yearbook

YEARBOOK

US-KOREA 2014

US-KOREA 2014

YEARBOOK

Published by the U.S.-Korea Institute at SAIS www.uskoreainstitute.org

SAIS U.S.-Korea Yearbook 2014

Copyright © 2015 by the U.S.-Korea Institute at SAIS (www.uskoreainstitute.org) The Paul H. Nitze School of Advanced International Studies, Johns Hopkins University Printed in the United States The views expressed in this publication are those of the authors and do not necessarily reflect the views of individual members of the U.S.-Korea Institute at SAIS or its Advisory Council Members. All rights reserved, except that authorization is given herewith to academic institutions to reproduce articles herein for academic use as long as appropriate credit is given both to the authors and to this publication.

TABLE OF CONTENTS Introduction .....................................................................................................3 Acknowledgements ..........................................................................................5 Contributors .....................................................................................................7 Yearbook Overview ..........................................................................................9 A Dangerous Triangle: The Impact of Chinese-Japanese-South Korean Relations on U.S. Policy, by Mario Vanella .................................................11 The Twenty-Year Crisis of the North Korean Economy: Reflections upon the Two Decades (1992-2012) and the Search for a Viable Soft Landing, by Ju Hyung Kim ........................................................................................................29 Institutional Path Dependence in Korean Trade Liberalization, by Kendrick Kuo .........................................................................................................45 Republic of Korea’s Participation in Global Value Chains: How to Increase Forward Participation, by Alin Horj .........................................................63 South Korea’s Energy Security: Vulnerabilities and Opportunities for LNG in the Face of Weak Oil Prices, by Jagabanta Ningthoujam ..........................83 No Home for the Household: The Implications of Household Debt and Demographic Change on the Real Estate Market in South Korea, by Kyu Seok Shim .....................................................................................................101

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INTRODUCTION This 2014 edition of the SAIS U.S.-Korea Yearbook is a product of extensive research and study by SAIS students in the course, “Korea’s Economic Development,” offered in the 2014 fall semester. The Korea’s Economic Development course was designed to provide an overview of economic development in Korea by exploring three areas: the basic theoretical foundations for rapid economic growth in South Korea while investigating the role of government policy and institution; contemporary economic issues in South Korea, including the 1997 and 2007 Financial Crises; the North Korean economy, analyzing the prospects for and implications of national unification. After drafting reports, students traveled to Seoul in November 2014 to participate in various briefings and interviews with Korean government officials, scholars, and politicians. The authors’ insights are not only based on extensive reading, but also on interviews conducted with experts in Seoul and Washington, DC. This yearbook is composed of six papers of varying topics. Mario Vanella begins the yearbook by addressing the U.S. foreign policy implications of the current relationship between South Korea, China and Japan, and proposes policy recommendations for regional stability. Ju Hyung Kim examines two decades of North Korean history, analyzing policy responses of North Korean leadership and implications for the future. Kendrick Kuo discusses the development of South Korea’s free trade strategy of institutional path dependence after the 1997 financial crisis, examining the variables that contributed to this evolution. Global value chains are explored in Alin Horj’s paper as he examines the drivers behind participation and makes recommendations for South Korea’s forward and backward participation. Jagabanta Ningthoujam focuses on opportunities for LNG in South Korea’s energy security landscape, offering suggestions to improve competitiveness and energy security as well as addressing the risks. To conclude the scholarly compilation, Kyu Seok Shim assesses the implications of South Korea’s demographic transition on the real estate market, the risks that increasing household debt poses for the country, and the government’s response to this economic crisis. The yearbook represents the culmination of a semester-long intellectual endeavor to understand the past, present, and future of Korea. We hope that readers will find this 2014 Yearbook to be informative on affairs on the Korean peninsula and a useful contribution to current U.S.-Korea scholarship.

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ACKNOWLEDGEMENTS The publication of the 2014 Yearbook, a proud product of the “Korea’s Economic Development” class taught at the Johns Hopkins School of Advanced International Studies (SAIS), would not have been possible without the help and support of many individuals. First and foremost, we would like to express sincere gratitude to the U.S.-Korea Institute Chairman Emeritus Don Oberdorfer, USKI Chairman Ambassador Stephen Bosworth, Deputy Chairman Yong Shik Choo, and Director Jae H. Ku for their unwavering support for the Korea Studies Program, the “Korea’s Economic Development” class, and the Yearbook. We would also like to acknowledge the many officials and scholars in Washington and Seoul who helped arrange professional meetings and took their precious time to meet with the class and/or individual students to discuss their research topics of interest. Thanks to the insight, knowledge, and generosity of these officials and scholars, the student authors were able to produce excellent works of research and analysis that are found in this year’s publication. Most of all, we would like to recognize the students of the “Korea’s Economic Development” class for their efforts throughout the fall of 2014. Special thanks are directed to USKI Assistant Director Jenny Town and Korea Studies Academic Program Manager Sarabeth Craig for managing the administrative and logistical details of the research trip, and overseeing the production of the Yearbook.

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CONTRIBUTORS Alin Horj is a second-year M.A. student at SAIS, concentrating in Southeast Asia Studies and International Economics. Prior to SAIS, Alin lived in Thailand for one year, interning with the United Nations Education, Science and Cultural Organization (UNESCO), and researching on environmental issues at the Chulalongkorn University in Bangkok. He plans to work in Southeast Asia on regional trade policies and trade facilitation. As an undergraduate student at Ca` Foscari University in Venice and Georgia State University in Atlanta, he obtained a double degree in Economics and studied abroad in Belgium and France. Ju Hyung Kim is a first-year M.A. student at SAIS, concentrating in Conflict Management and Korea Studies. After graduating from Seoul National University and majoring in public policy, he was involved in a number of field experiences ranging from finance to political research. He worked at Woori Investment & Securities, the Asia Society Korea Centre, and the Korea Institute of International Studies. He speaks French and Spanish, and is especially interested in the issue of nation-building and alliance management Kendrick Kuo is a second-year M.A. student at SAIS, concentrating in China Studies and International Economics. He is also an editorial assistant for War on the Rocks. He graduated summa cum laude and Phi Beta Kappa from the George Washington University with a B.A. in International Affairs and Religion. In 2010, he was a Boren Scholar at the University of Jordan. After graduating from SAIS, he will return to GWU as a PhD candidate in the Department of Political Science. Jagabanta Ningthoujam is a second-year M.A. student at SAIS, concentrating in International Development and International Economics. Prior to SAIS, he worked as an energy consultant focusing on the gas, power and renewable market in the Asia-Pacific. He studied Mechanical Engineering at the National University of Singapore and has lived and worked in Singapore, India, and Japan. After SAIS, he intends to work for a major multilateral bank focusing on the crossroad between energy and development. Kyu Seok Shim is a second-year M.A. student at SAIS, concentrating in Korea Studies and Global Theory and History. Prior to SAIS, he has lived in Brazil and obtained his B.A. in Political Science and History from Columbia University. He has interned at a trade research organization, and has also taught at a private academy in Seoul. His primary academic interests include democratic development in South Korea and patronage networks from a comparative perspective. He aims to continue his studies by pursuing a PhD in these subjects.

