European Union and East Asia: An Economic Relationship

The European Union and East Asia

The world economy continues to be dominated by the ‘Triad’ regions - Europe, North America and East Asia. This text analyses the economic relationship that has evolved between two Triadic powers - the European Union (EU) and East Asia - and its future prospects, especiallyin the wake of the recent financialcrises that have shaken the East Asian region. The author examines the development of economic diplomacy and exchange betweenthe EU and its East Asian tradingpartners - Japan, China, South Korea, Taiwan, Hong Kong, and the Association of Southeast Asian Nations (ASEAN) - in both bilateral and multilateral contexts. The inter-regional dimensionprovided by the Asia-Europe Meetings (ASEM) is alsoconsidered,as are theoretical perspectives from the field of international political economy on these different relationships. Furthermore, the economic development and future challenges facing the East Asian states are studied with special reference to the region’s recent financial crises. This text argues that the EU must afford greater priority in the promotion of its economic relationship with East Asia. If it continues to remain the weakest Triadic link, the EU risks future geoeconomic marginalisation as the transpacific axis strengthens into the twenty-first century. It is also proposed that the EU and major East Asian powers must assume greater responsibilities in managing the international economic order. Undergraduateandpostgraduate economists and students of European, International Relations and Asian Studies will find in this book possible answers to the challenges facing Europe and East Asia in the next century.

Christopher M. Dent is Senior Lecturer in Economics and European Studies at theUniversity of Lincolnshire and Humberside and is theauthor of The European Economy: The Global Context (1997).

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The European Union and East Asia An economic relationship

Christopher M. Dent

London and New York

First published 1999 by Routledge 1 I New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge lr an impnnt of the Zylor B Franclr Group

0 1999 Christopher M. Dent The right of Christopher Dent to be identified as the Author of this Work has been assertedby him in accordance with the Copyright, Designs and Patents Act 1988 Typeset in Baskerville by J&L Composition Ltd, Fdey North Yorkshire Printed and bound in Great Britain by Biddles Ltd, Guildford and King's Lynn All rights reserved. No part of this book may be reprintedor reproduced or utilised in any form or by any electronic, mechanical, or other means,

now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval systm, without permission in writing from the publishers. Bn'hsh Library Cataloguing In Publicahon Data A catalogue record for this book is available from the British Library Labrary of Congress Cataloging m Publicahon Data

1999

Dent, Christopher M., 1965The European Union and East Asia: an economic relationship1 Christopher Dent. cm. p. Includes bibliographical references and index. 1. European Union countries-Foreign economic relations-East Asia. 2. East Asia-Foreign economic relations-European Union countries. I. Title. HF1531.24E184 337.405-dc21 CIP ISBN 0-415-17199-7 (hbk) ISBN 0-415-17200-4 @bk)

To Ruth, Thomas and Koshka amorfidelis pertinax est

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Contents

1

2

...

List ofJigures List o f tables

Vlll

Preface Acknowhdgments List of abbreuiations

x111 xiv xv

The international political economy of EU-East Asia relations: theoretical perspectives EU-East Asia economic relations: an overview of recent developments The EU and ASEAN The EU andJapan The EU and China The EU, Taiwan and Hong Kong The EU and Korea Regionalism and inter-regional co-operation Future prospects for the EU-East Asia economic relationship Appendix JV0k.s

References Index

X

...

1 16 36 76 118 152 187 219 250 259 267 287 309

Figures

2.1 World Bank model of East Asian growth 2.2 East Asian group shares of EU trade with the region (1980, 1997) 2.3 EU-East Asia trade (1975-97) 2.4 EU trade with East Asia by member state (1987, 1997) 3.1 ASEAN’s exports to the EU by sector (1980, 1987, 1997) 3.2 EU-ASEAN merchandise trade (1975-97) 3.3 ASEAN member state sharesof EU-ASEAN trade (1987, 1997) 3.4 EU member state shares of EU-ASEAN trade (1987, 1997) 3.5 Inward FDI stocks in ASEAN by geographic origin (1996) 3.6 EU financial assistance to the ASEAN10 group (1976-98) 4.1 Stock of outward FDI from Japanby geographic destination (1981, 1996) 4.2 EU-Japan merchandise trade (1975-97) 4.3 Japanese FDI flows to Europe and USA (198 1-96) 4.4 Sectoral structure of EU-Japan trade (1980, 1997) 4.5 EU trade with Japan by member state (1987, 1997) 4.6 Stock of Japanese FDI in Europe by host country destination ( 1996) 4.7 Inward FDI stocks in Japan by geographic origin (1989, 1996) 4.8 EU direct investment in Japan: netstock invested by member state (1996) 5.1 China’s import and export trade(1 979-97) 5.2 Inward FDI flows in China, 1979-97 (actual realised) 5.3 Inward FDI stock in China by geographic origin (1987, 1995) 5.4 China’s exports to the EU by sector (1980, 1987, 1997) 5.5 EU-China merchandise trade (1975-97) 5.6 EU trade with China by member state (1987, 1997) 6.1 EU-Taiwan merchandise trade (1975-97) 6.2 EU member state trade with Taiwan (1987, 1997) 6.3 Taiwan’s exports to the EU by sector (1980, 1987, 1997) 6.4 Inward FDI stocks in Taiwan by geographic origin (1987, 1996)

19 23 24 25 52 53 67 68 68 69 84 93 102 104 109 111 112 113 120 120 124 133 134 138 168 169 170 171

F@res 6.5 6.6 6.7 6.8 6.9 7.1

7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.1 8.2

Stock of outward FDI from Taiwan by geographic destination (1 996) EU-Hong Kong merchandise trade (1975-97) EU member state trade with Hong Kong (1987,1997) Hong Kong’s exports to the EU by sector (1980, 1987, 1997) Inward F’DI stocks in Hong Kong by geographic origin (1987, 1996) EU-Korea merchandise trade (1976-97) EU member state trade with Korea (1987, 1997) Korea’s exports to the EU by sector (1980, 1987, 1997) Inward FDI stocks in Korea by geographic origin (1 989, 1996) Stock of outward FDI from Korea by geographic destination (1987, 1996) International lending to Korea (by end of June 1997) Stock of Korean FDI in Europe by host country destination (1 996) Cumulative stocks of Korean outward FDI (1 980-96) EU direct investment in Korea: net stock invested by member state (1 996) Subregional economic zonesin East Asia Europe’s major growth axis

ix

172 179 180 181 182 198 202 203 204 205 210

21 1 212 215 224 237

er

Tables

2.1

Triad trade flows: percentage shares of world total (1960, 1980, 2.2 The Triadicdistribution of East Asian trade (percentage of total) 3.1 Geographic breakdown of ASEAN’s international trade partner,trade per (percentage 1960-97) institutional relations: framework the 3.2 EU--ASEAN relations: main co-operative activities 3.3 EU-ASEAN economic 3.4 Average utilisation rates of quotas by East Asian countries in EC imports of textiles and clothing under the MFA, 1979-82 (9’0) 3.5 EC non-tariff barriers against imports from selected East Asian 1974 countries, 3.6 Applications approved under Article 1 15 against imports from East selected Asian countries, 1981-5 3.7 EU financial assistance to ASEAN by category and time period (Ecu 3.8 EU anti-dumping duties on ASEAN products (at November 1998) 4.1 Geographic breakdown of Japan’s international trade partner,trade per (percentage 1960-97) EU-Japan consultation 4.2 frameworks 4.3 EU anti-dumping duties on Japanese imports (at November 1998) 5.1 Geographic breakdown of China’s international trade partner,trade per (percentage 1960-97) 5.2 EU anti-dumping duties on Chinese imports (at November 1998) 6.1 Geographic breakdown of Taiwan’s international trade partner,trade per (percentage 1960-97) 6.2 Geographic breakdown of Hong Kong’s international trade partner,trade per (percentage 1960-97) 6.3 EU anti-dumping duties on imports from Hong Kong and (at Taiwan

