After the government stopped pursuing the HCI(Heavy and Chemical Industry) drive in 1979, it was necessary for the Korean economy to move towards a market-driven and more open economy. The government began import liberalization in earnest in the early 1980s, after it had suffered a temporary setback under the HCI policy. The government reduced intervention in the economy and emphasized greater reliance on the market. It also decided on market opening measures to stimulate a competitive business environment. The rapid increase in export volume also encouraged the government to undertake import liberalization. In addition, stable energy prices, low international interest rates and a favorable exchange rate, especially with that of Japan, in the mid-1980s became catalysts for trade liberalization.
Korea introduced the Advance Notice of Tariff Reduction in 1984, to help trading companies prepare for it, and reduced tariff rates gradually over a period of 11 years. The Advance Notice of Tariff Reduction was successfully implemented, which made clear the government’s intention to open the domestic market.
The event that had the most significant impact on Korea’s trade and economic policy was the Uruguay Round (UR) negotiations (1986-1994). Due to the UR agreement, Korea reduced its tariff rates by 54 percent, and increased the share of tariff-free goods to 26 percent of total items, a big jump from 4 percent in the pre-UR period. As a result, the average tariff rate in 1989 was 12.7 percent, and fell to 7.9 percent in 1995, almost the same level as the recent simple average tariff rate.
Figure 4-4. Korea’s tariff rates (1978-2007)
Besides tariff reductions, the Korean government enacted the External Trade Act in 1987, which enhanced trade liberalization and considerably reduced direct support for exports. Moreover, the government encouraged foreign investment, which had been highly restricted, preparing plans to attract foreign direct investment (FDI) in 1980 and opening the capital market in 1988 (with the lifting of some restrictions).
During this period, major trading partners strongly urged Korea to open its market as Korea’s trade surplus was increasing due to favorable economic conditions, such as stable energy prices, low international interest rates and low value of won in the mid-1980s. Trade conflicts with the U.S. became a major concern for Korea as its bilateral trade surplus with the U.S. increased rapidly (from 1.9 billion dollars in 1983 to 9.5 billion dollars in 1987). After the Plaza Accord, the Japanese yen sharply rose in value, which was beneficial to Korean exports and helped increase its trade surplus with the U.S. The U.S. pressed Korea on market opening, based upon Section 301 of the Trade Act of 1974, and bilateral tensions reached a peak when the U.S. enacted the Omnibus Trade and Competitiveness Act of 1988. Between 1979 and 1988, the U.S. conducted eight Section 301 investigations involving Korea in various areas, including insurance, shoes, steel rope, intellectual property rights, cigarettes, beef and wine; but all disputes were resolved by consultations and no retaliatory measures were taken. However, Section 301’s retaliation threats were influential in Korea’s market opening.
From the 1990s, Korea started opening markets in services and FDI. Competitiveness based on low wages was no longer a valid option since the 1990s. Wages have risen rapidly since the mid-1980s due to the democratization of Korean society and the end of labor surpluses, while Japanese firms increased outsourcing to Southeast Asian countries in order to take advantage of lower wages there. These circumstances forced Korea to develop technology-intensive industries. In addition, Korea was pressed to open its markets due to worldwide economic integration resulting from the UR, the World Trade Organization (WTO) and globalization trends.
In 1993, the Korean government announced the New Economy Five-Year Plan, which included (1) the internationalization and liberalization of the economy, (2) active participation in the new international trade order such as the UR, (3) the qualitative improvement of export products, and (4) the facilitation of technology transfer through FDI. The government simultaneously announced an economic policy that would be driven by the private sector and it promoted industrial restructuring through market opening, deregulation and competition. During the early 1990s, Korea carried out the following market liberalization policies: the opening of distribution markets, a plan to liberalize financial markets (1992), improvement of overseas direct investment (ODI) regulations (1992), the real-name financial transaction system (1993), and the Won Currency Internationalization Plan (1993). The FDI liberalization policy included abolition of several FDI-related obligations and increased the number of business categories to be liberalized (1994).
Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.