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Mario Vanella is a second-year M.A. student at SAIS, concentrating in Strategic Studies and International Economics. He was awarded the Carlo Maria Santoro Fellowship and the Marie Kraus Fellowship. Prior to SAIS, Mario obtained his JD and his M.A. in Business Law at the Università Cattolica del Sacro Cuore in Milan. He worked as political advisor for the Vice President of the European Parliament and then as a lobbyist in the private sector. He has relevant work experiences in Italy, Belgium, USA, Israel and Argentina. He speaks 5 languages.

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YEARBOOK OVERVIEW A Dangerous Triangle: The Impact of Chinese-Japanese-South Korean Relations on U.S. Policy by Mario Vanella Mario Vanella examines the complicated relations between China, Japan, and South Korea. The paper analyzes the issues currently exacerbating the relationship between Japan and South Korea, their economic relations, and the possible military diplomacy between the two countries. The paper then discusses the Sino – South Korean economic relations and the FTA’s economic effects, and proposes policy recommendations aiming to the conservation of the regional equilibrium. The Twenty-Year Crisis of the North Korean Economy: Reflections upon Two Decades (1992-2012) and the Search for a Viable Soft Landing by Ju Hyung Kim Ju Hyung examines the North Korean economy’s structural degeneration during the twenty year timeframe (1992-2012) and its overall implication. From the analysis of North Korea leader’s policy response in the post-Cold war era, he concludes that the DPRK’s structural degeneration was an ineluctable result of the political bargaining among incompatible options: striking a balance between regime stability and economic liberalization. Institutional Path Dependence in Korean Trade Liberalization by Kendrick Kuo Kendrick Kuo analyzes the development of South Korea’s free trade strategy in the aftermath of the 1997 financial crisis. Using an institutional path dependence approach to political economy, he argues that contingencies created by the crisis, the strategy of setting precedents, and bureaucratic inertia are important variables in the evolution of South Korea as a free trade hub. Republic of Korea’s Participation in Global Value Chains: How to Increase Forward Participation by Alin Horj Alin Horj examines the role of global value chains for the Republic of Korea’s growth, arguing that participation is mainly driven by exports of high-tech industries that are fragmented along the production networks and have intense usage of foreign intermediates. An analysis of forward participation and backward participation suggests that Korea should increase its forward

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participation by investing in sectors that are less fragmented, such as upgraded services links and software, which are less likely to be sliced up along the value chain of production. South Korea’s Energy Security: Vulnerabilities and Opportunities for LNG in the Face of Weak Oil Prices by Jagabanta Ningthoujam Jagabanta Ningthoujam examines the energy security landscape of South Korea under the evolving era of weak oil prices using the Liquefied Natural Gas (LNG) supply situation as a lens. It signals unique opportunities to improve competitiveness and energy security, albeit with a new risk of energy supply constrictions and an environment of potential deflation. He argues that Longterm competitiveness must rely on diversification. No Home for the Household: The Implications of Household Debt and Demographic Changes on the Real Estate Market in South Korea by Kyu Seok Shim Kyu Seok Shim examines the implications of South Korea’s demographic transition on its real estate market and the risks posed by a rapidly escalating household debt. He also analyzes the ROK government’s response to the faltering demand in the housing sector and argues that it may only serve to further leverage homebuyers, presenting the possibility of a long term economic crisis in the aging country.

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Institutional Path Dependence in Korean Trade Liberalization by Kendrick Kuo

Institutional Path Dependence in Korean Trade Liberalization by Kendrick Kuo

I. INTRODUCTION Why did the Republic of Korea develop a free trade agreement (FTA) strategy in the early 2000s? Embracing FTAs was part of a broader response to the 1997 financial crisis, which provided a window of opportunity to make fundamental reforms to the country’s political economy. An explanation using the pursuit of self-interested gain, however, is too simple. It ignores the historical factors that made reform possible, the ideas that shaped the type of response chosen, and the institutions that sustained Seoul’s commitment to FTAs as part of its economic strategy. In other words, to tell an accurate story of South Korea’s (henceforth Korea) requires recognition of how path dependent forces affect policy decisions. Paul Pierson defines path dependence as “social processes that exhibit positive feedback and thus generate branching patterns of historical development.”1 Positive feedback implies that the cost of switching from one alternative to another increases over time. Economists started exploring the idea of “increasing returns” as an alternative to decreasing marginal returns, first recognized in technological progress. This idea bled into political economic research when Douglas North and Paul Pierson began formally examining the way institutions exhibit path dependent tendencies.2 Decisions to create or reform an institution occur when a critical juncture offers a unique environment conducive to such changes; and once a path is chosen, subsequent time periods reinforce the divergent paths. Actors then make decisions within these institutional contexts, which limit the choices available to them and incentivize actors to continue down the selected trajectory.3 Institutional path dependence is directly relevant to Korea’s FTA strategy. Free trade agreements require significant start-up costs, but as individuals and organizations learn and develop institutional habits, a new status quo takes hold when they implement the agreement. Moreover, predictions that more free trade agreements will be signed cause individuals and groups to adapt their actions in ways that help make those expectations come true. Investigating the path dependent dynamics of Korea’s trade liberalization helps policy researchers understand where Korea comes from and where it 1 Paul Pierson, Politics in Time: History, Institutions, and Social Analysis (Princeton, NJ: Princeton University Press, 2004), 21. 2 See Douglass C. North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge University Press). 3 Ibid., 23.

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may be going. First, a path dependence approach will be placed in the context of existing literature on determinants of FTAs. Second, path dependence theory will be explained. Third, the empirical evidence will be explored along the lines of contingency, sequencing, and inertia—all noted characteristics of path dependence. Finally, implications for the future direction of Korea’s FTA strategy will be considered. II. WHERE DOES TRADE LIBERALIZATION COME FROM? Understanding existing political economy approaches to free trade agreements offers a useful backdrop for grasping the applicability of path dependence theory, which complements and crosscuts many schools of thought.4 The “demand” school emphasizes factors at the domestic level, principally involving import-competing and exporting industries, and their potential influence on policymaking. The most prevalent research is on importcompeting industries’ interest groups who organize politically to promote protectionism. This assumes that elected officials will bend to these demands to maximize the chances of winning elections. There are disagreements over whether trade policy will generate factoral cleavages between capital and labor or sectoral cleavages.5 In both arguments, factor mobility plays a determinative role. One interpretation of the effects of capital mobility is that higher capital mobility is correlated with an increased likelihood of trade liberalization.6 In another study, based on differences in capital-labor endowment ratios, Scott Baier and Jeffrey Bergstrand found a correlation between potential welfare gains from a free trade agreement and the agreement’s successful conclusion.7 There are also non-industrial interest groups to consider. During recessions and exchange

