Trade and Foreign Direct
Investment Policy in Korea


Yoong-Deok Jeon



Executive Summary

1. Many import restrictions are still in effect in Korea though it is claimed that trade should be liberalized. All of them should be abolished
to make the Korean economy efficient.

2. Restrictions on FDI in 31 industries should also be abolished because they cost more than benefit.

3. There is no reason to maintain Trade Commission if all of trade protection is being scraped out.

 





Contents

1. The Arguments for Free Trade and Foreign Direct Investment Policy

  1) Free Trade Policy

  2) Free Foreign Direct Investment Policy
 

2. The Critique against Wrong Perspectives

  1) The Critique against the Theories for Trade Protection

  2) The Critique against the Theories for Investment Restriction
 

3. Overview and Assessment of Current Trade and Investment Policies

  1) Trade Protection and Investment Restriction Policies in Korea

  2) Evaluation of Trade Protection and Investment Restriction Policies in Korea
 

4. Direction for Reform

  1) Abolition of Various Import Barriers

  2) Abolition of Restrictions on Foreign Direct Investment

  3) Measures To Eliminate Environmental Contamination

  4) Repeal of Trade Commission

  5) Abolition of Various Export Restrictions


5. Summary

 

 

The purpose of this essay is to evaluate current trade and foreign direct investment(FDI) policy in Korea and to suggest some reform. In section 1, the arguments for free trade and investment policy will be discussed in detail. In section 2, wrong perspectives for the theories of trade protection and restrictions on investment will be criticized. In section 3, current trade and investment policy in Korea will be overviewed and evaluated. In section 4, direction for reform will be suggested. In the final section, summary will be offered.


1. The Arguments for Free Trade and Foreign Direct Investment Policy

1) Free Trade Policy

In a free market economy, there is no need, in principle, to make a distinction between international trade and exchange among domestic economic agents except that international trade is an exchange between economic agents with different nationalities and they use foreign currencies to settle their payments. International trade or domestic exchange takes place because the trading parties see the opportunity to enjoy mutual benefits that result from high productivity due to the division of labor. International trade takes place between geographically distant places, in comparison to domestic ex-change(Yet, this is not the case for border trade). Then, we ask ourselves, why the wealth of people increases when international trade or domestic exchange is made? There are several reasons.

First, exchange makes goods and services flow to those who value them most. Let's take an example of automobile production. For companies which produce automobiles, a large number of cars are virtually valueless to them. On the contrary, such multitudes of cars are burdensome because of the costs to keep them. Production of numerous cars is for benefiting consumers. Cars are exchanged for by money and those who need cars most consume them. People who engage in exchange increase their wealth through such exchange. This is also true of international trade that takes place across borders.

Second, exchange is made for profits by making the trading parties specialize. Specialization makes it possible to increase quantity of products given the costs or to reduce the costs when the same amount of products is made. If a person, for example, has good plumbing skill, he can specialize in it and make some revenues, which he can use to buy necessary food, clothes, cars, and etc. If he wants to make them for himself and also wants to provide plumbing service, then the productivity will be very low. Specializing in one occupation or area and, then, making exchange pay off. Suppose a Korean company has advanced shipbuilding technologies. It is impossible to produce coffees in Korea due to weather conditions. Then, it is beneficial for the Korean company to buy coffees in exchange for ships and also beneficial for the Brazilian company to buy ships in exchange for coffees. Production of ships and coffees in the world will increase and two countries engaged in international trade benefit from such exchange. To produce what one can do best is called the principle of comparative advantage. Based upon it, the division of labor occurs. It increases productivity. In the 1960s and 1970s, Korea had abundant labor force and the United States had plentiful capital in comparison. Korea exported labor-intensive goods, such as footwear, textile and toy and imported capital-intensive goods, such as machinery and equipment. Such division of labor was determined by comparative advantage. It accounts for dynamic aspects as well. To take an example, Korea, in the past, had comparative advantage in labor-intensive industries. As capital has accumulated, Korea now comes to have comparative advantage in capital-intensive industries.

