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South Korea


May 9 has been set as the date when South Koreans will go to the polls to elect a new President, to replace the disgraced Park Geun-hye. This follows a ruling by the eight-member Constitutional Court on March 10 which unanimously upheld the decision by the National Assembly to impeach her for conspiring with a confidante to extort money from big companies and then seeking to conceal her wrongdoing. Until a new head of state has been elected, the former Prime Minister Hwang Kyo-ahn will stay on as Acting President. Unfortunately, this means that Korea is in for a few more weeks during which pressing economic policy issues will be given short shrift, as has been the case during the months of rancorous protests and legislative inaction that followed the eruption of the influence-peddling scandal last October.

The political turmoil that has damaged consumer confidence and private consumption is not about to end just yet. Construction investment has been hurt by tighter mortgage rules. Business confidence has been hit by the arrest of the head of the electronics chaebol Samsung Group, Lee Jae-yong, over corruption allegations linked to the scandal that led to Ms. Park’s impeachment, which has hit the company just as it seeks to recover from the fallout surrounding its fire-prone Galaxy Note 7 smartphone. This, too, is a cloud over the economy that will not lift right away. I do expect, though, that the incoming President will pursue an expansionary fiscal course in an effort to uphold consumption by debt-laden households and to support employment by backing faltering mainstay industries. When all is said and done, the consensus forecast predicting 2.4% real economic growth for 2017 looks fairly realistic.

The nasty fly in the ointment could be relations with China, which is the recipient of one-fourth of Korea’s exports and has become a critical economic partner. Beijing has made it quite clear that it resents Seoul’s plan to deploy a US anti-ballistic system – the terminal high altitude air defense platform or THAAD – to protect its citizens from an increasingly bellicose North. It fears that the US will use the system’s powerful radar to look deep into Chinese territory and monitor its missiles as well, reducing their effectiveness as a threat as well as a deterrent. To underscore its disapproval, the Chinese government has begun to orchestrate a corporate boycott against South Korean companies, for now targeting in particular the Lotte Group, which owns 100 supermarkets in China and had approved a land swap in South Korea allowing deployment of the THAAD on one of its golf courses. Chinese tour groups have been banned from visiting South Korea and Beijing is obviously determined to ratchet up its pressure. Almost every major Korean company relies heavily on Chinese sales, so the ultimate impact of a PRC boycott could be severe.

On the other hand, the US cannot afford to relent in its determination to see the THAAD deployed, not given the existing security agreement between Washington and Seoul, not with 28,500 US troops stationed in South Korea to bolster defenses against the North and act as trigger, and not with Pyongyang making rapid progress in its development of a long-range ballistic missile that is capable of targeting the US Western seaboard thousands of miles away. For the longest time, various US governments, including those of Pres. Clinton and Pres. Bush, had hoped to persuade China, North Korea’s biggest aid donor, foreign investor and trade partner, to stop what essentially is a client state from building an ever more formidable nuclear arsenal and fashioning the missiles to deliver those weapons. But China showed neither the ability nor the will to contain Pyongyang, even though lately, after years of prevarication, it has taken a few tiny steps to show that it is not exactly happy with North Korean leader Kim Jong Un’s ambitions.

With this in mind, US Secretary of State Rex Tillerson, on his first trip to Asia, made it clear that “the policy of strategic patience has ended,” referring to the Obama Administration’s notion that Pyongyang can be contained, even if it cannot be prevented from becoming a nuclear power. He stressed, quite correctly, that punishing South Korea for deploying the US anti-missile system “is not the way for a regional power to help resolve what is a serious threat to everyone,” and that Beijing should instead “address the threat that makes THAAD necessary.” The White House has a number of options, and for now it seems unprepared to take any of them off the table. But for the next man in the Blue House, the presidential residence in Seoul, the alternatives will be much more limited.

It is, of course, still an open question who will win the elections. For now, the clear front-runner and favorite is Moon Jae-in, a former leader of the opposition Minjoo party who ran and lost against Ms. Park and her conservative Saenuri party in 2012. Public opinion polls give him an approval rating in the neighborhood of 33%, which is more than 15 percentage points ahead of the next-most popular candidate, Ahn Hee-jung. At home, Mr. Moon has pledged to push for a supplemental budget, if elected, to crank up the sluggish economy. Internationally, his instincts appear to point him in the direction of being cooler on his country’s alliance with America and more interested in the old “sunshine” policy, which favors making nice with North Korea in the hope that this will help moderate Pyongyang’s aggressiveness.

A realistic assessment of the situation hardly supports the pacifist view and the conclusion that Seoul should resist deployment of the THAAD system. Besides, the next South Korean government, whatever its stripes, cannot afford to alienate the Trump Administration when Washington remains the guarantor of its security and the US is even more important to the economy than China. Korea has a bilateral trade agreement with the US, known as KORUS FTA, which involves an estimated 362 million consumers on both sides. It not only eliminates 95% of each nation’s tariffs on goods but also has created new protections for multinational financial services and other firms. Last year, the US exported USD 42.266 billion worth of merchandise to Korea and accepted USD 69.932 billion in imports from there, giving Seoul a trade surplus of USD 27.666 billion.

In short, the incoming Korean President will have some difficult decisions to make and the same will be true for the Trump team, as the tension clawing at the Korean Peninsula is much more likely to get worse than to improve. Korea does not want to alienate the US, but fears increasing retribution from China. The US does not want to alienate Beijing, especially amid heightened tensions over the South China Sea, but it has lost faith with Pres. Xi Jinping and his ability and/or willingness to get tough with Pyongyang. The Trump Administration reportedly is considering increasing financial penalties on Chinese companies in response to growing evidence of their support for North Korea’s weapons programs. This undoubtedly would risk retaliation from Beijing. And behind the scenes South Korea is said to be in the process of creating a highly-trained hit squad, modeled on special forces operations in the US, with the mission to “eliminate” Kim Jong Un and his top military commanders in the event of war…. With all options being on the table, this is a hot spot that will continue to warrant close watching.

Global Perspectives by Dr. Hans Belcsak