17 20 39 47 50

55 56 56 58 63 89 99 101 130 141 156 160

T a b h xi Geographic breakdown of Korea’s international trade (percentage per trade partner, 1960-97) 7.2 Major Korean manufacturing FDI projects in Europe 7.3 EU anti-dumping duties on Korean imports (at November 1998) 8.1 The ASEM: main elements

7.1

A. 1 East Asian countries: comparative economic profile A.2 Economic growth in East Asia during the 1960s to 1990s (real GDP growth O/O, average annual for each decade) A.3 Geographic breakdown of the EU 15’s external trade, 1960-97 (percentage per trade partner) A.4 EU-East Asian trade: sectoral analysis in 1997 (Ecu million) A.5 EU industrial trade with East Asian countries: top ten positions of East Asian trade partners in selected extra-EU export markets and import sources (1 997) A.6 Cumulative stocks of foreign direct investment in developing East Asia by Triadic source (1980, 1985, 1993, 1996) A. 7 Extra-EU trade and the East Asian financial crisis (1 997June 1998) A.8 EU anti-dumping investigations initiated against trading partners A.9 Patterns in international trade (percentage shares of total by trading Dartner. 1960-97)

195 197 206 243 259 259 260 26 1

262 263 264 265 266

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Preface

The economic relationship between the European Union (EU) and East Asia remains a much under-researched field, and yet it has become one of the most important structural features of the world economy. This text offers a systematic and thorough analysis on various aspects of this relationship. It not only considers the present state of EU-East Asia economic relations but also their historical development, primarily in a post-war context. Furthermore, the bilateral, inter-regional and multilateral dimensions of EU-East Asia economic diplomacy are examined with frequent reference to the wider ‘Triadic’ framework of relations (i.e. Europe, East Asia and North America). How developments at the substate, state and regional level have influenced the direction of the EU and East also studied by this text. Intheconcluding Asia’s economicrelationshipare sectionstomostchapters,differenttheoretical perspectives fromthe field of international political economy(IPE)areappliedtoenhancethereader’s understanding of the substantive issues covered. The text’s opening chapter provides its initial theoretical framework and introduces some of the running themes found in subsequent chapters. In Chapter 2 an overviewof recentdevelopments in EU-East Asia economicrelations is offered that further introduces the reader to recurrent themes. Chapters 3 to 7 then respectively examine the EU’s economic relationshipwith the Association of Southeast Asian Nations(ASEAN),Japan,China,TaiwanandHongKong (jointly), and South Korea. Regionalism in both East Asia and Europe together with inter-regional co-operation are the focus of Chapter 8. Finally, Chapter 9 considers the future prospects of the EU-East Asia economic relationship. On a technical matter, while the term EU is often used to refer to its precursial guises (i.e. the EEC and EC)before 1993, the date when the Treaty on European Union was fully ratified, there are other times when the terms EEC and EC are used in theirhistoricalcontext. Furthermore, as no EU-based data beyond 1998 has been introduced into the text, ECUs (European Currency Units) instead of euros are accordingly used as reference terms.

Acknowledgements

The author would like to thank a number of people who have made this book possible. From my university, I owe a great deal to Leigh Davison who has both encouraged my efforts and helped facilitate research time and resources. The guidanceandsupportI have received fromDebraJohnsonshould also be acknowledged, as should the administrative efficiencies of Pat Phillips. A long overdue acknowledgementof thanks is also deserved by Clive Piggott, Jan James, Joan Lawrence, Malcom Bee and Lee Miles for inspiration. There are a number of peopleatotherorganisations towhomIam also very grateful. At the European Commission, Jonathan Hatwell, Lenette Kgeldsen, Jonathan Claridge, Peter Guildford, Alastair McDonald, NoreenDoyle, Jean-Pierre de Laet, Willem Noe,MaryvonneCoursin,Carl Asenius, Jean-ChristianRemond,Laurence Argimon-Pistre and Philip van Amersfoortproved particularly helpful in supplying both valuable insight and information. At the various East Asian missions to the EU located in Brussels, I am extremely grateful to Pyung-oh Kwon (Korea), Young Song(Korea),Xian-kun Lu (China),PangEng Fong (Singapore), MohamedZain (Malaysia), ToshikazuInui(Japan)andSongsakSaicheua (Thailand). Masataka Fujita and Lizanne Martinez from UNCTAD provided a wide range of foreign direct investment data crucial to this text. I owe similar thanks to Hayley CrumpleratJETRO,Caroline Millerick (Bank of Korea), Simon Chan (Hong Kong Economic and Trade Office), Pam Lucas (Majestic Trade Centre), Melanie Grainte(Taiwan Trade Centre), Chong-wha Lee (Korea Institute for International Economic Policy), Michael Porteous (Invest in Britain Bureau), Pierre-Yves Leborgn (RJR International) and also SergePerrinwho proffered information on recent Korean investment projects in Europe. I would also like to extend my gratitude to the Routledge team- Andreja Zivkovic, Alison Kirk and Craig Fowlie - for humouring me through the ordeal that is book writing. Iwould finally like to thank my family who have had to suffer an ordeal of their own as a consequence of this project. In this respect, my wife deserves especial mention, as does our son Thomas, to whom I have given the onerous responsibility of writing thisvery last word. Cottingham, England

Abbreviations

Africa Caribbean Pacific anti-dumping duty ASEAN Free Trade Area Asian Monetary Fund AMF ANZCERTA Australia-New Zealand Closer Economic Relations Agreement Asia-Pacific Economic Co-operation forum APEC Association of Southeast Asian Nations ASEAN Asia-Europe Meetings ASEM Common Agricultural Policy CAP Common Commercial Policy CCP Commission of the European Communities (European CEC Commission) Central and East Europe CEE Common external tariff CET Common Foreign and Security Policy CFSP Commonwealth of Independent States CIS Directorate General (of the CEC) DG East Asian Economic Caucus EAEC East Asian Economic Grouping EAEG European Community EC European Community Investment Partners ECIP European Coal and Steel community ECSC European Currency Unit ECU European Development Fund EDF European Economic Community EEC European Free Trade Area EFTA economic and monetary union EMU export-oriented industrialisation EO1 export processing zone EPZ Economic and Technical Development Zone ETDZ European Union EU foreign direct investment FDI free trade area ETA

ACP ADD AFTA

xvi Abbreuiations

FTAA GATS GATT GDP GNP GPA GSP IBRD ILO IMF

IPE IPR IS1 ITA ITTO JERC KMT LDC LLDC MFA MFN MITI MNE MOF MOSS MPD NAFTA NAS NGO NIC NIDL NIDZNAT NME NTA NTB ODA OECD OPEC PAFTA QMV QR R&D RIA

Free Trade Area of the Americas General Agreement on Trade in Services General Agreement on Tariffs and Trade gross domestic product gross national product Government Procurement Agreement Generalised System of Preferences International Bank for Reconstruction and Development (World Bank) International Labour Organisation International Monetary Fund international political economy intellectual property rights import substitution industrialisation Information Technology Agreement International Tropical Timber Organisation Japan Economic Research Centre Kuomintang (Taiwan’s Nationalist Party) less developed country least developed country Multi-Fibre Agreement most favoured nation Ministry of Industry and International Trade(of Japan) multinational enterprise Ministry of Finance (of Japan) ‘market-oriented, sector-specific’ Modulated Preferential Duty North American Free Trade Agreement New Asia Strategy non-governmental organisation newly industrialising country new international division of labour National Industrial Development Zone for New and Advanced Technology non-market economy New Transatlantic Agenda non-tariff barrier official development assistance Organisation for Economic Co-operation and Development Organisation of Petroleum Exporting Countries Pacific Free Trade Area qualified majority voting quantitative restriction research and development Regional Integration Arrangement