Third, exchange allows us to enjoy the benefits of mass production. Production of diverse goods in contemporary world requires an enormous amount of capital and equipment. Production costs can be lowered only when the goods are produced on a large scale. If specialization through exchange is blocked, then goods, which call for a large amount of capital and equipment, can not be produced or, if produced, their production costs will be high. Adam Smith, a founder of Economics, demonstrated us the benefits of division of labor by an example of a pin factory. When there was no division of labor or specialization, a worker could make only 20 pins a day. When a job was divided into several functional categories, a worker could make about 4,800 pins a day. Such benefits of specialization and division of labor can be obtained only when there is exchange.

As discussed above, free trade benefits all parties involved in it. If so, what will happen when we liberalize hitherto trade protection? It is certain that free trade will contribute to the international division of labor and trading parties will benefit. Exports of trading parties will expand to obtain such benefits and will lead to economic growth. It will also increase the volume of imports and, thus, promote economic growth further. Therefore, trade liberalization, which will trigger a virtuous cycle of economic growth and further trade liberalization, should be given top priority among public policies.

2) Free Foreign Direct Investment Policy

A lot of the less developed countries(LDCs) actively implement various programs to promote wealth and prosperity. Yet, the gap between per capita incomes of the developed countries(DCs) and the LDCs does not diminish easily. Many commentators have listed ignorance or inferiority of workers in the LDCs as one of the main reasons for the gap. However, the fundamental source of the gap lies in that there is a difference in the supply of capital and in the amount of capital goods between the DCs and the LDCs. Capital investment per worker in the DCs is much higher than that in the LDCs. More capital investment per worker may lead to higher productivity and, thus, to higher per capita income. There are fundamentally two ways to increase capital or capital goods. The first way is to promote domestic savings. Diligence and frugality can contribute to them. The second way is to induce inflow of foreign capital into a country. FDI often brings in advanced technology and management techniques along with capital. It also means an addition of foreign competitors to domestic market and, thus, promotes competition in domestic market, which becomes a motor force for economic growth. In short, FDI must be one of the sources of wealth and prosperity.

 

2. The Critique against Wrong Perspectives

1) The Critique against the Theories for Trade Protection

There are many theoretical propositions that support trade protection. We examine the validity of three arguments among them. First, there is the argument that trade protection is necessary for national defense and security. For example, missiles should not be purchased abroad but produced domestically, however high production costs may be. This argument is not different from the one that we should have the self-sufficiency of main cereals, e.g. rice, because of food security. Since Korea imports most of advanced weapons from abroad, we can think of a situation where we take protective measures to promote domestic production of those weapons. However, there is no reason to produce advanced weapons by domestic manufacturers alone. They will become more competitive when they compete against foreign suppliers. When we import weapons, we may think of a situation where foreign suppliers of weapons increase prices or stop the supply of weapons for security considerations. Yet, it is possible only in theory. There are so many competitors in the world that foreign suppliers actually can not take such actions. In the 1970s when the Cold War was at its peak, for example, Soviet Union wanted to import wheat, a main grain in the West. The interest group, which lobbied the U. S. government first to export wheat, was the association of American wheat exporters. At that time, the export of wheat to Soviet Union and other eastern European countries was prohibited for the Cold War. In other words, foreign suppliers do not inflict harm to others when they have to accept harm to themselves.

Second, the traditional proposition for trade protection is an infant industry argument. A main point of it is as follows. Domestic manufacturers in the promising new industries need protection in their initial stage of development because they do not have enough time to enhance their competitiveness and, therefore, they will be weeded out. The temporary protection is required particularly when there is an advantage of mass production or when there is important knowledge or technology that one can learn with the passage of time. The presumption of the argument is that infant industries will bring more benefits than costs after they come to have capability to survive for themselves through protection. If this is true, why can't we take free trade policy? If there will be profits after a certain period, why can't capitalists invest now without protection? Therefore, there is a logical contradiction in the infant industry argument. We often see the case where the infant industries do not grow to be competitive and do remain as infants. They may not have competitiveness as long as they are protected. On the contrary, infant industries may have competitiveness when they are exposed to competition from the beginning.

Third, there is the argument that trade should be protected because of dumping. By definition, dumping means a company sells its product in the foreign market much below the production costs of it while accepting the loss. The argument for dumping can be meaningful only when one drives out its competitors from a market and is compensated later for the loss due to temporary low pricing. However, there are so many competitors in the world that it can not be possible for any competitors to call a higher price than the internationally competitive one. No competitors can sustain themselves even for a short time under such pricing. Therefore, dumping is theoretically impossible. Dumping is just another name of cutthroat competition and is the false argument that disadvantaged domestic companies from such competition make up to induce the protection of government. Dumping is only rhetoric for the protection of domestic companies or industries.1)

To sum up, the national security, the infant industry and the dumping argument that support trade protection are neither logically nor practically persuasive. There is no tenable theory for protection of trade. As discussed before, trade protection is proposed by the interest groups to protect their self-interests through invoking the public authority. We should not be misguided by wrong theories.

