Asian Economy

South Korea's Lessons for Trump

The country is the world's most striking example of the benefits of free trade.

South Korea's reliance on exports was once radical.

Photographer: SeongJoon Cho/Bloomberg

Advisers seem to have convinced U.S. President Donald Trump not to trash the country's free-trade agreement with South Korea -- for now. Trump himself still seems intent on extracting concessions from the Koreans and could yet withdraw from the deal. The irony is that, more than any other, South Korea's own story shows how foolish that would be.

QuickTake Free Trade and Its Foes

Korea's postwar rise may be the world's most striking testament to the power of trade to create jobs and amass wealth. Back in the 1960s, economists wrestled with the question of how to alleviate crushing poverty throughout much of the developing world, especially in newly formed nation-states in Africa and Asia that had recently emerged from the colonial era. At the time, South Korea's gross national income per capita was about $120, on par with Kenya and Madagascar.

The prevailing wisdom held that the global economy was rigged against poor countries and the only way they could escape destitution was by disengaging from it. If their economies remained tied to those of their former colonial overlords, emerging nations would be unable to develop the manufacturing and other industries they needed to progress.

A better idea, it seemed, was to raise tariffs and other barriers on imports in order to spur industrial production at home, create jobs and raise incomes. Many leaders throughout the developing world, who were often the product of independence struggles themselves, were drawn naturally to that argument. They influenced the direction of countries like India, where policy took on a decidedly anti-trade bias. These ideas on development coalesced into something called “dependency theory.”

South Korea pursued the opposite course. Rather than turning its back on the global economy, Seoul’s policymakers embraced it. They plugged the South Korean economy directly into the world trading system and promoted exports above all else.

In this regard, Korea was very much influenced by the experience of Japan, which was already in the midst of a historic economic boom that had also been sparked by an outward-focused economic model. But when Korea embarked on this course, it was still in the minority. Development economists didn't take the strategy very seriously.

Numbers tell the rest of the story. In 1962, India’s GNI per capita was $90. By 1990, it had quadrupled to $380. Over that same time span, though, Korea’s per capita income surged 53 times -- to $6,360. After 1991, India also adopted a more trade-based development strategy, which subsequently accelerated its growth rate.

“Dependency theory” went wrong because poor nations simply couldn't generate the levels of demand needed to support new industries, nor the comparative advantages for them to compete on a global scale. In many cases, the state ended up having to subsidize these sectors, rendering many of them inefficient.

Korea’s trade-oriented model worked because it capitalized on the much larger demand in foreign markets like the U.S. It exploited the country’s comparative advantages in the world trading system -- primarily, low wages that attracted factory work in labor-intensive industries such as shoes and toys -- and generated lots of jobs at home. Korea then was able to use the capital this strategy generated to develop new, high-value industries -- the chips, LCD panels, cars and other products the economy is known for today.

The Koreans, to be sure, were never true free-traders. They found all sorts of ways to protect their nascent industries from foreign competition. But, to this day, they appreciate the importance of exports; Korean companies have increased their market share in the U.S. since the pact came into effect five years ago. That’s why even new South Korea President Moon Jae-in, who generally favors more socialistic economic policies, has staunchly defended the trade pact with the U.S.

Unfortunately, dependency theory seems to influence several of the new U.S. administration's policies, which are aimed at fostering production at home rather than importing from abroad, even if that means subsidizing factories with state funds. In reality, free-trade agreements don't just expose U.S. companies to foreign competition, they also open foreign markets to U.S. exporters.

It's true that total U.S. exports to Korea have fallen since the free-trade agreement was signed. But they’ve declined less than Korea’s overall imports: In other words, the market share of U.S. exporters has actually increased under the pact. Plus, the U.S. continues to run a surplus with South Korea in services, its strength. As Trump decides how hard to push South Korea, this is recent history worth keeping in mind.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Michael Schuman at contactschuman@gmail.com

    To contact the editor responsible for this story:
    Nisid Hajari at nhajari@bloomberg.net

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