Abbreviations xvii SEA SEM SEZ SI1 SPARTECA SREZ SRTA TAFTA TRIMS TRIPS TVE UN UNCTAD VER

WTO

Single European Act Single European Market Special Economic Zone Structural Impediments Initiative South Pacific Regional Trade and Economic Cooperation Agreement sub-regional economic zone sub-regional trading arrangement Transatlantic Free Trade Area Trade-related investment measures Trade-related intellectual property rights township and village enterprise United Nations United Nations Conference on Trade and Development voluntary export restraint World Trade Organisation

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Theinternationalpolitical economy of EU-East Asia relations Theoretical perspectives

Introduction This text is a work of international political economy (IPE). The main aim of this chapter is to introduce the theoretical perspectives from the IPEfield that can be applied to the European Union (EU)-East Asia economic relationship. Such an exercise serves two main purposes.First, it provides an analyticalframework in which events and developments covered in subsequent chapters can be better understood.Second, it presents an additionalintroductory overview of the relationship to that offered by Chapter 2. International political economy can be defined as ‘the interplay of economics and politics in the world arena’, where ‘the economy canbe defined as the system of producing, distributing, and using wealth’,and ‘politics is the set of institutions and rules by which social and economic interactions are governed’ (Frieden and Lake 1995: 1). It emerged (some would say re-emerged) as a sub-set discipline of the international relations (IR) field in the early 1970s after the global shocks of the period, most notably the collapse of the Rretton Woods exchange rate system by the in 197 1, the1973-4 oil crisis and theensuingstagflationexperienced world economy. These raised new questions of economics and politics to which many politics-oriented IR specialists could not provide comprehensive and convincinganswers.’ Other developments in theinternationalarenaduringthe 1970s gave further impetus to IPE studies, for instance<Japan’s ascendancy as the world’s nexteconomicsuperpower andthe growingglobalimpact of the European Community (EC), both of which posed a challenge to the post-war Americanhegemony. More recently, theidentification of new linkages forged between states and societies by the various processes of globalisation has supplied more work for IPE academics. The end of the Cold War and the associated shift from ideological competition to economic competition (and from geopolitics to geoeconomics) have had a similar effect. According to Milner (1998), IPE scholars are principallyinvolved in thc studyof foreign economic policy (FEP) choices (e.g. protectionism, exchange rates), issues of comparative economic development and the impact of international economics on domestic politics. Moreover, they have generally sought answers to the above through the investigationof four categories of explanatory factors:

2 International political economy of EU-East Asia relations 0

0

distribution of world power, with particular reference to the hegemonic state; structure, function and consequences of international institutions; impact of ideas, beliefs and values; effect of domestic politics.

These are recurrentthemes and focal points in the chapters thatfollow. However, the specific organising principle of this text is the study of how the economic relations between the EU and East Asia have evolved to their present state, how these relations are likely to develop in the future and what conclusions can be drawn from the observations made by each chapter. This entails a multi-level analysis in which the process of economic diplomacy, the development of economic exchange, the impact made by systemic factors and different theoretical interpretations on the above are examined.

Theoretical Perspectivesof IPE

In this section, we introduce IPE’s three main theoretical traditions, namely neorealism, neo-liberalism and Marxism, concentrating on the key assumptions of each theoretical perspective as well as their associated theoretical concepts. Neo-realism From realism to neo-realism

As its name suggests, neo-realism is a revision of realist theory, which itself is the most established school of thought in the IR field whose roots can be traced to the writings of Thucydides and Machiavelli. According to realism, the nationstate is the only significant actor in international affairs and all other actors are essentially subordinate to it. Moreover, states are assumed to be power maximisers and behave in a rational manner in seeking this objective. Thus, states are involved in a competitive struggle to advance their position and status within the international community. As no global governing authority exists to cajole states into acting in a certain manner, anarchy prevails in the realm of international relations. Although coalitions between states may arise wherc they assist each stateto attain self-serving goals, these arrangements are loose and inherently unstable. States are more interested in achieving relative gains over other states than receiving higher absolute gains bestowed to individual states that participate in co-operative acts. In addition, the internal characteristics of nation-states (e.g. democracies,dictatorships) are irrelevant. All share the same goal of national advancement and hence function within the international system in a similar manner. Neo-realism is founded on these basic assumptions. However, whereas realism stresses hierarchy between states settled by equilibrium balances of power, neorealism is more concerned with polarity and how centres of power within the international economic system affect state behaviour. Furthermore, neo-realism

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posits that the balance of power between states can change quiterapidly with the frequent shift in interstate alliances. Realist assumptions about the absolute primacy of politico-military objectives in the state’s agenda are also questioned by neo-realists, but only insofar aseconomic objectives canattaintantamount importance wheretheir realisation advances the nation’s international status. Anotherdeparture from realist thinking lies in the neo-realist view that the interstate struggle for power is the result of the anarchic structure of the international system as a whole. Consequently, state behaviour is conditioned, but not determined, by the structure of the international economic system. Hence, neorealism is essentially concerned with both states and systemic structure (Waltz 1979; Gilpin 1984).

Hegemonic stabilig An important aspect of neo-realist theory is the issue of hegemonic stability (Kindleberger 1973; Krasner 1976; Lake 1991). This centres on the role of the world’s hegemonic state to maintain stability in the international system amid the anarchic conditions of interstate relations. It is thus inclined because of the awards conferred with this responsibility. By supporting an open andfree trading system, the hegemon is able to exploit its industrial superiority through exporting to accessible overseas markets. T he hegemon also has the capability to persuade or force other states to comply with international trade rules, which it itself has principally fashioned. This constitutes an exercise in both relational and structural power. Th e former relates to the leverage that an international actor can directly exert on the behaviour of or decisions made by another. O n the other hand,structural power refers to the ability of certain international actorsto shape and determinethe systemic structures within which other actors must also operate (Strange 1994). This pertains not just to an actor’s ability to influence the rules, procedures and scope of international institutions such as the World Trade Organisation (WTO),but also the regulatory environment in which transnational 2 economic activity takes place. Hegemonic stability theory contends that friction in international economic relations will rise as hegemonic power declines. Neo-realists point to the demise of Britain’s hegemonic position after World War I and the trade conflicts of the 1930s as evidence of this. Even though the USA was in a position to assume the hegemonic mantle from Britain during the inter-war period, it was reluctant to do so, preferring instead a policy of isolation and passivity while simultaneously being engaged in a zero-sum game protectionism along with its industrial rivals.3 Post-war policymakers in the USA were, however, determined to avoid any conditions that would lead to another Great Depression. Consequently, the USA adopted a proactive hegemonic position as manifested by both its pivotal role in creating new international organisations - most notably the General Agreement on Tariffs and Trade (GATT), the United Nations, International Monetary Fund (IMF) and World Bank and as architects of the Marshall Plan. Further historical evidence for hegemonic stability was provided by the golden period of P a ~

