Economically. How so?
South Korea has a perpetual trade deficit with Japan. To be sure, Korea has had a trade deficit with Japan for pretty much most (if not all) of the 20th and 21st centuries. As of April 20th, Korea’s trade deficit with Japan stands at about $10.3 billion, a billion more vs. the same time last year, and more than Europe and the U.S. combined.
Now, the trade deficit Korea suffers with Japan is very different in make-up than the U.S. trade deficit with said country. The U.S. trade deficit is in a lot of consumer goods such as home entertainment, electronics, automobiles, appliances, etc. Korea’s trade deficit is made-up mostly of capital goods (i.e. manufacturing equipment, test & measurement instruments, building equipment, etc.) and components to finished goods (i.e. electronics going into LG cell phones, electric motors going into Samsung Blu-Ray players, rubber grommets going into Hyundai cars). For example, a Samsung chip requires a Tokyo Electron silicon wafer probe. LG quality control requires a Hitachi testing instrument and a plastic part going into a KIA requires a Mitsubishi injection molding press. The simple fact of the matter is that Korea’s relies on Japanese capital products and sub-components. So much so that Toyota, two years ago, demanded that Japanese component manufacturers stop supplying Hyundai.
Per some economists, Korea needs to develop their own capital product manufacturers as well as more contract manufacturers, otherwise, the trade gap will either stay materially unchanged or continue to get worse.
33 Comments
Excellent layman-level economic analyses, Wangkon - very insightful for making sense of things.
They also have a trade defecit with Australia, and it’s getting bigger.
Surprise surprise one of those items is beef. The non mad cow variety!!
# 2,
Korea’s imports from Australia are mostly in farm goods and raw materials, something where there are easy substitutes for. For something like beef, for example, if there is political will, then substitutes can flood the market.
Also, Korea’s trade deficit with Japan for 2008 will probably be greater than TOTAL trade with Australia.
Not being economically minded, can someone explain where or if licensing fees and royalties figure into a trade deficit?
I thought there was an article not long ago explaining that Korean companies pay a truly astronomical amount for compensation to Japanese companies for patents.
there is nothing wrong with a trade deficit! people keep viewing trade deficits as weakened national position, that Koreans, by importing more than they export, lose some kind of position or are at the mercy of the exporting nation and it’s policies.
except there are only incentives on both sides to continue what they’re doing trade wise. it takes capital and years of r and d to create comparative products in korea, what’s the damn point if it isn’t profitable. japan’s exporting parts and intermediate service industries only benefit from an outside market to sell to and cushions overproduction. also, korean development of equivalent companies would just saturate the market and steal market shares anyways.
as long as both sides are not abusing one another’s position, there are (relatively) little problem with two neighboring countries trading with one country being a primary receiver and the other being a primary giver.
That’s right - those payments are part of trade deficits/surpluses. The graph above should include those amounts.
Companies don’t have to report those numbers specifically in their accounts, though. Where a company holds patent rights, it is often happy to trumpet how much it earns on licensing, but the companies who pay out don’t like to draw attention to it.
i remember a samsung semiconductor engineer telling me that they paid royalties on well over 50% of their technology, mostly to japan. however, i’d have to dig around to see if this is still correct.
korea’s patent filings have increased dramatically in the last few years, most notably through a big samsung patent intitiative. whether many of those patents are important is something else. but really, doesn’t every country that relies on foreign technology talk about how they need to develop it domestically instead? far easier to said than done.
qualcomm is a great provider of IP that korea is locked into no matter how much they try to get around it. until korea’s putting a lot more capital to innovation, there will be a heavy reliance on japan.
Besides automobile parts and mold compound insulation for electronic devices, Korean chaebols’ production of LCD/TFT screens/monitors, mobile phones, PDAs, etc. also use Japanese optical films, specifically, Nitto Denko’s optical film. There is a Korea-Nitto Optical LCD Film Manufacturing Plant in Pyeongtaek.
Korea of late, is also exploring technological cooperation with Israel as well. Samsung’s partnership with Sightic Vista is worth noting.
See:
http://www.koril-rdf.or.kr/abo.....9f86a09a55
Over the years I’ve heard much bellyaching about this very topic, and several “national technology self-reliance” schemes have been proposed. What is often left unsaid is that these imported components have firstly allowed Korea to leap frog into new products (ones that it couldn’t produce solely on its own), and secondly they allowed Korea to expand its exports (and considerable trade surplus) as well as provide new products to the domestic market, i.e., ones that other nations - Japan - enjoyed advantage but were locked out of the marketplace.