4 I follow the schemas of Helen V. Milner, “The Political Economy of International Trade,” Annual Review of Political Science 2, no. 1 (1999): 92; and Marc Busch and Edward Mansfield, “The Political Economy of Trade Policy,” in (accessed November 3, 2014). 5 For a factoral cleavage arguments, refer to Ronald Rogowski, “Commerce and Coalitions: How Trade Affects Domestic Political Alignments,” in Jeffry A. Frieden and David A. Lake (eds.), International Political Economy: Perspectives on Global Power and Wealth (Princeton, NJ: Routledge, 1989); Anna Maria Mayda and Dani Rodrik, “Why are some People (and Countries) More Protectionist than Others?” European Economic Review 49, no. 6 (2005): 1393-1430; Kevin O’Rourke, Richard Sinnott, J. David Richardson, and Dani Rodrik, “The Determinants of Individual Trade Policy Preferences: International Survey Evidence,” Brookings Trade Forum (Washington, DC: Brookings Institution Press, 2001), 157-206; Kenneth F. Scheve and Matthew J. Slaughter, “What Determines Individual Trade-Policy Preferences?” Journal of International Economics 54, no. 2 (2001): 267-292. For sectoral cleavage arguments, refer to Douglas A. Irwin, “Industry Or Class Cleavages Over Trade Policy? Evidence from the British General Election of 1923,” in R.C. Feenstra, G.M. Grossman, and D.A. Irwin (eds.), The Political Economy of Trade Policy: Essays in Honor of Jagdish Bhagwati (Cambridge, MA: MIT Press), 53-76; Douglas A. Irwin and Randall S. Kroszner, “Interests, Institutions, and Ideology in Securing Policy Change: The Republican Conversion to Trade Liberalization After Smoot-Hawley,” The Journal of Law and Economics 42, no. 2 (1999): 643-674; Stephen Magee, “Three Simple Tests of the Stolper-Samuelson Theorem,” in Peter Oppenheimer (ed.), The Stolper-Samuelson Theorem: A Golden Jubilee (London: Oriel Press, 1994), 185; Marc L. Busch and Eric Reinhardt, “Geography, International Trade, and Political Mobilization in US Industries,” American Journal of Political Science (2000): 703-719. 6 Giovanni Maggi and Andres Rodriguez-Clare, “A Political-Economy Theory of Trade Agreements,” American Economic Review 97, no. 4 (September 2007): 1374-1406. 7 S.L. Baier and J.H. Bergstrand, “Economic Determinants of Free Trade Agreements,” Journal of International Economics 64, no. 1 (October 2004): 24.

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Institutional Path Dependence in Korean Trade Liberalization

rate fluctuations, government officials may bend to the pressure for relief from imports.8 At the same time, if the macroeconomic situation is bad enough, developing countries may liberalize trade regimes to jumpstart their economies.9 The “supply” side school focuses on the effects of variation in state institutions and political regimes to identify impacts on protectionist policies. Earlier work focused on “state strength” and the ability to insulate from and withstand group pressure.10 During the 1980s, political economists started examining how domestic political institutions might promote trade liberalization as citizens held officials accountable for the health of the economy.11 Others found that democracies tend to trade more with one another and that democratization promotes trade liberalization among developing countries since it usually benefits labor.12 Contrarily, skeptics reasoned that democratization empowers a variety of economic interest groups, leading to cross-national competition among them, gridlocking the trade liberalization process.13 Other cited factors in democracies that potentially hamper effective trade policy formulation include partisanship,14 the number of “veto points” (i.e. independent partisan and institutional actors),15 a presidential versus parliamentary system,16 and the average size of constituency blocs.17 The third approach examines international institutions and the way they entrench multilateral trade liberalization even after popular support has 8 Scott Bradford, “Protection and Jobs: Explaining the Structure of Trade Barriers Across Industries,” Journal of International Economics 61, no. 1 (2003): 19-39; Rudiger Dornbusch and Jeffrey Frankel, “Macroeconomics and Protection,” in R.M. Stern (ed.), US Trade Policies in a Changing World Economy (Cambridge, MA: MIT Press, 1987), 77-130. 9 Dani Rodrik, “The Rush to Free Trade in the Developing World: Why so Late? Why Now? Will it Last?” in S. Haggard and S.B. Webb (eds.), Voting for Reform: Democracy, Political Liberalization, and Economic Adjustment (New York: Oxford University Press, 1992), 61-88. 10 Katzenstein, Peter J. Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison: University of Wisconsin Press, 1977); Stephen D. Krasner, Defending the National Interest: Raw Materials Investments and US Foreign Policy (Princeton University Press, 1978); Stephen D. Krasner, “US Commercial and Monetary Policy: Unravelling the Paradox of External Strength and Internal Weakness,” International Organization 31, no. 04 (1977): 635-671. 11 Timothy Frye and Edward D. Mansfield, “Timing is Everything Elections and Trade Liberalization in the Postcommunist World,” Comparative Political Studies 37, no. 4 (2004): 371-398; Witold J. Henisz and Edward D. Mansfield, “Votes and Vetoes: The Political Determinants of Commercial Openness,” International Studies Quarterly 50, no. 1 (2006): 189-212. 12 Edward D. Mansfield, Helen V. Milner, and B. Peter Rosendorff, “Free to Trade: Democracies, Autocracies, and International Trade,” American Political Science Review (2000): 305-321; Helen V. Milner and Keiko Kubota, “Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries,” International Organization 59, no. 01 (2005): 107-143. 13 Daniel Verdier, “Democratic Convergence and Free Trade,” International Studies Quarterly 42, no. 1 (1998): 1-24. 14 Pushan Dutt and Devashish Mitra, “Political Ideology and Endogenous Trade Policy: An Empirical Investigation,” Review of Economics and Statistics 87, no. 1 (2005): 59-72; Beth A. Simmons, Who Adjusts?: Domestic Sources of Foreign Economic Policy during the Interwar Years (Princeton University Press, 1997). 15 Witold J. Henisz, “The Institutional Environment for Economic Growth,” Economics & Politics 12, no. 1 (2000): 1-31; George Tsebelis, Veto Players: How Political Institutions Work (Princeton University Press, 2002); Susanne Lohmann and Sharyn O’Halloran, “Divided Government and US Trade Policy: Theory and Evidence,” International Organization 48, no. 04 (1994): 595-632; Michael J. Gilligan, Empowering Exporters: Reciprocity, Delegation, and Collective Action in American Trade Policy (University of Michigan Press, 1997); Sean D. Ehrlich, “Access to Protection: Domestic Institutions and Trade Policy in Democracies,” International Organization 61, no. 03 (2007): 571-605. 16 Ronald Rogowski and Mark Andreas Kayser, “Majoritarian Electoral Systems and Consumer Power: Price-Level Evidence from the OECD Countries,” American Journal of Political Science (2002): 526-539; Helen V. Milner and Benjamin Judkins, “Partisanship, Trade Policy, and Globalization: Is there a left–right Divide on Trade Policy?” International Studies Quarterly 48, no. 1 (2004): 95-120 17 Daniel L. Nielson, “Supplying Trade Reform: Political Institutions and Liberalization in Middle-Income Presidential Democracies,” American Journal of Political Science 47, no. 3 (2003): 470-491; David Karol, “Does Constituency Size Affect Elected Officials’ Trade Policy Preferences?” Journal of Politics 69, no. 2 (2007): 483-494.