4

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Americana that followed (late 1940s to 1960s). Moreover, the decline in American

hegemony that was evident by the 1970s’ and the contemporaneous increase in trade friction during the decade were seen as further vindication of neo-realist theory. To a significant extent this originated from US recourse to unilateralism and a more defensive trade policy stance.5 However, the validity of hegemonic stability theory is contested by neo-liberalism for reasons we shall discuss later. There is also a strong case that claims regarding the death of the US hegemonic position have been much exaggerated (Strange 1987, 1994). During the 199Os, the US economy has performed better than its two potential hegemonic contenders, the EU and Japan, and has maintained a technological lead across a broad range of strategic industries. Moreover, even if the EU is predicted to be thc hegemonic succcssor to the USA (‘Thurow 1992; Hughes 1996), history shows that prolonged structural adjustments are required before such a transition is effected. For example, the US economy was around three times larger than Britain’s by 19 14 and sterling persisted as the global standard currency up until the outbreak of World War I1 (Kennedy 1988). Acquiring hegemonic status is thus not automatically conferred upon attaining the world’s highest gross national product (GNP) but rather through a combination of factors. The collective economic weight of the EU may be greater than that of the USA (see Table A. l), yet it lacks the same politico-military weight carried by the USA in the international arena. Thisis a recurrent theme in subsequent chapters as most East Asian countries still look to the USA for leadership in many aspects of international economic affairs. The resurgent economy of the 1990s, as well as the US’S involvement in the Asia-Pacific Economic Co-operation (APEC) forum, have reinforced this position. Neo-mercantilhl

Neo-mercantilism is not so much part of the neo-realist theory but rather an expression of it. Mercantilism was the cowcntional wisdom on trading practices during the sixteenth and seventeenth centuries and much of the eighteenth century, thus predating liberal notions of free trade based on comparative advantage. It stressed the role played by economic activity in ensuring the security of the state and promoting national advancement. This was primarily achieved by accumulating wealth throughcommercial endeavour and regulation, with the ultimate aim of realising higher political objectives. Traditionally, this inferred strengtheningthe state’s militarycapabilities in order tocxtend its sphere of influence within the international community. In modern times, enhancing the nation-state’s industrial capabilities with theadditional objective of improving the material well-being of its people has become increasingly relevant. While the principles of free trade and comparative advantage have more or less dominated the intellectual high ground from the lateeighteenth century onwards,many states have pursued neo-mercantilist tracle policies during the post-war period. Among neo-mercantilism’s most ardent protagonists have been various East Asian countries, most notably Japan, Korea and Taiwan. Some EU

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member states, but particularly France, have also shown strong neo-mercantilist impulses, although national-level protectionism is circumscribed by the framework of the EU’s CommonCommercial Policy (CCP). Neo-mercantilism is essentially a state-centric philosophy, hence its association with the neo-realist worldview. Its most ostensible practices are concerned with the protection and promotion of strategic industries, these being essential to maintaining the longrun political and economic security of thestate.Examplesinclude essential material-based sectors (cg. steel), large globalised sectors (e.g. automobiles and electronics) and high-tech sectors with considerable future growth potential (e.g. information technologies and aerospace industries). The emergence of’ strategic trade theory during the 1980s lent some intellectual support to neo-mercantilism (Krugman 1980, 1986; Brander and Spencer 1985; Krugman and Smith 1993). Adopting an industrial organisation approach, the premise of strategic trade theory was based on the view that imperfect competition prevailed in most of the world’s industries and not perfect competition, a central assumption of the neo-classical theory of comparative advantage. Hence, by assisting its indigenous oligopolistic firms or ‘national champions’ in exploiting attainable economies of scale and scope, greater economic rents and other positive externalities could he generated to the benefit of‘ the whole economy. Such state intervention could involve the granting of export subsidies or orchestrating inter-firm collaborations, hence the promotive aspects of neo-mercantilism. Despite its obvious appeal to policymakers, neo-mercantilism has become an increasingly untenable policy option for two main reasons. First, it is an antagonist commercial policy that islikely to have repercussions, for example, from retaliatoryactions undertaken by other states. Furthermore, neo-mercantilist policies have become increasingly dissonant in the current era of freer markets presided over by thc new multilateral order. Second, because globalisation has blurredthe boundaries of ‘national’economic activity, statesponsorship of indigenous firms and industries has become less effectual. The expanding web of cross-border linkages woven by multinational busincss activity has weakened the internationalised firm’s allegiance to its country of origin. This has narrowed the scope of the state’s ‘national’ industrial policies.

&eo-realism in context At first glance, it may appearthat an application of neo-realist analysis to EU-East Asia economic relations poses some important methodological difficulties. This is not least because the main actor most frequently considered throughout this text, i.e. the EU, is not actually a nation-state butrather a complex ‘system of governance’ operating between a regional group of nation-states (Chapter 8 provides a fuller discussion on this issue). Nevertheless, the general framework of this text is based on the useof territorialreferencepointsthe economic relationship between two regions, or regional groups of states. Like a state, the EU can he defined by its territorial boundaries and employs diplomatic agents to represent its interests in international affairs. With respect to trade, this

6 International political economy

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is principally conducted at the supranational level by the European Commission under the auspices of the CCP In subsequent chapters we analyse the development of the EU’s economicrelationshipwith other territorial-basedunits, whether they are nation-states (Japan, China, Korea), another regional group of states (Association of Southeast Asian Nations, or ASEAN) or territories possessing economic sovereignty but where political sovereignty has either been withdrawn (Hong Kong) or remains contested (Taiwan). This gives scope to apply the basic tenets of neo-realist analysis to the text’s themes. For instance, a central preoccupation of the EU has been to improve its competitive position against East Asian producers and in the region’s expanding markets. Neo-realism’s anarchic struggle for advancement is even more applicable to the East Asian states. The rapid economic development that most have experienced during the post-war period has been achieved because, invariably, both the state and society have been willing to subordinate all other goals to ‘catching up’ with the developed countries. For Japan this specifically related to restoring its position as a major industrial power. Korea’s industrial endeavours were initially galvanised by the state’s ob.jective toachieve‘nation-building through exports’. A similar strategy was pursued by Taiwan in attempts to establish itself as a desacto nation-state and thus augment its political legitimacy. For most ASEAN states, the goal of rapid industrialisation has been part of a postcolonial, confidence-building exercise in nation-statehood. The significant economic achievements made by China in recent years have also demonstrated the willingness of state to make ideological compromises in order to secure national advancement. Furthermore, neo-realists would argue that the EU’s international agenda is only a reflection of inter-state bargaining within the group with more powerful member states able to shape this agenda quite considerably. Throughout this text we will note how EU commercial policy is often influenced by specific national interests, such as France with respect to agricultural trade. However, most neorealistsdidnotexpectthe EU’s long-standingcoalition of member states to endure because of the negationof political sovereignty that is required to make the coalition work. In the context of the international economic system, EU member states have accepted to varying degrees that they must co-operate in order to compete with their common industrial rivals, especially the USA and Japan. Neo-realism’s focus on systemic factors is shared to some extent by this text. In recent times, these factorshave become more important with the strengtheningof both the multilateral trade order under the aegis of the WI’O and other regimes” in which the EU and East Asian states participate. However, the role played by fortified international institutions and new regimes that helps govern the global economic system is stressed more by neo-liberals than neo-realists. The hegemonic stability issue is also highly relevant given the longer-term relative decline in US hegemony over the post-wz-r period, the new multi-polar balanceof power between the Triad regions (Europe, North America, EastAsia) and recent dcvelopments in alliance formation between them (see Chapter 2). Frequent reference will be made tohow the USA is still able to use hegemonic power to brokcr deals

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7

or forge alliances with East Asian states that have been to the actual or potential detriment of EU commercial interests. Finally, we have already noted that some East Asian and EU states have displayed a predilection for neo-mercantilist policies. As a whole, the EU has also been accused of neo-mercantilism, whether in regard to sponsoring major European industrial collaborations such as Airbus in civil aerospace or ESPRIT in information technology, or concerning its ‘managed’ trade policies (Winters 1994). In more recent times, these accusations have subsided as the EU has embraced a more neo-liberal economic agenda.