Korea could certainly invest considerable sums to duplicate these technologies, but to what end? Will these “new, domestically developed” technologies require protection too?
That Japan enjoys a surplus and Korea depends on Japanese tech surely grates the pride of many.
A sound motive for import substitution?
#3 Well if Australia’s/Canada’s raw materials are easily substituted then why are the prices going up so much?. So Posco decides not to buy coking coal, what do they substitute it with? Mangoes!
The products may be homogonous, but in no way are they easily substituted.
It is in fact finished products that are easily substituted. Flat screen TV’s come from a variety of factories, there is over production, so prices have come down!
Re: #1 Ditto that.
WangKon, nice job breaking it down in layman’s terms.
I view this trade deficit as more of an economic security concern. Should nationalism rachet up (not under Lee, but under the next ROK Pres., maybe) Japanese firms could listen to the likes of Toyota and put a hurting on Korean firms needing the Japanese capital equipment. However, that’s not likely to happen.
Also, to Korea’s credit, Japan has been industrialized much longer, so it’s economy has had more time to mature and develop those feeder industries.
However, Korea is catching up even now. I can think of no better example than the Mitsubishi-licensed Equus vs. the domestically designed Genesis.
Korea will catch up sooner rather than later, methinks.
#1 and #11,
Thanks. I think it’s better to be understood by the many than by the very few…
trade deficit with Japan does not matter.
That’s interesting coming from someone who bemoans the fact that Korean Americans buy too many Japanese cars and not enough Korean ones. Isn’t it ironic that a big chunk of change used to buy Korean cars is funneled to benefit Japanese companies anyways?
Its more ironic that we’re using Japanese capital goods to overtake Japanese companies.
The Japs must be pissed as hell.
I seriously doubt anyone will, especially Korea, sign an FTA agreement with Japan when nationalism is so profound in that country.
wang, much of the South Korean industry and growth came from doing whatever Japan did, and then doing their own thing.
you name it.
ship building, automobiles, ramen, snacks, pretty much nothing is unique to the peninsula, but actually originates from the Japanese isles.
yet, bottom line, is buying Korean returns as much profit as possible back to Koreans.
and, sometimes but very rarely, the role is reversed, as in SamSung.
what’s 60 years of trade deficits with Japan? South Korea surpassed some west Europe nations in GDP.
from literally a nation producing nothing of interest for anyone.
i don’t care for trade deficits, whether it be US trade deficits or ROK trade deficits.
whereas, buy a Toyota, I mean a Zero, and not a penny goes to the Koreans.
unless, the car dealer is your jip-sa-nim at your church.
i know how things work in our world.
I think Toyota should use that as an advertising slogan.
Korea has a trade deficit with Japan. Japan has a trade deficit with China. And China has a trade deficit with Korea. That is what “International Trade” is all about. A Win-win situation.
right as usual, Natto San.
I came to the conclusion that Koreans as a whole are too much of a Japanophile bunch,
and whether or not Korea accepts it or not,
Japan is one of the top 2 nations that fundamentally affect the Korean economy.
and whether or not Korea accepts it or not,
Japan taught Korea, pretty much since late 1800s, not the other way around. The teaching position was effectively abandoned sometime before AD 1000. Europe filled in nicely for them, and it was truly to Korea’s peril.
But, Koreans must still vehemently combat the inherent, insistent, condescending, unrepentent attitude of the Japanese regarding Koreans, with respect to colonization. No tribe in the world appreciates lack of independence. Westerners are fools to suggest that Koreans do otherwise. Dutch still don’t like the Deutsch, comprende? A Dutchman, who is now an American in Georgia, who used to work for Fokker, told me so.
economics wise, do what exactly what Lee Myung Bak plans. Trade and wish for peace and prosperity.
in this century, we’ve seen what isolation has done to the following countries,
Cuba, Myanmar, North Korea, Zimbabwe, Iraq.
not pretty.
On substitution, for Austin:
Finished goods are not substitutable. Try telling a kid who wants an Xbox to take a Playstation instead. If your girlfriend needs a Prada handbag to match an outfit, the Chanel won’t do. If the Razr is hot this year, a cool dude doesn’t want to carry a Nokia. Finished goods are ‘high value-added’, meaning that they are worth more than the sum of their parts, thanks to design, marketing, branding effects.
