It Makes a Difference to the Sheep

KOREA'S CHINA PLAY. An interesting Business Week article that makes a compelling argument for the fact that how South Korea manages it relations--particularly economic--with China may be the most important issue in the ROK's long-term future:

But if every Korean could spend a few minutes on LG Road in Nanjing, they would see instantly what the No. 1 issue for Korea is: China. How to profit from it. How to grow with it. And above all, how to survive with it. In the shadow of China, the political drama in Korea looks like dangerous self-indulgence. Korea's political class should be preparing South Korea for what's shaping up to be both the biggest opportunity and the biggest threat to the country's economy since the Korean War. Even the Asian financial crisis, severe as it was, may prove to have less of an impact on Korea's future than China will have.

Why? Some of the figures speak for themselves:

Last year, South Korean businesses invested more in China -- $4.4 billion -- than U.S. companies, who poured in $4.2 billion. China last year overtook the U.S. as the top destination for Korean exports. This year, the gap will widen, as exports to China jump 35%, to $47.5 billion, compared with a 7% rise, to $36.7 billion, in exports to the U.S. Korea, in fact, would have sunk into recession last year if it weren't for its Chinese trade, which accelerated 50% in 2003.

This has been good for the big corporations but not so good for Korean workers, who sound themes very similar to those we have heard in the Democratic Presidential primary race in the U.S.:

So far, the benefits have largely flowed to Korean corporations, not their workers. And Korea's labor laws and union contracts may not be flexible enough to adapt to the changes. Since 1992, 770,000 manufacturing positions have disappeared from Korea. In the same period, Korean companies have created well over 1 million jobs in China. "A reckless corporate exodus has accelerated since last year," says Lee Jung Sik, a senior director at the Federation of Korean Trade Unions, whose membership has fallen by 110,000, to 890,000, in the past six years.

But more troubling is the fact that China is rapidly catching up in the technologies which constitute Korea's comparative advantage:

An early warning sign: Korea's National Science & Technology Council in December reported that Korea is only 1.7 years ahead of China in the sophistication of its technology, and that the gap could shrink to zero within five years. In the crucial cell-phone market, Korean companies today only have a two-year lead over their Chinese rivals in terms of new products and technologies. By 2007, Chinese companies will have caught up, Korea's Commerce Ministry says.

And then there's this critique of the ROK economy:

If Korea had a flexible economy like the U.S. that generated jobs as fast as it lost them, China would not pose as much of a threat. But Korea built its postwar model on one big idea -- to use local cheap labor to undersell the Japanese in the world markets for manufactured goods. Since the Asian financial crisis, that model has changed somewhat, with foreign companies taking over some Korean factories and banks and companies like Samsung competing more on innovation and quality than price.

But Korea still has a long way to go before it's a flexible, job-generating, fully modern economy.

Of course China has political and strucutral economic problems of its own. Its ascent to regional or global primacy is far from given. But Koreans would do well to pay close attention to the challenges posed by closer economic ties with China.

UPDATE: Some good comments on the article at the Rathbone Press.