Neo-liberalism From liberalism to neo-liberalbm Like neo-realism, neo-liberalism is also a revision of an earlier theoretical tradition. The assumptions and emphasis of neo-liberal theory, though, are considerablydifferenttoneo-realism,beingfounded on ‘classic’ liberalnotions of individual self-determination and utility-maximising rationality ‘The laissez-faire principles of free trade and comparative advantage are essentially expressions of the above, that is uninhibited individual endeavour in its quest to pursue laudable economic objectives. Moreover, the private organisations (i.e. firms) trade with each other, not states as such, and hence liberals emphasise the individual as the most significant actorin the international economicsystem. From this leads a preoccupation with competition between firms, rather than interstate competition, and the primacy of markets over states. Neo-liberalism builds on these assumptions but has also expanded its theoretical foundations. The view that non-state actors play a key role in international economic affairs is extended to include transnational and transgovernmental factors. Transnational actors can take many guises, for example, as representatives from non-governmental organisations (NGOs) such as industry associations, officials from supranational or international agencies, or business executives employed by multinationalenterprises(MNEs).’Transnationalrelationscan either work separately or in tandem with interstate relations. Even where statecentricnegotiations determineactual outcomes,transgovernmentalcoalitions may evolve between like-minded state officials whose own self-serving interests may not necessarily be aligned to the state they are supposed to represent. The growth in both the number and scope of international organisations, together with the new interlinkages forged by globalisation, have broadened the nature of transnational relations and introduced greater complexity to the governance of international economic relations (Risse-Kappen1995).This trend has, of course, affected those between the EU and East Asia where transnational actors have become increasingly participative. According to neo-liberals, this proliferation of transnationalised linkages presents an apriori case for interstate co-operation. As interdependence prevails, and with it convergence of different state’s interests, governments are forced to work together to find resolutions to common problems and challenges. This can

8 International political economy

of‘ EU-East Asia

relalions

also manifest itselfin state-firm co-operation and diplomacy(Stopford et al. 1991), where ‘to regain some influence over events, governments and firms have to collaborate with one another; they have to sacrifice their unilateral freedom of action for some degree of mastery over transnational flows of goods, capital, technology, ideas and people’ (Keohane 1993: 48). While there exists a strong neo-liberal consensus against state intervention, it is also accepted that states need to co-operate both to redress market failure at the international level and jointly to provide the public goods required for the international economic system to function in a non-anarchical fashion. Examples of the former include collaborative efforts to regulate global monopoly power (e.g. the Microsoft case involving EU and US competition policy authorities) or international accords on pollution control (e.g. the Montreal Protocol on ozone-depleting substances). Examples of the latter include international organisations such as the WIO and IMF that are ableto ‘facilitate co-operation by reducingtransaction costs, improvingtransparency and elaborating rules and norms that serve to reeloptnontOJ E L - H o t g h o t gcconotnic dipkotmcy The UK’s colonial relationship with Hong Kong up to,Junc 1997 meant that an EU-level economic diplomacy with thc city state was confined to C C P actions and occasional nlultilatcralcontacts Lvithin theGA’I’T/WTOframework. In anticipating the reversion to Chinese rule, the European Commission carried o u t various initiatives that would help delineate a post- 1997 EU policy towards Hong Kong.In 1993,the European Commission established an EU representative office in t h e city statr to help manage commcrcial issues and other matters of concern. Over the. followingyears, EU ExternalKrlationsCommissionerSir Lron Brittan made several speeches i n Hong Kong which outlined how the EU rnvisaged its economic relations with the territory would develop in the hturr. The first of these occurred i n November 1994 where Brittan took the opportunity to defend the EU’s anti-dumping regime and highlight how the quantitative restrictions o n the EU’s non-textileimports from China have heendrastically curtailed.”” T h r favourwas returned in April1995when Hong Kong’s Chief Secretary, Anson Chan, paid a visit t o Brussels to explore how EU -Hung Kong relations wouldevolve afterthe handover. At theconvention of the Foreign AEairs Council i n Ilecemher 1995, EU foreign ministersagreed to pursue a ‘principle of continuity’ policy towards Hong Kong, whichwassuitably vague enough not to upset Br$ng. I n Junr 1996 thr Council of Ministers conlirmed EU support I’or a smooth and succc.ssfu1 transition of power in the territory. This laid theground for talks held thc following month betwccn HongKong Governor ChristopherPatten with EuropeanCommissionPresidentJacques Santer over the EU’s placc in Hong Kong’s economicand political futurc.4‘J In the I3ackground of the merting, ncgotiations were conducted between the EU and Hong Kong delrgatesresponsible for trade (including customs), industryand intellectual property rights protection. During theshort time in which EU-Hong Kong rconomic diplomacy has formally existed, the tonc of relations has been generally positive. Hong Kong’s commercial openness has m r a n t that F,U businesses have not encountered the same market access problems expericnccd in other East Asian economies. Highly drvelopedmutualtrade,investment and finance links have bred a significant degree of interdcpendencr Ixtwecn the two powers and hence a broad range of common economic interests at the hilateral and multilateral level. The ‘bridging’ role played by the UK LIP until mid-1997 also helped to create a firm kamework of relations in the initial stagcs. ‘li, providepointsofreference for the future development of these relations, the Luropcan Commission puldished a ‘communication’ document which it prescntcd to the Council of Ministers i n April 1997 (CEC 1997). ’I‘his was relatively thin on detail and mostly devoted to analysing how democratisation in Hong Kong could be safeguarded. Thrre was no suggestion of any \vide-ranging EU-Hong Kong trade and co-operation agreement being signed to help auL;mcnt relations, either because Hong Kong’s advanced economic position did n o t necessitate it or, as is more likely, because this wo~~lc{ sendthewrong signals t o Beijing. Signingsuch anagreement would ha\^

178

T f l e El/:

%wan and H o q honypersisting trade friction in key sectors andcertain cross-sector issues. Furthermore, Korea’s1997-8 financial crisis brought a new complexion to the economic relationship, and therein various challenges to EU businesses and policymakers. ‘I‘llese are the main themes that are considered by this chapter. Following the pattern of previous chapters, we first analyse different aspects of the Korean economy to provide an important background context to our discussions.

Korea: Asia’s next giant? Korea’s post-war industrial transformation has perhaps been the most rcmarkable of the four principal East Asian ‘tiger’ economies.’ From the agrarian-based economy of the 195Os, it now stands as onc of the region’s industrial powerhouses. ‘Thefirst task of this section is to study Korea’s path to modern industrial statehood. ‘fhisis followed by a closer examinationof Korea’s chaebol conglomerates that have spearheaded the country’s export-drivenindustrialisation. Finally, a consideration of future challenges facing the Korean economy is made, paying esprcial attention t o the impact of the 1997 -8 financial crisis.