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eroded.18 Intuitively, multilateral regimes are expected to encourage free trade by imposing obligations that limit the ability for government officials to acquiesce to protectionist pressures. Andrew Rose, however, questioned this presumption, citing empirical evidence that GATT/WTO members did not conduct more trade than other states;19 yet this evidence itself has been questioned by those arguing that Rose failed to take account of all beneficiaries, including nonmembers, and other institutions that comprise the multilateral framework.20 Additional debates surround whether international institutions help or undermine free trade. For example, stronger institutionalized linkages through the WTO trade rounds arguably created greater liberalization in agricultural trade.21 On the other hand, the U.S. Generalized System of Preferences, which grants non-reciprocal market access to developing countries, may undercut free trade in those countries by weakening export-oriented segments of society.22Another discussion is the efficacy demonstrated by international institutions in enforcing compliance. Some argue that GATT/WTO rulings have received high levels of compliance even if cases are brought against developed countries by developing ones.23 Others disagree, identifying market size as a key independent variable in determining compliance.24 These three generalized approaches are not mutually exclusive. Similarly, path dependence dynamics can be integrated into these analytical perspectives. III. DEFINING PATH DEPENDENCE Path dependent forces can supplement the demand school in ways institutions shape the demands made and how realignment of interest groups over time can buttress a chosen policy to promote or downplay certain economic sectors. Domestic political institutions are path dependent entities and therefore do not have infinite malleability. And international trade institutions, like domestic political ones, have evolved and continue to evolve along a certain trajectory. Analysis of international trade liberalization in Asia has centered on “building block” theory, taking either economic or political form. The “building block” formulation comes from Richard Baldwin’s economic domino theory of regionalism, which postulates that preferential trade agreements create trade and 18 Robert O. Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton University Press, 2005). 19 Andrew K. Rose, “Do we really Know that the WTO Increases Trade?” American Economic Review 94, no. 1 (2002): 98-114. 20 Arvind Subramanian and Shang-Jin Wei, “The WTO Promotes Trade, Strongly but Unevenly.” Journal of International Economics 72, no. 1 (2007): 151-175; Michael Tomz, Judith L. Goldstein, and Douglas Rivers, “Do we really Know that the WTO Increases Trade? Comment,” The American Economic Review (2007): 2005-2018. 21 Christina L. Davis, “International Institutions and Issue Linkage: Building Support for Agricultural Trade Liberalization,” American Political Science Review 98, no. 01 (2004): 153-169. 22 Çaglar Özden and Eric Reinhardt, “The Perversity of Preferences: GSP and Developing Country Trade Policies, 1976–2000,” Journal of Development Economics 78, no. 1 (2005): 1-21. 23 Marc L. Busch and Eric Reinhardt, “Geography, International Trade, and Political Mobilization in US Industries,” American Journal of Political Science (2000): 703-719. 24 Blonigen, Bruce A. and Chad P. Bown. “Antidumping and Retaliation Threats.” Journal of International Economics 60, no. 2 (2003): 249-273; Bown, Chad P. “On the Economic Success of GATT/WTO Dispute Settlement.” Review of Economics and Statistics 86, no. 3 (2004): 811-823.

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investment diversion, which in turn incentivizes excluded countries to either join the agreements or establish their own agreements.25 As FTAs proliferate, trade liberalization chips away at import-competing sectors vis-à-vis exporters, strengthening pro-liberalization political groups at the domestic level. John Ravenhill proposed a political interpretation of Asia’s growing number of agreements. Instead, governments accede to FTAs to prevent exclusion from regional economic diplomacy.26 Ravenhill does not use the “building block” label to describe his own hypotheses, but the path dependent process described is similar enough to warrant grouping them together for the sake of my analysis here. An alternative to both economic and political “building block” theories, the path dependence approach shows how institutions underpinning FTA activity can overcome countervailing forces, such as a decline in economic or political incentives. Multilateral trade negotiations, institutionalized within the GATT, were originally the norm and concluding regional or bilateral agreements was considered a setback. But multilateral trade institutionalization failed to generate strong enough path dependent, pro-trade policies to overcome vested economic interests; and this failure can partially account for Asia’s trend toward bilateral trade agreements.27 Therefore, institutional path dependence in FTAs will theoretically be seen most clearly at the domestic level by tracing the evolution of political economic bureaucracies and new institutional forms created to sustain trade liberalization. Path dependence can best be understood according to positive feedback processes that are observable and, therefore, indicative of path dependent dynamics. These self-reinforcing institutional processes are marked by contingency, a critical role for sequence, and inertia.28 Contingency refers to a situation where a constellation of conditions combine to offer a unique opportunity to effect fundamental change. Sequencing is important because history is remembered institutionally, and small events can have a greater effect than large events later on; and so analyses must incorporate stretches of time in order to account for historical causation. Finally, institutional inertia offers a plausible counter-narrative to functionalist explanations of social outcomes, particularly those who emphasize rational choice theory. Focusing on actors’ motives, rational choice analyses obscure slow-moving, long-term processes that clearly play an important role in 25 Richard Baldwin, “The causes of regionalism,” World Economy 20, no. 7 (1997): 865-888. 26 John Ravenhill, “The ‘new East Asian regionalism’: A political domino effect,” Review of International Political Economy 17, no. 2 (2010): 198-200. 27 John Ravenhill, “The new bilateralism in the Asia Pacific,” Third World Quarterly 24, no. 2 (2003): 300-304. John Ravenhill argues that countries in the Western Pacific abandoned multilateral trade initiatives in favor of bilateralism due to the weakness of existing regional institutions (exposed by the 1997 financial crisis), the WTO’s sluggish progress on multilateral trade negotiations, the positive experiences with regional agreements in other parts of the world, and an increasing interest among business groups for bilateral agreements. Also refer to Gregory P. Corning, “Trade Regionalism in a Realist East Asia: Rival Visions and Competitive Bilateralism,” Asian Perspective 35 (2011): 267. 28 See Pierson, 44-48. Pierson also discusses a fourth characteristic of multiple equilibria, whereby under initial conditions amenable to positive feedback, a number of outcomes are possible. Demonstrating this empirically would require historical counterfactuals and intense path-tracing that would be daunting except for the most diligent historian.

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our understanding of the social world.29 Relative efficiency is not always (if even frequently) the explanation for policy decisions. Path-dependent dynamics offer alternative explanations to power relations. The following section is an analysis of how all three path dependent characteristics of institutional continuity and change can account for the development of Korea’s FTA strategy. IV. THE DEVELOPMENT OF KOREA’S FREE TRADE AGREEMENT STRATEGY The Asian financial crisis was a critical juncture that triggered regional integration initiatives and Korea’s accelerated overhaul of its political economy. A critical juncture offers three necessary and sufficient features: a crisis undermines the legitimacy of current arrangements; there is an incentive for change and collective action; and time pressure forces parties to make important decisions with limited information.30 The significance of the financial crisis is evident not only because regional initiatives proliferated, but also because they marked the first move away from the U.S.-centric San Francisco System and toward increased intraAsian integration.31 East Asian regionalism was intimately tied with a drive to limit U.S. influence and a U.S. controlled international economy.32 Intraregional organizations were meant to offer formal mechanisms to deal with future crises.33 The 1997 financial crisis was not only a critical juncture for regional institutional innovations, but also for Korea’s political economy. Amid capital outflow of $12 billion from Asia, the Korean won lost 60 percent of its value in six months, resulting in a full-blown financial crisis. This was followed by a humiliating $57 billion IMF bailout package and downgrading of Korean sovereign debt to junk bonds status.34 The crisis also catalyzed a shift from multilateral trade—then the international norm for trade liberalization—to the adoption of an FTA policy. The prolonged GATT negotiations during the Uruguay Round already elicited skepticism about the efficacy of multilateral trade agreements as more countries joined the global trade regime. In 1999, the infamous WTO meetings in Seattle were plagued by anti-globalization protests that shut down the city. These are just two salient reasons why the multilateral trade movement began to lose momentum around the world. Korea recognized this slowdown and the economic benefits of moving forward with free trade initiatives at a bilateral 29 Ibid., 177. 30 Kent E. Calder, “Critical Junctures and the Contours of Northeast Asian Regionalism,” in Kent E. Calder and Francis Fukuyama (eds.), East Asian Multilateralism: Prospects for Regional Stability (Baltimore, MD: Johns Hopkins University Press, 2008), 27. 31 Ibid., 35. 32 Sook-Jong Lee, “Korean Perspectives on East Asian Regionalism,” in Kent E. Calder and Francis Fukuyama (eds.), East Asian Multilateralism: Prospects for Regional Stability (Baltimore, MD: Johns Hopkins University Press, 2008), 202. 33 Examples: Chiang Mai currency-swap arrangements (2000-), Asian Bond Fund, China’s $1 billion Thai support package (1997), regular ASEAN+3 finance meetings (1998-), and East Asia Summit (2005-). 34 Robert Garan, Tigers Tamed: The End of the Asian Miracle (Honolulu: University of Hawaii Press, 1998), 165.