A blast furnace can function on coal from any of several mines in any of several countries. That’s why there is one world price for any particular grade of coal - it doesn’t matter where it comes from, its properties are the same. It’s a commodity.
You’re right that some things become commoditized with mass production. Upon market introduction, flat screen panels are high-value added products, and branding matters. As production lines became able to pump them out cheaply in mass quantities, it became difficult for manufacturers to convince consumers to pay more for any particular brand or design of flat panel. They became commodities. Starbucks reversed this process for another basic commodity: coffee.
Note that commodity only means undifferentiated. It does not necessarily mean cheap. There is one global price, and it goes up and down on supply and demand.
Thanks Linkd. You saved me some typing.
Did you check out my response to you here?
http://www.rjkoehler.com/2008/.....ent-153795
Yeah, thanks, but what’s a xanga?
Xanga’s a blog host for kids under thirty.
It was early in my blogging experience. I didn’t know any better.
I remember xanga… it was quite an online experience when I was 15.
Didn’t know it still existed… thought myspace/facebook would’ve suffocated it.
An economic talk that I can actually understand. Awesome. The commodity-Finished good difference, I learned while playing Sid Meier’s Colonization though.
Okay, to those of you who say that the trade imbalance with Japan doesn’t matter, you are dead wrong.
The trade deficit with Japan for the first quarter of 2008 is $8.3 billion. Korea’s total current account deficit for the same time period is $5.2 billion. Current account is the trade balance plus capital inflows/outflows. Given that the trade deficit with Japan is GREATER THEN all the current account deficit, it means that it is one of the leading determinants of Korea’s negative current account balance (”CAB”).
ALL developed nations strive to have a positive CAB. Germany and Japan have the most consistent level of positive CABs because not only do they make world class products, but because they also make the MEANS of production, i.e. the capital goods. Go into a factory anywhere on the face of the earth, what do you see? A German lathe, a Japanese testing & measurement machine, so on and so forth.
The only developed nation that can get away with consistently negative CAB is the U.S. and that’s only because the rest of the world has a vested interest in having a stable U.S. currency and economy. The U.S. has the best of both worlds. They can spend more money then they have and get foreigners to give them more money. Korea? Not so much by a long shot.
Some of the inputs in this blog is interesting and I agree with the majority of it. I agree that it’s interesting to see how Korean immigrants love Japanese cars. If you go to Koreatown in Los Angeles or in Orange Country, they are filled with Japanese cars. Korea considers Japan as a rival, but why purchase cars from a rival country? Even KBS World airs Toyota and Honda commercials. Koreans are known as being nationalists, if so, why aren’t Koreans proud of their own cars and products? I also have to agree that Koreans are dependent on Japan. Another thing is that Koreans are known to open Japanese and sushi restaurants abroad. Why can’t Korean food, beer and so on sell? If Koreans are so proud, their country should be well known as well as their food. Whatever Korea’s feelings are towards Japan, Japan is still the winner, even during the WBC when Ichiro was playing.
Also, even if Hyundai and other korean products have Japanese parts in them, I would still purchase them. For example, the design of the 2008 Hyundai Sonata and Elantra look better then the Toyota Camry and Honda Accord. If I had the money, I would purchase a Hyundai Sonota.
Koreans really need to work on marketing their culture, food and country to the world. Koreans have to use Japan to go to the next level. Korean beer such as Cass, OB and Hite should be more well known. If Korean food became popular such as Chinese food is, then Korea’s image would drastically change and it will benefit the economy. I don’t know why koreans don’t market their own food and country to the world. Koreans need to make Korean food popular outside of Asia. This is something the Korean government has to take seriously. Anyway, I’m about to purchase a 42 inch LG LCD TV from Best Buy or Circuit City next week.
wjk:
“Dutch still don’t like the Deutsch, comprende? A Dutchman, who is now an American in Georgia, who used to work for Fokker, told me so.”
Did you know that Fokker was actually started by a Dutchman in Germany in 1912?
And Prince Bernhard,the husband of the Queen of the Netherland and the member of the board of supervisors of Fokker,was a German?
wjk:
“Dutch still don’t like the Deutsch, comprende? A Dutchman, who is now an American in Georgia, who used to work for Fokker, told me so.”
Did you know that Fokker was actually started by a Dutchman in Germany in 1912?
And Prince Bernhard,the husband of the Queen of the Netherland and the member of the board of supervisors of Fokker,was a German?
One Trackback
[...] Let’s not forget Korea’s addiction to Japanese technology and subcomponent products (which was also outlined here). [...]