188

The EU and Korea

Korea’s path to development

Korea’s geographical location, sandwiched between China and Japan, has given it considerable strategic importance in East Asia. While it was able to resist the exertion of European colonialinterests, Korea hasfrequentlybeensubjectto 2 interference from its powerful neighbours. During the years 19 10 to 1945,Japan exercised an aggressive and exploitative colonial rule in Korea: the Korean people were forced to learn Japanese, endure other forms of cultural imperialism and suffer general economic hardship, while the economy became subservient to the material demands of the Japanese economy (Kwak and Lee 1997). At the same time, Korea benefited from investments made in its infrastructure and education systems, a codification of modern civil laws, increased monetarisation of the economy, the introduction of a new financial system and the development of the country’s export sector in this period. Hence, like laiwan and otherparts of EastAsia,Korea’seconomicdevelopment in theearlyhventiethcentury was shaped by the forces of Japanese colonialism.” After 1945 Korea becamethecentre of acomplexgeopoliticalstruggle betweentheemergent Cold Warpowers. The Korean Civil War of 1950-3 ended in stalemate, with the consequent divide between the newly formed states of North Korea and South Korea” being established along the thirty-eighth parallel. North Korea remains the lastCold War bastion of totalitarian Communism and continuestoexperiencesignificanteconomicdificulties.South Korea’s (hereafter Korea) embrace of a different economic system has led to a far more successful path of development5 (Soon 1994).However, economic growth was not the immediate priority of President Syngman Rhee’s post-civil war administrationbutratherthepoliticalobjective of reunification.Koreanevertheless embarked on a somewhat haphazard, yet effective import substitution industrialisation policy at this time that helped insulate domestic producers from foreign competition while simultaneously promoting indigenous techno-industrial development, particularly in food and textile sectors. The economy also benefited from USA, thatwerededicatedto large inflowsof foreignaid,primarilyfromthe Korea’s reconstruction.” In April 1960 Rhee’s government collapsedaftera period of widespread civil disquiet due to a combination of political corruption, repressive acts andthe effects of an economicslowdown. The replacement administration, led by Chang Myon, was not able to deliver quick solutions to problems generated by an ill-managed economy and subsequmtly fell victim to a successful coup d’dat organised by Major-General Park Chung-hee in May 1961. The reformsintroduced by thenew Park government were to have farreaching consequences for the Korean economy, shaping many ofits current salient features. As part of a high growth strategy, export-oriented industrialisation became the main priority of economic policy from the early 1960s onwards. The government’smaxim of ‘nationbuildingthroughexports’galvanisedthe country into meeting new developmentobjectives, with exporttargets set for business and sanctionsimposed if thesewerenotrealised.Italsodrew upon

many aspects of thr Japanese development model, which had already proved highly success1111 in the early post-war years. Korra’s conglomerate cnterprises the chaebol were Ixomoted t o acquirr the same scale production advantages achirvcd by Japan’s prewar Zaibatsu and post-war kelretsu company groups (SCT Chapter 4). ‘l’hc new Fivr Year Plan (E’YP)framework, introducedin 1962, took its inspiration from Japan’s sector-based rationalisation plans of the 1950s, although the former represented a more comprehensive attempt to state-orchestrate thc country’s economic development (Bridges 1993). Later on in 1975, a framework was established for thr c.//aebol groups to emulate the Japanese sogo sho.rhn through limning their own general trading companies (G’I‘Cs), and hence furthcr promote Korea’s exports. Further comparisons c.xtcnd to the close state-business relationships that have been nurtured i n ImthJapall and Korea. This particularly relates t o the ‘de~~rlopment alliance’ that was estaldished Iwween the Korean government and the chaebol i n the formative ycars of thc Park go\‘ernrncnt, itself motivated by the expedient of securing its political legitimacy (Koo and Kim 1992; Lee 1997). Owing to their scale and dominant position in the Korean economy, the chaebol alsooffered the statc the advantage of requiring a narrower span of administrative control (Song 1994).The statc c/~aebalnexus remains a key determinant of Korea’seconomicdevelopmrnt and hasled to mutualdependencies evolving hetwecn both sides. l b r most of the post-war period, thechaebol havc spearlleaded Korea’s industrial restructuring and export drives, largely in accordance with the government’s FYI’ olljcctives. To rcalise these, the clznebol were assisted by soft loan policies and other incentive mechanisms. Korea’s brand of ‘guided capitalism’ took its main orientation from the 19’1’ framework. The principal ohjective of the First I T P ( 1 962-6) was the expansion of the country’s infrastructure, while the Second ITP (1967-7 1) was primarily focused on drvcloping labour-intensive manufacturing capabilities. In its ‘I’hird FYP (1972-6), the Korean governmentinitiatedKorea’s heavy and chemical industry (HCI) that provided the economy with a broader industrial foundation on which higher value-addrd sectors could hr developed and economies of scope captured. Both txport promotion and industrial policy had been broadly sectorneutral until the HCI drivc, but thereaftrr Ixcame more sector-specific, as well as firm-specific in character.’ hslorcover, thelatc 1970s were to becomethe high watermark of Korca’s developmental statc with the continued extensionof cheap credit,discretionaryincentivemrchanisms and selected sectoralinten‘rntiolls. The Fourth FYI’ (1977 -81) also heralded a shift i n industrial priorities towards the development of moretrchnoIo~~-intensive activities, c.g. e1ec.trollic.s and automohilrs. However, Korea cntered a period of crisis around this time wit11 the assassination of President Park in Octolxr 1979 and the pressures exerted by thc glol,;il ‘shocks’ of the early 198Os, i.e. oil price hikes, currency and interest ratr fluctuations. 111 response, the 1:ifth FYP (1982-6 ) of the new reginlc of (;enera1 Chun Doo-hwan ( 1 5180 ~ 7 introduced ) dercgulatory measurm that aimed t o i11jec.t morc flexibility intotheeconomy, in additionto provisions t o help rasr t 1 1 ~ ~

~

I90

The El/ and kbrea

growing labour unrest that arose as a consequent effect of the above pressures. It also signalled the start of a less interventionist role by thestate, with a new emphasis placedon economic liberalisation. This trendwas continued by the Sixth FYP ( 1 987-9 I), whose inaucguration coincided with the receding of military governance under the new presidency of Roh Tae-woo (1 988-92). Constitutional and social reforms soon followed, with the effect of releasing pent-up wage demands. The subsequent rise in wage levels during 1988 and 1989 seriously eroded the competitiveness of the Korean economy, converting much prized trade surpluses into deficits. Nevertheless, Korea had achieved the highest average annual growth rate of any East Asian country during the 1980s at 9.7 per cent, a slight improvement on the 9.5 per cent rate for the previous decade (see ‘Iahle A.2). When President Kim Young-sam took ofice in 1992, the developmental state continued to makeits retreat, albeit at a gradualised pace.Under the auspices of the 7th FYP (1993-7)” Korea’s finance sector was further liberalised, numerous protected homemarkets opened, competition policy strengthened,greater transparency introduced to trade policy, domestic rcgulations made more consistent with international standards and numerous restrictions lifted on foreign investment (both inwardand outward) and import licensing. These all became elements of the government’s segyehwa (globalisation) policy. Korea’s commitment to uphold the Uruguay Round andWorld Trade Organisation (”TO) accords also extended the scope of liberalisation to othw areas,such as agriculture, government procurement, retail and financial services. Furthermore, Korea had to liberalise its capital markets in order to meet the membership criteria forjoining the Organisation for Economic Co-operation andDevelopment (OECD),which it secured in October 1996. However, it was the country’s 1997-8 financial crisis that led to the most important advances in liberalising the Korean economy. The origins of the crisis lay in the stntr’s cheap credit policy towards the chnebol which had encouraged them to maintain high debt equity ratios. By 1997 the fragility of the cizneboCs financial structures had become increasingly apparent. In January, Hanbo Steel became insolvent while KiaMotors was nationalised in October afterbanks refused the company further loans. Korea’s liquidity problems were exacerbated by both the cvidesprcad practice among its hanks of borrowing short-term capital to finance long-term investment and the unravelling of a widcr financial crisis across East Asia. By November, the country was on thc verge of bankruptcy. The failure of the Kim Young-sam government to provide a convincing policy solution led to the intenrention of the International Monetary Fund (IME) and the election of the new Kim Dae-jung administration in Tlecember 1997. In return for $571~1worth of fbnds to help restore Korea’s financial stability, the new government was obliged tointroducefar-reachingeconomicreforms under the terms of the IMF ‘hailout’ programme, comprising: 0

0

the tightening of monetary and fiscal policy aimed at reducing Korea’s trade deficit-induced external debt; a comprehensive restructuring of the financial system based on a firmer exit policy, increased competition and strong market and supervisory discipline;

T h e ELI and Korea 0

0

0

19 1

atimetable to liberalise trade in accordancewithcommitments set by the WTO, including the removal of trade-related subsidies, restrictive import licensing and the importdiversification programme;9 wider foreign accessin Korea’s financeand capital markets (including majority share ownership); a more flexible labour market, including the lifting of restrictions on lay-offs and strengthening employment insurance.