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level, outside the multilateral framework. Political economic reform in Korea had been ongoing since the 1960s, but a significant institutional and structural overhaul was needed that could only be justified by a critical juncture.35 Contingency: 1997 Financial Crisis and Its Immediate Aftermath The need for reform does not guarantee reform, nor does it explain why a specific reform policy is chosen.36 So, why was trade liberalization on the agenda? Reform was effective because of a financial crisis that created access for international financial institutions to influence the reform process; a reform-minded leadership committed to ending the state-business nexus; and a strong state that could become a tool, via industrial policy, to engender a liberal economic order.37 In effect, “reform syndrome” had taken hold of Korea’s domestic political economy.38 International financial institutions. The IMF restructuring program for Korea was perhaps the harshest of those imposed on the crisis’s victims. Koreans label it the second-greatest national disaster after the Korean War.39 The IMF agreements signed by Korea on December 5 and 24, 1997 infamously called for financial austerity, but also—more importantly for our discussion—a Korean economy open to foreign investment and increased market orientation.40 The agreements increased foreign direct investment in Korean industrial firms through simplification of procedures, which is an unusual provision for the IMF to impose, but reflected U.S. interests as a sponsor of the bailout.41 Seoul accepted the liberalization measures because there was a lobby in Korea that favored opening up to activate more market discipline among domestic firms; and so, the Korean negotiators leveraged the IMF intervention to transition the Korean model from a developmental state to a more mature economy.42 This included a shift from a stagnant multilateral trade framework to an aggressive FTA strategy. To account for this dramatic policy transformation, a report from the Korea Institute for Economic Policy lists the main factors: “increased importance of RTAs in world trade; changes in the international perception of regionalism; the need for securing export and investment markets; the need for accelerating restructuring and opening of the Korean economy; 35 Roy W. Shin and Yeon-Seob Ha, “Political Economy of Policy Reform in Korea: Review and Analysis,” Policy Studies Review 16, no. 2 (Summer 1999): 72-80. 36 Joo-Youn Jung, “Reinventing the Interventionist State: The Korean Economic Bureaucracy Reform under the Economic Crisis,” Pacific Focus 23, no. 1 (April 2008): 124. 37 Meredith Woo-Cumings, “The State, Democracy, and the Reform of the Corporate Sector in Korea,” in T.J. Pempel (ed.), The Politics of the Asian Economic Crisis (Ithaca, NY: Cornell University Press, 1999), 130, 136. 38 Sunhyuk Kim, “The Politics of Economic Recovery in South Korea: A Comparative Perspective,” Pacific Focus 17, no. 1 (Spring 2002): 30-32. 39 Lee, 202. 40 For a fuller treatment of corporate reforms, refer to Ajai Chopra, et al., “From Crisis to Recovery in Korea: Strategy, Achievements, and Lessons,” in David T. Coe and Se-Jik Kim (eds.), Korean Crisis and Recovery (Washington, D.C.: International Monetary Fund and Korea Institute for International Economic Policy, 2002), 47-52; 68-82; Woo-Cumings, 132-133. 41 John A. Mathews, “Fashioning a New Korean Model out of the Crisis: The Rebuilding of Institutional Capabilities,” in Ha-Joon Chang, Gabriel Palma, and D. Hugh Whittaker (eds.), Financial Liberalization and the Asian Financial Crisis (New York: Palgrave, 2001), 162. 42 Ibid., 163.

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and strengthening of political and economic ties.”43 These factors coupled with the financial crisis prompted Korea’s decision to embrace FTAs with major trading countries in order to adapt to the world economy and strengthen Korea’s economic recovery.44 Seoul realized that economic reform and an open policy could influence foreign credit ratings, and were necessary for full recovery. Not to mention an ideational shift that reversed the verdict on FTAs as a closed trade policy to be seen by the WTO and OECD as a positive step for global trade liberalization.45 Iain Pirie demonstrated how the IMF intervention shifted the balance of power between reformers and conservatives in favor of the former.46 Reform-minded leadership. Kim Dae-jung won the presidency in 1997 and immediately initiated a series of policy innovations in the aftermath of the crisis.47 The financial crisis allowed Kim to truly reform the Korean system and impose top-down policies rather than a slower consensus-building and voluntary cooperation approach.48 As president-elect, Kim met with the country’s top five business leaders in January 1998, three weeks after the election, and secured their agreement to rein in the chaebol (Korean business conglomerates) and promote small and medium-sized enterprises. Kim Dae-jung’s economic team was comprised of famous critics of Korea’s chaebol system. They published the names of firms and banks threatened with closure if they could not dig themselves out of insolvency. The government also sold shares in state-run monopolies to foreigners.49 Kim was the first Korean president to proffer East Asia as a community. He improved Korea’s diplomatic relationship with Japan and visited Tokyo in October 1998, opening a new era of bilateral relations. On September 16, 1998, the Japanese Ambassador to South Korea proposed that the two countries start a joint study group to explore a bilateral FTA. Kim’s conciliatory signals to Japan likely motivated the offer. Although the proposal was not popular, the idea of an FTA piqued the interest of Korean policymakers.50 Soon thereafter, on November 5, 1998, the Inter-Ministerial Trade Policy Coordination Committee announced

43 Chan-hyun Sohn and Jinna Yoon, Korea’s FTA (Free Trade Agreement) Policy: Current Status and Future Prospects (Seoul, Korea: Korea Institute for International Economic Policy, 2001), 13-15. Also refer to Lee, 203. 44 Inkyo Cheong, Korea’s FTA Policy: Focusing on Bilateral FTAs with Chile and Japan (Seoul, Korea: Korea Institute for International Economic Policy, 2002), 12. 45 Ibid., 14-15. 46 Iain Pirie makes a path dependence argument about the origins of Korea’s liberalization, stretching back two decades before the 1997 financial crisis. 47 Calder, 35. 48 Kim, “The Politics of Economic Recovery in South Korea,” 34; Woo-Cumings, 132. 49 Bruce Cumings, “The Asian Crisis, Democracy, and the End of “Late” Development,” in T.J. Pempel (ed.), The Politics of the Asian Economic Crisis (Ithaca, NY: Cornell University Press, 1999), 39. 50 Sung-Hoon Park and Min Gyo Koo, “Forming a Cross-Regional Partnership: The South Korea-Chile FTA and Its Implications,” Pacific Affairs 80, no. 2 (2007): 262.

