all Koreans, of course, support such an extreme view. Most Koreans recognize the need for a future-oriented relationship with Japan. Indeed, that has been the position of Korea for a long time. This is why former president Kim Dae Jung opened Korea's door to Japan's popular culture. More recently, a genuine cultural exchange has occurred across the sea between the two countries with a Korean soap opera series becoming a smashing hit and their leading actor turning into a pop hero in Japan. That prompted a large influx of Japanese tourists into Korea. Similarly, the administration of President Roh Moo Hyun has started negotiation for conclusion of a free trade agreement (FTA) aimed at expanding the already close economic ties.

But all this constructive development has come under threat as a result of recent disputes over Dokdo Island. And this dispute is so intense it can jeopardize their economic relationship, undermining the efforts on FTA negotiation. The two sides have held six rounds of talks so far, but it is now uncertain as to when the next round will be held. Suddenly, politics is beginning to overshadow economic interests.

This is a sad development because Japan and Korea already carry on an unusually large volume of trade. An FTA is meant to expand it further. Had it not been for the current dispute, the two sides would have finished the negotiations by end of this year. Now that looks uncertain.

Trade is critical for both countries. In 2004, Japan was Korea's 3rd largest market and Korea had the same weight for Japan. But Korea is developing a huge trade deficit from Japan. In 2004, that deficit amounted to a whopping US$24.4 billion, by far the largest with any trading partner. It accounted for 83% of Korea's total trade deficits of US$29.4 billion. Few countries can sustain this level of lopsided trade for any length of time. This chronic imbalance is structural in nature, and calls for a fundamental solution.

The deficits arise from Korea's reliance on Japan for intermediate parts and components that go into finally assembling cars and electronics for export markets. Under the circumstance, the more Korea exports these products, the more it has to import core components from Japan. That leads to more deficits for Korea. This is a vicious cycle that must be broken.

And yet, with diplomatic relations coming under extreme tension, the two countries are unlikely to reach an agreement on FTA anytime soon. Further delay on agreement could have the undesirable side-effect of worsening Korea's deficit. When that happens, the hardest hit will be Korea's small and medium sized enterprises that depend on Japan for supply of intermediate parts and components.

In view of rapid changes overtaking the East Asian economic order today, neither Korea nor Japan can afford to drag its feet on FTA. Behind them looms the growing shadow of China's economic challenge. Korea's manufacturing sector is no match for China's gigantic mass-production base.

To survive, Korea must hasten to develop its own parts and components industry that can take advantage of China's manufacturing prowess. An FTA between Korea and Japan is essential for this purpose. An FTA will bring the two countries' businessmen closer. Their common pursuit of better business will stimulate collaboration, beyond the barrier of political differences. That will bring more investment from Japan. Japanese companies last year made significant investment in Korea's electronic parts industry. For example, SONY and Samsung electronics have established a joint venture company for making LCD (liquid crystal display). With big companies preferring cooperation over competition, small and medium sized companies will follow by developing cooperative framework.

In the global economic structure, countries in the same region must pull their resources to achieve a synergy effect. For Korea to move forward, it must first develop new markets in East Asia, gradually expanding trade with the neighboring countries. Thus an FTA between Korea and Japan not only enhances bilateral relations, but also promote prosperity of the entire East Asia region. This is why they should not allow political passions to override economic interests.

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