The implementation of these measures would further accelerate the retreat of Korea’s ‘developmental state’. While the legacy of the financial crisis will most likely involve a decade of si,pificant financial and industrial restructuring, the Korean economy’s capacity for growth is anticipated to stay relatively strong. Korea can also be expected to remain an important international trade partner and one of East Asia’s major industrial producers. Thus far it has achieved considerableexport success in globally significant industriessuch as automobiles, consumer electronics, semiconductors, electrical and industrial machinery, steel, ships, chemicals, textiles, clothing and footwear. Table A.9 shows how Korea’s share of world exports has risen from less than 0.1 per cent in 1960 to 2.5 per cent by 1997. Like their Japanese counterparts, Korean companies have made concentrated penetrations into Western markets and continueto endure counterreactionary protectionist measures.

Korea’s chaebol conglomerates: a closer examination Most chaebol companies were created and remain largely controlled by self-made founding families. Throughout the 1960s and 1970s, thechaebol took advantage of cheap state-providedcredit andrapiddomesticandexportmarketgrowth. Moreover, as Chen (1 995: 162) observed:

The rapid industrialisation and fast-changing industrial structure have forced chaebol to continuously look for new opportunities. If they do not constantly form new businesses they will suffer from lower growth rates and lose their relative share of the market. Therefore,chaebol tend to diversify into products and markets that are not related to their current lines of business. Consequently, the corporate interests of many chaebol are dispersed across a wide spectrum of activities. For example, the Samsung group’s industrial portfolio includes ships, semiconductors, PCs, consumer electronics, financial services, chemicals, industrial machinery, telecommunications, real estate and textiles. T he chaebol’s broad range of industrial interests has meant that a high proportion of their output is still generated in Korea. However, during the 1990s most chaebol acknowledged the need more actively to internationalise their operations, especially in those sectors where global competitive forces dictate. As with Chinese guanxi links, but in contrast to Japanese keiretsu connections, family ties play an instrumental role in chaebol organisation and ownership. At its extreme this can takr the form of a dynastic, usuallypatrilineal succession within

192 The E l i and horea the company. 'I'his has been perhaps most clearly seen in the LG group, where the male desccndants o f its founder, In Hoc Goo, have held key executive positions. It is also commonplace fbr other relatives to be appointd to senior positions, furtherreinforcingthecentralisation of powerwithin the group.This produces a more hierarchical structure which differs to the keireh's more flexible and adaptable network arrangements between group companies ("hitley 1990; Orru et al. 1997). Inrelative terms, chaebol organisational structures arc more akin to inter-market keiretsu as opposcd to their vertically integrated equivalents. Simple subcontract networking hasevolved within many chaebol's span of control, in contrast to the elaborate relational subcontracting thatprevails among Japan's major assemblers and their suppliers. 'I'hc chaebol have also traditionally lacked the financial independence of thc keiretsu with no group bank at their core. An important advantage of the chnehd model is that it allows the strategic decisions made by the group's top executiveship quickly to be converted into palpable actions. This has been particularly demonstrated within the Daewoo group II) whose large overscas investments in commercially remote locations during the 1990s aroused much interest. Due to the Japanrsc predilection for consensual decision-making, such an approach is much Icss likely to occur within the keiret.su. According to Hattori (1989), the chaebol can becategorisedinto one of three types, namely those based on: direct and .sole ownershil,, i n which the family founders ownall the chaebol subsidiaries, e.%.thc Hanjin group; a dominateholding conlpaly,,,wherebythefoundersowntheholdingcompany, which i n turn OWIS the subsidiaries, e.g. Daewoo; inter-lurkkg mutual ozor~er.sh$,whereby the founders own both the holding company and an intermediary founclation,whichitself owls the group's subsidiaries. Linksof ownership and co-operativeinteractionbetween these subsidiaries arc particularly high, e.g. Samsung. Inthe 1990s a general shift towardsthethird orgallisatiorlal paradigm was apparent(Chen 1995). This inferred that the chaebol's ability tocapture economies of scale and scope had improved. Furthermore, they had become less organisationallyindependcntthroughenteringinto extcwsive subcontracting links with domestic and fbreign ShlEs. However, chaebol primacywithinthe Korcan economy has come under threat as a consequence of t h c b 1997 8 financial crisis. Somr have becomc bankrupt (e.g. Kia)" while others were on the verge of collapse. The rationale of maintaining the state-clzaehol nexuswas also seriously questioned by the Kim Dac-jung government. Its ambitious plans to promotethc ShlE sector wcrcseen a s centraltotherestructuring of Korean industr): and thus as part o f the crisis-managerncnt process. 'I'hc opening up or many cllaebol-dorninatcd domesticmarkets to breigncompanieshas posed another challenge. In response, most chaebol have undertaken rxtensivc rationalisation cxercises i n which their range of diversified activities has heen reduced and longer-term domestic and overseas investmcnts scaled back.

Tlu EU and horen

193

Future challenges In the aftermath of the 1997-8 financial crisis, thr Korean economy has had to make a number of important structural acljustments. ‘These especially relate to industrial restructuring, financial sector reform, deeper market liberalisation and accomlnodating wider foreign access to both domestic product and capital markets (Matthews 1998; Mok 1998). In many respects, the crisis had simply raised the importance of fulfilling pre-established economic policy olljectives. For example, the Korean government’s segyelma policy was supposed to liheralisr domestic markets and remove constraintsuponinward foreign directinvestment(FDI) flows. This policy, though, had been criticised by Korea’s trade partners for its lack of scope and slow pace of implementation. However, undcr thc conditions of the IMF bailout programme, the Korean government was compelled to adopt more convincing policy reforms. The future challenge for the government lies in effecting desired structural change in the economy and overcoming sources of resistance that impede this objective (Dent 1998d). In addition, the crisis raised questions concerning Korea’s future rolein the international economic community. As an emerging trade powcr, its compliance to multilateral trade rules and norms will become increasingly critical. Korea’s government and companies will also be expected t o hehave in a more finarlcially responsible manner given the impact of the crisis on the international financial system. Generally, Korea has become more aware of its position and rcsponsibilities attheregional level (Sakong 1993). Itsgrowingstature and geographical location give it a unique position in the Asia-Pacific, acting as a potential mediator between APEC’s larger members (Le. the USA, Japan and China) andalso a key provider of new capital and technological assistance to less developed neighbours. In axis with .Japan, it will prove a strategic partner in the hroader economic development of Northeast Asia, as already evinced in the Turnen River Area Development Project (see Figure 8. I , p. 224). Various other challenges facing the Korean economy arc apparent. Korea’s education and training systems have helped to produce a numerate, technically adept and diligent workforcc with a large proportion educatcd to a higher level. However, given the country’s relatively high labour costs there remains considercrisisable pressure to raise the level of human capital investment. While the depressed wage and exchange rates led to an improvement in price competitivenessduringthelate 199Os, another generalpredicamentforthe Korean economy remained. This relates to Korea being caught in a transitional on low-wage, low-tech activities and stage of development hetween that based those of ahigh-productivity and knowledgc-intensivc. nature. Hence., Korea needs to develop the capability to compete more on qualitative terms across a range of industries. l o achieve this, other persisting structural weaknesses in thc Korean economy must be overcome. For examplr, it maintains a pronounced technological depend12 ency on .Japan and thc USA, even in its coreindustriessuchaselectronics whereoriginal equipment manufacture and licensing agreemcnts with foreign