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that Korea would pursue an FTA with Chile, and then conducted feasibility studies with other trading partners. Seoul formed a special taskforce for the Korea-Chile FTA that comprised of five working groups. Strong state. In the wake of the financial crisis, President Kim Young-sam and President-elect Kim Dae-jung established a joint Emergency Economic Committee, which was a de facto economic cabinet in charge of important economic decisions. Kim later created the Financial Supervisory Commission, which consolidated a number of financial functions. These supra-ministerial institutions allowed the Kim administration to insulate itself from bureaucratic resistance with the support of the United States, the IMF, and the Korean public.51 Kim successfully centralized trade policy, wresting power from the various line ministries that catered to their own core constituencies. This top-down management of trade policy, which continued up until President Park, is described in more detail below in the discussion on bureaucratic inertia. Sequencing: Setting Precedents with the Korea-Chile FTA Sequencing in Korea’s FTA policies took the form of setting important precedents that begat institutional learning on how to carry out negotiations and implement agreements and built both bureaucratic and public consensus on the benefits of an FTA. Korea’s reform strategy maximized political momentum for reform (optimal political sequencing) and reduced transaction costs (optimal economic sequencing).52 An important place to begin our analysis is the precedents set by Korea’s first preferential trade agreement: the Chile-Korea FTA. Korea and Chile agreed to begin negotiations for a bilateral FTA at the APEC Leaders’ Meeting in September 1999. Seoul self-consciously pursued FTAs with smaller trading partners to minimize risks and potential losses, so that a positive precedent could be set in preparation for FTA negotiations in the future. Chile was such a country.53 An FTA with Chile would do minimal damage to domestic industries, and allow Korea to test the waters politically and economically before concluding planned FTAs with major trading partners such as Japan, the United States, China, and the European Union.54 Korea also had a complementary economy with Chile, not to mention Korean exporters were at a disadvantage in the Chilean markets due to Chile’s FTAs with Korea’s competitors.55 Seoul willingly placed economic benefits as a secondary priority to establish precedence for an FTA policy.56 Santiago had significant experience in regional 51 52 53 54 55 56

Kim, “The Politics of Economic Recovery in South Korea,” 32. Shin and Ha, 66. For a detailed account of the pre-negotiation, negotiation, and ratification phases, refer to Park and Koo, 266-273. Ministry of Foreign Affairs and Trade (MFAT), 1999 White Paper on Diplomacy (Seoul: MFAT, July 2000), 230; Lee, 203. Cheong, 26-27. Ibid., 27.

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trading agreements, and Seoul considered it as a model for implementing economic and institutional reforms, with the goal of accruing the positive externalities of trade liberalization. Concluding an FTA with Chile would allow Korea to study the FTA promotion process and trade system; and based on this experience, Korea expected to have constructed a model FTA for use as a baseline in negotiating future FTAs.57 Another sequencing effect of the Korea-Chile FTA was improving public awareness of FTA benefits, which gave Seoul an enhanced capacity to implement FTA policies. There was a general lack of public knowledge and a negative preconception about trade liberalization. The popular perception, for example, was that free trade would contribute to the growth of imports and a complete elimination of tariffs immediately after the FTA went into effect, requiring large, short-run adjustment costs.58 Once establishing the precedent that FTAs were important tools for national commercial diplomacy, domestic constituencies would be more amenable to government insulation from protectionist pressures.59 With the principle of FTAs established, Seoul could negotiate more controversial agreements requiring deeper concessions by domestic interests. Korea’s trade liberalization path was not dictated purely by domestic institutions. International activities set precedents that shaped Korea’s options. A stark example is the way the European Union set a precedent for excluding sensitive sectors from bilateral agreements, when it excluded most agricultural products from its FTAs with Mexico and South Africa. This created a path dependent process (admittedly a weak one since precedents are easily overturned without institutionalization) in which the Japan Business Federation (Keidanren) lobbied for the same treatment in Japanese FTA negotiations, and the Japanese government followed suit in its Japan-Singapore Economic Partnership Agreement negotiations, excluding segments of the agricultural sector from the liberalization provisions.60 Korea then indicated that it would protect its agricultural sector from Mexican and Chilean competition in its preferential agreements with them. Korea has accumulated significant experience in FTA negotiations with the United States and the European Union, among others; this experience will help facilitate discussions regarding non-tariff issues such as investment, competition policy, and government procurement. Moreover, these FTA talks have forced greater flexibility toward liberalization on the part of the manufacturing sector.61 57 Ibid., 27, 41. 58 Ibid., 42-43. 59 John Ravenhill, “The New Trade Bilateralism in East Asia,” in Kent E. Calder and Francis Fukuyama (eds.), East Asian Multilateralism: Prospects for Regional Stability (Baltimore, MD: Johns Hopkins University Press, 2008), 90. This also worked in Japan. See Naoko Munakata, “Evolution of Japans’ Policy Toward Economic Integration” (Washington, D.C.: Brookings Institution, 2001); and “How Trade Agreements Can Reform Japan,” The Globalist (Washington, D.C.: Brookings Institution, 2002), available at www.theglobalist.com/dbweb/StoryId.aspx?StoryId=2560. 60 Ravenhill, “The new bilateralism in the Asia Pacific,” 308. 61 Corning, 275.

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This follows the theorized process whereby positive feedback generates new entities that buttress the path dependent course. For example, Seoul introduced a new assistance program in 2007 for industries adversely affected by liberalization. There is a whole host of assistance programs designed to help assuage adjustment costs and ameliorate opposition.62 Inertia: Institutionalizing Trade Liberalization If policies adopted at an identified time induce positive feedback channels, we should expect a reinforcement of that policy through changed patterns of political organization.63 Institutional arrangements foster complementary organizational forms, which then go on to cultivate new complementary institutions.64 This is exactly what we have seen in the evolution of FTA-oriented bureaucratic entities over time that consolidated a state economic bureaucracy in favor of trade liberalization. Before the crisis, Korea’s state economic bureaucracy held coordination power based on control of the capital market. Industrial policies synchronized interrelated issue areas (corporate, financial, and labor) to benefit the economy as a whole. Korea began its economic liberalization in the 1980s and accelerated these policies in the early 1990s. Throughout the reform process, Seoul primarily adopted piecemeal reforms.65 But, the 1997 financial crisis offered a window for a broad economic reform agenda.66 The financial crisis called into question the Korean economic bureaucracy’s capacity and legitimacy as the country’s economic coordinator.67 The economic bureaucratic reform touched a wide swath of the government’s administrative structure. These institutional reforms paralleled the decline and fall of Korea’s developmental state in the aftermath of the financial crisis, which has been described as a process of neoliberalization.68 The Kim administration, not to mention the U.S. Treasury and the IMF, labeled practices characteristic 62 For overview treatments of these FTA subsidies, refer to Mireya Solís, “South Korea’s Fateful Decision on the Trans-Pacific Partnership,” Foreign Policy at Brookings, Policy Paper 31 (September 2013): 13-14; Inkyo Cheong and Jungran Cho, “Reforms of Korea’s Trade Adjustment Assistance Program for Its Bilateral Trade Agreements with the European Union an the United States,” Asian Economic Papers 10, no. 1 (2011); Sei-Kyun Choi, Tae-Hun Kim, and Dae-Hee Chung, “Evaluation of Compensation Measures and Impacts of Implemented FTAs on Agricultural Sector,” Korea Rural Economic Institute Research Reports, October 2009, http://www.krei.re.kr/eng/publication/reports_view.phpreportid=R597&cpage=9&skey=&sword= (accessed November 23, 2014). 63 Pierson, 174. 64 Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge, MA: Cambridge University Press, 1990), 95. 65 Shin and Ha, 67. 66 For an overview of industrial restructuring (chaebol reform), financial liberalization, incentives for FDI, labor market reform, and the privatization process, refer to Shin and Ha, 85-95. 67 Jung, 125. 68 For some of this literature, refer to M. Hart-Landsberg and P. Burkett, “Economic crisis and restructuring in South Korea: beyond the free market-statist debate,” Critical Asian Studies 33, no. 3 (2001): 403-430; Iain Pirie, The Korean developmental state: From dirigisme to neo-liberalism (Abingdon and New York: Routledge, 2008); Cumings, 17-44.