194

The EU and hkea

firmshave accounted for the vast majority ofKorea’s exports in this sector (Hobday 1994). Korea also relies heavily uponJapaneseand US component suppliers that make up a broader dependence on import trade from Japan and the USA (Table 7.1). Achieving greater technological independence, or at least diversifying this dependency, has become a strategic objective for many chaebol. This is mademore imperativefromthenumerousJapanesefirmsthat have restrainedtheirtechnologytransfers toKoreancounterparts since theearly 1990s so as to limit feedback competition effects (Ursacki and Vertinsky 1994; Smith 1997). Another structural weakness lies in the high degree of industrial concentration that prevails inmostsectors of the Korean economy. Chaebol industrial domSME sector, subsequentlycreating a dearth of inancehas‘crowdedout’the domestic suppliers and hence an import dependency on foreign supplier firms. Furthermore,theeconomy lacksinnovative SMEs and smaller, more flcxiblc forms of business organisation found in otherEast Asian NICs such as Talwan ’ and Hong Kong. Future attempts to unravel the mutual dependencies cntwined in the state--chaebolnexus will, however, prove to he a difficult task with potentially undesirable outcomes. Those Korean bureaucrats and chaebol rxccutives with a vested interest in maintaining the status quo will resist such attempts. Moreover, most Korean SMEs are highly dependent upon the chaebol, and thus structural adjustment towards less industrial concentration is likely to he slow Finally, the ultimate future challenge of the South Korean economy is reunification with its Northerncounterpart. ‘Thisis both Seoul’s‘holy grail’ and ‘poisoned chalice’. Llismantling the last barrier of theColdWar is likely t o improve the unified country’s international standing in the long run. However, the potential economic h r d e n s associated with reunification are proportionately far greater than those carried by Germany. North Korea’s G1)P per capita was a mere one-seventh of South Korea’s by the late 199Os, and the former’s widespread social andeconomicstructuralimbalances would undouhtedlyrender integration an extremely costly cxercise on many accounts. Yet despite the economic sacrifices involved for SouthKoreans,reunification will remainthe nation’s prime political and societal objective for the fixesecahle future.

EU-Korea economic relations Korea’s rise to modern industrial statehood has meant that the EU’s economic relations with the country have become an increasing priority. In the analysis that follows, we shall show how the early period of these relations was charactrrised by infrequent diplomatic contact and prolonged conflicts of interest over a numher of trade issues. However, more co-operative acts were to emcrgc in the 1990s with the formalising of EU- Korea economic diplomacy and growing economic interdependence between the two powers. We shall also discuss how various trade frictions nevertheless persisted intothe decade, as well as the intensification of the EU-Korea FDI relationship. The impact ofKorea’s financial crisis is also considered.

TabL 7.I Geographic breakdown of Korea's international trade (percentage per trade partner, 1960-7)

1960 1965 1970 1975 1980 I985 1990 I995 1997 Imports Erports Imports Exporls Imports Exports Imports Erporis hnporis Exports Imports Exports Imports Erports Imports Esporis Imports Exports EL15 USA Canada Australasia

20.9 41.2 7.9 2.7

12.9 11.7 0.0 0.0

8.7 39.4 0.3 1.0

11.9 35.2 1.4 0.8

10.5 29.5 1.2 0.8

8.7 46.0 2.3 1.0

7.4 25.9 2.1 3.0

15.4 30.2 3.9 1.7

7.8 16.7 21.9 26.4 1.7 2.0 3.4 1.5

10.9 21.0 2.0 1.3

10.4 35.5 4.1 4.0

12.0 24.3 2.1 4.4

13.6 29.8 2.7 1.7

13.4 22.5 1.9 4.2

12.2 19.3 1.4 1.4

11.2 19.9 1.6 4.5

11.3 16.4 1.3 1.7

Japan China Taiwan Hong Kong

20.2 0.0 1.9 0.4 6.9

63.7 0.0 1.2 8.1 2.1

36.0 0.0 2.3 1.6 8.9

25.1 0.0 1.1 6.2 15.8

40.8 0.0 1.7 1.0 6.3

28.0 0.0 0.8 3.4 4.1

33.5 0.0

25.4 0.0

26.3 0.0

17.4 0.0

24.3 0.0

15.0 0.0

3.6 2.0

0.4 6.8

4.7 6.6

1.4 8.8

5.2 5.1

24.1 5.5 1.9 0.6 7.1

13.7 7.4 3.1 8.5 14.3

19.7 7.2 1.7

0.3 7.7

26.6 19.4 0.0 0.0 ~ 2.1 1.9 0.9 5.8 7.2 6.0

9.6

10.6 10.7 3.4 7.6 15.5

kIiddle East Africa Latin America'

0.0 0.1 3.2

0.0 0.0 0.0

0.5 0.9 0.4

0.6 1.2 0.2

3.9 0.3 0.3

0.6 1.9 0.5

16.2 0.6 0.7

5.1 3.9 1.0

24.6 11.3 0.5 2.7 1.6 2.7

9.3 1.4 6.0

5.2 2.2 3.4

7.5 0.7 2.5

3.1

8.6 0.9 2.4

3.1 1.2 4.7

11.5 1.4 2.1

3.4 1.4 4.7

Other

0.6

0.3

0.0

0.5

3.0

2.0

2.6

7.8

13.6

9.9

9.7

11.4

6.9

9.7

8.2

12.0

ASEAV'

Source: IMF Direction sf Eude Stulittics Timarbook, various editions Note: I Includes the Caribbean states.

~

~

-

5.0

-

8.0

-

3.1 1.5

1.4

1’36 The Ell nnd hbrea First contacts and initialprolonged conflicts For much of post-war period, and like so many other East Asian NICs, Europe has played the ‘Cinderella’ role i n assisting Korea’s economic development. In other words, the EU group has remained a somewhat distant third in Korea’s leagut: of internationaleconomic partners behind both Japan and the USA, which havc proved to he the country’s closest and most constant economic allies. Over thc 1960s and 1970s we can ohserve (l’alde 7.1) how their relative positions switched as major import sourcc and export market providers, with the USA initially serving a s the former and Japan tllc latter. Korea’s tradc dependency on the US andJapanese economies peaked in the early 1970s: at the heginning of the decade thcse two main partners were rcsponsible for over 70 per cent of its trade. Up until this time, Korca’s dependency on EU 15 import and export markets had dwindled,although Europc h t , g a n t o attract a higherproportion of Korean exports l y the end of the 1970s. By 1‘380, however, thc EU 15 supplied a mere 7.8 per cent of Korea’s imports. Foreign investment flows between Koreaand Europe over this period remainedat an cven lower level of significance. By 1977 Europe had only attracted twenty-seven minor invcstmcntsfromKorea’s multinationals totalling $1.8!?m or 2.7 per cent of total cumulative Korean outward F1)I since 1968, the date horn which overseas investments were permittcd. Almost rvcry one of thcse projects was concerned with esta1,lishing exportmarketing and distrilxltion Glcilitics. Although the Irvel of Korean net investment in Europc had risen to $23.2m hy 1987, ncw FDI prqjects maintained the ‘tradc facilitating’ trend while the region’s share of thecumulativetotal dropped slightly to 2.5 percent. However,from theearly 1980s onwardsthe rhneDo1, andSamsung and LG I