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of the “Asian development model” as “cronyism” and “corruption” in order to delegitimize them as sowers of the crisis and hence the reapers of market punishment.69 Kim Dae-jung realigned the bureaucracy to lock in support for his reform agenda.70 Although the Kim administration was marked by a top-down management style indicative of imperial presidencies, Kim consolidated and institutionalized his policies rather than announcing major reform policies as decrees and implementing them through popular campaigns, as Kim Youngsam did.71 After democratization in the 1980s, South Korea’s trade policy was fragmented between ministries, marked by inter-ministerial conflict as individual line ministers lobbied for policies to protect their constituencies. A coherent FTA strategy required Seoul to centralize trade policymaking. President Kim Dae-jung’s transition team was comprised of individuals across sectors and professions (academia, business, labor, government, journalists, and politicians) that provided a legitimate platform for stakeholders to take a lead advisory role for the government and the public.72 This deliberative body hosted public hearings, discussed proposals, and drafted reform legislation for approval by the president-elect. President Kim leveraged the popular demand for bureaucratic reform to realign the state economic bureaucracy in favor of his reform initiative and establish a power base within the bureaucracy.73 In March 1998, Kim reorganized the Ministry of Foreign Affairs as the Ministry of Foreign Affairs and Trade (MOFAT), under which the Office of the Minister for Trade (OMT) was created to coordinate foreign policies on trade, trade negotiations, and international economic affairs. In this way, Korean trade policymaking was centralized within a single bureaucratic agency. The OMT recruited trade expert officials from the then Ministry of Trade and Industry. These officials began examining FTAs at the strategic policy level.74 In 1999, Seoul abolished the import diversification program, which restricted imports from countries with which Korea had a serious trade deficit—a landmark decision.75 Nonetheless, the line ministries could still delay trade negotiations if they ran counter to sectorial interests. This resistance was overcome bureaucratically in 2001 with the establishment of an inter-ministerial coordination body: the Ministerial Meeting on External Economic Affairs. This new body raised the political cost of blocking trade 69 Rodney Bruce Hall, “The Discursive Demolition of the Asian Development Model,” International Studies Quarterly 47 (2003): 72-73. 70 My analysis focuses on the Ministry of Foreign Affairs and Trade (MOFAT) where trade liberalization policy was conducted, rather than the dismemberment of the Ministry of Finance and Economy (MOFE), which lay at the heart of the state economic bureaucracy. For a detailed account of MOFE’s reform, refer to Jung, 121-138. 71 Kim, “The Politics of Economic Recovery in South Korea,” 35. 72 Shin and Ha, 83. 73 Jung, 135. 74 Cheong, 30. 75 Ibid., 13.

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initiatives in the monthly meetings, since doing so could incur blame for failed negotiations.76 The Ministry of Agriculture exemplified this change in bureaucratic inertia. While line agencies held more sway, the Ministry opposed concessions on primary commodities during Korea’s FTA negotiations with Chile. After the Ministerial Meeting was formed, the Ministry of Agriculture did not directly oppose the Korea-U.S. (KORUS) FTA talks, but rather focused on securing safeguards and protracting liberalization calendars, and among other tactics. Within the Ministerial Meeting, MOFAT chaired the FTA committee and was responsible for the 2003 release of the FTA roadmap. The FTA roadmap for negotiations grouped them into short-term FTA partners (Chile, Singapore, EFTA, and Japan), medium-term FTA partners (Mexico, Canada, ASEAN, and China), and long-term FTA partners (U.S., EU, and India). On August 30, 2003, a meeting of foreign affairs ministers formulated a FTA policy statement that the Korean government would pursue comprehensive FTAs with a multitrack approach to achieve a per capita GDP of $20,000 and become a “hub state” for East Asia. The FTA Procedure Regulation, announced in June 2004, established the FTA promotion committee as the main promotion organization, comprised of a director of trade negotiation and civil servants in related ministries, such as the Ministry of Finance and Economy, MOFAT, and others. Under the promotion committee, a Private FTA Council of Advisors, with representatives from different academic and industrial fields, was formed to act as a liaison during the FTA contract process. MOFAT was the primary ministry responsible for international trade negotiations, formulating trade policy and policy implementation, while also coordinating with FTA-related divisions in other ministries, such as the MOFE, Ministry of Commerce, and others. An FTA branch was formed under MOFAT’s Trade Negotiation headquarters in late 2004, with divisions dedicated to FTA policies, regional negotiations, FTA product negotiations, and FTA service negotiations. MOFAT worked most closely with export-oriented industries and therefore it inherently favored exporters over import-competing industries.77 The Korean government had direct communication lines with the chaebol; and beneficiaries from FTA policies influenced trade liberalization policies more directly via the Advisory Committee for Domestic Economic Affairs, which spoke directly with the president.78 The favoring of exporters in the FTA policymaking process ran parallel with a constellation of business interests shifting in favor of trade liberalization. Before the neoliberal turn in Asia, regional cooperation was driven by security concerns rather than the economic interests of private sectors. Governments appeared to override concerns by domestic interest groups that 76 Solís, 8. 77 Bae and Moon, 7. 78 Ibid., 6.

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might oppose regional agreements.79 States actually had difficulty generating private sector involvement.80 But as preferential trade agreements proliferated in Asia, business groups were disadvantaged in markets where their competitors enjoyed preferential access, which realigned domestic interests groups in favor of trade agreements. Unlike domestic interests favoring trade liberalization, the government lacked an effective communication channel with interest groups standing to lose from FTA policies.81 Interest groups opposing the FTA could only influence policy indirectly through political parties in the National Assembly, which wields ratification authority.82 For example, agricultural sectors communicate to the government through the Ministry of Agriculture and Forestry, which is weak vis-à-vis MOFAT, and therefore try to exert more influence via lawmakers in the National Assembly. In 2004, President Roh Moo-hyun’s Northeast Asian Cooperation Initiative depicted Korea as a “hub nation” linking interregional networks and a “cooperator nation” serving as a catalyst for regional cooperation. Although it faced stiff competition from other potential hubs in Asia, Korea’s high trade-to-GDP ratio made it intensely trade dependent, leaving Seoul with little choice but to pursue FTAs and court foreign investment.83 Trade Minister Kim Hyun-chong argued that a U.S. trade agreement would buttress domestic structural reforms.84 President Roh’s support base was the anti-FTA camp, but he, swayed by these arguments and others like it, supported MOFAT in these trade negotiations.85 Under Roh, a centralized trade policy process continued unimpeded. President Roh and MOFAT oversaw the KORUS FTA negotiation process, leaving other government agencies on the sidelines. The 2006 announcement launching trade talks with the United States surprised the Korean public, since the FTA roadmap had designated a trade agreement with the United States as a long-term goal. In early February 2006, Seoul unexpectedly cut its annual screen quota in favor of the United States to start the KORUS FTA negotiations, which were concluded just before the midnight deadline on April 1, 2007. In 2008, Lee Myung-bak became president of Korea, and not only pushed for approval of the KORUS FTA, but also proclaimed a “Global Korea” whereby net trade agreements would cover 70 percent of exports. The global economic crisis of 2008–2009 dealt a blow to several East Asian economies, but did not dampen regional enthusiasm for FTAs. Between September 2008 and March 2009, 79 80 81 82 83 84

Ravenhill, “The new bilateralism in the Asia Pacific,” 303. Ibid. Bae and Moon, 9. For an overview of attempts by the National Assembly to curb executive power in FTA policy, refer to Solís, 10-12. Corning, 273. Min Gyo Koo, “Partisanship and South Korea’s Trade Policy: New Soul Searching between neo-developmentalism and neoliberalism,” paper prepared for the workshop on Democratic Accountability and Diplomacy in Asia, Tokyo, September 16, 2011, 10, http://www.iss.u-tokyo.ac.jp/ democracy/doc/Koo_Paper.pdf (downloaded November 23, 2014). 85 Solís, 8.

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dollar-based exports from the region decreased by 25 percent, while production dropped 15 to 30 percent for economies other than China.86 Nevertheless, in 2009, as FTA negotiations continued for several nations and Korea signed agreements with the EU and India. It is not surprising that some of the most active participants in preferential trade agreements are countries with a relatively long commitment to trade liberalization and a state bureaucracy amenable to neoliberal policies.87 MOFAT’s bureaucratic power was evidently at its height when it successfully pushed for negotiating FTAs with major economies earlier than the roadmap dictated. FTA negotiations with the second and third group have been surprisingly fast. V. PATH DEPENDENCE MATTERS FOR ECONOMIC POLICY Rational choice theory cannot alone account for Korea’s trade policy decisions. Institutions change calculations and expectations, which reinforce certain paths. John Ravenhill finds little empirical evidence that firms have played a major role in promoting or opposing FTAs in East Asia.88 Nor are the welfare effects of prominent Korean free trade agreements substantial. The U.S. International Trade Commission, for example, projected that the KORUS agreement would only raise the U.S. and Korea’s GDP by 0.2 percent and 0.7 percent, respectively.89 A Japan-Korea free trade agreement would potentially have a net negative impact on Korea despite a slight uptick in Korean exports.90 President Park Geun-hye more recently decentralized trade negotiation authority to the renamed Ministry of Trade, Industry, and Energy (MOTIE) to further integrate trade and industrial policies. This revamped ministry issued a new FTA roadmap in June 2013, which prioritized bilateral trade agreements with China and the Regional Comprehensive Economic Partnership. This institutional change, however, may undercut Korea’s proactive trade policy. MOFAT’s insulation from protectionist interests and a staff of elite bureaucrats made it an ideal vehicle for an ambitious trade strategy, whereas MOTIE may not be as capable.91 Path dependence is neither radically contingent at the front end nor deterministic at the back end. Rather, at the front end, there may be more than one alternative and relatively small factors that can determine the outcome; and 86 87 88 89

Corning, 281. Ravenhill, “The new bilateralism in the Asia Pacific,” 304. Ravenhill, “The ‘new East Asian regionalism’: A political domino effect,” 198-200. Statistics cited in John Ravenhill, “The new bilateralism in the Asia Pacific,” 309. For a full literature review of previous studies on welfare effects of a Korea-U.S. FTA, refer to Kozo Kiyota and Robert M. Stern, Economic Effects of a Korea-U.S. Free Trade Agreement (Washington, DC: Korea Economic Institute of America, 2007), 5-20. 90 R. Scollay and J. Gilbert, New Regional Trading Arrangements in the Asia Pacific? (Washington, DC: Institute for International Economics, 2001). 91 Mireya Solis, “South Korea’s Fateful Decision on the Trans-Pacific Partnership,” Foreign Policy at Brookings, Policy Paper 31 (September 2013): 9.

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at the back end, change continues, but is bounded.92 Thus, despite President Park’s bureaucratic reshuffle, several elements of continuity remain. The FTA negotiation personnel were simply relocated from MOFAT into MOTIE and the internal institutional structures also remain the same.93 The three aspects of path dependence considered here—contingency, sequencing, and inertia—demonstrate its applicability to the evolution of Korea’s trade policy. By no means has the telling of this story in Korea been exhausted.94 The restructuring of the state economic bureaucracy is not the only locus of trade policy in the aftermath of the financial crisis—changes to the presidency, chaebol reform, democratic ideology, and financial sector liberalization all had impacts on trade policy to varying degrees. Theoretically, path dependence is a rich field of research with detailed and nuanced facets that are left unexplored. Nonetheless, future research that uses Korea’s trade liberalization as a case study should be disabused of the notion that rational choice models can sufficiently explain Seoul’s policy decisions. Korea’s FTA policy is a product of complex path dependent processes that reflect the rich political and economic dynamics that created it.

92 Pierson, 51-52. 93 Meeting with Chang-Hyun Yoon, Director of FTA Implementation Division, Ministry of Trade, Industry, and Energy, on November 27, 2014 (Sejong City, Republic of Korea). 94 For book-length accounts of Korea’s economic restructuring, refer to Sung Deuk Hahm and L. Christopher Plein, After Development: The Transformation of the Korean Presidency and Bureaucracy (Washington, DC: Georgetown University Press, 1997); Chun-In Moon, “Democratization and Globalization as Ideological and Political Foundations of Economic Policy,” in Jonryn Mo and Chung-in Moon (eds.), Democracy and the Korean Economy (Stanford, CA: Hoover Institution Press, 1998); Barry Gills and Dong-Sook Gills, “South Korea and Globalization: The Rise of Globalism?” in Samuel Kim (ed.), East Asia and Globalization (Lanham, MD: Rowman & Littlefield Publishers, 2000); Jang-Sup Shin and Ha-Joon Chang, Restructuring Korea Inc.: Financial Crisis, Corporate Reform, and Institutional Transition (New York: RoutledgeCurzon, 2003).

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U.S.-Korea Institute at SAIS 1717 Massachusetts Avenue NW, 6th Floor Washington, DC 20036 w w w.uskoreainstitute.org