2) The Critique against the Theories for Investment Restriction

There are diverse restrictions on foreign direct investment, especially on inflow of foreign capital. The most important argument for the restrictions is the infant industry one: To protect infant industries, trade protection should be provided and investments in the domestic market by foreign competitors should also be prohibited or restricted as well. As discussed before, the infant industry argument is not valid theoretically. The restrictions on FDI do not have theoretical basis, either.

A more fundamental aspect of restrictions on FDI has to do with people? perception. Many people in the LDCs consider foreign investors as ?xploiters who should be driven out from their countries. Exploitation, by definition, is the outcome of a situation where one party coercively imposes its will upon the others. Exploitation is impossible in the world where exchange or trade is voluntarily made. Such misperception is a sort of anti-capitalistic mentality. It is important to note that foreign investors make an investment decision only when they have excellent comparative advantage in technology and/or management skills because they have to compete against local competitors who have advantages in various ways. Thus, they may make high profits and be compensated for their investment. Negative perception of people against FDI certainly restricts the inflow of foreign capital into domestic market. Such restrictions reduce competition in local market and eventually lead to the reduction of national income. When FDI is freely allowed, available domestic capital increases and competition becomes fiercer. This will result in the increase of personal incomes and national wealth. Therefore, active inducement of FDI is a means for wealth and prosperity.

 

3. Overview and Assessment of Current Trade and Investment Policies

1) Trade Protection and Investment Restriction Policies in Korea

Trade Protection Policy

Recently, Korea has made some changes about trade policy and it seems to move toward free trade. Yet, the policy direction of trade protection is not abandoned. As economic conditions change, we often see the addition of protection measures to current trade policy. Regarding agricultural and marine products, a protectionist tendency is increasing. It is also increasing for the environment-related goods, as the popular concern with environmental pollution rises. To implement trade protection policies, the government uses various methods. Policy measures for protection are largely divided into two: tariff and non-tariff barrier. A tariff barrier imposes customs to imported goods and raises their prices so that domestic goods presumably have price competitiveness. Tariffs in Korea are classified into anti-dumping duty(Article 10 of Tariff Act), retaliatory duty(Article 11), emergency duty(Article 12), special emergency duty (Article 12, paragraph 3), countervailing duty(Article 13) (No. 1), preferential duty(Article 14), international cooperation duty(Article 43, paragraph 8)(No. 2), coordination duty(Article 12, paragraph 2), price balancing duty and seasonal duty(Article 15, paragraph 2), quota duty (Article 16)(No. 3), temporary duty(No. 4), and basic duty(No. 5).2) Duty rates are determined by Tariff Act or by investigative activities. An average rate of tariff is now about 8 percent. The government can impose a variety of tariff and/or non-tariff barriers on imported goods in accordance with Tariff Act. Some duties are imposed on the following goods for various purposes: photoengraving plate for printing, fiber glass, Chinese refined phosphoric acid, American ethanolamin, lithium I battery from Japan and the U.S., chloride from the U.S. and China, soda lime from China, Bulgaria and Russia, male electric razor from Japan, the Netherlands and China, H-beam from Russia, medium quality fiber plate from Malaysia. As of 1998, the lowest duty rate is 5.25 percent and the highest one 58.7 percent. To protect domestic producers, special emergency duty is applied with respect to the quantity and minimum price of agricultural, marine and livestock products when the imports increase rapidly or prices of imported goods go down and they hurt domestic producers. This duty is applied to 29 items, including milk cows. The duty could be a rate or a fixed amount and is determined by the Prime Minister's decrees. The rate of international cooperation duty is determined in accordance with the Tariff Treaty with a particular country. It is applied to 69 items and the rate ranges from 5 percent to 60 percent. Adjustment duty is applied when the structural adjustment or national health is at stake. This duty rate is determined temporarily. It is applied to 39 items, including sea-bream and the duty rate could vary either between 11 percent and 100 percent or the amount, i.e., 201 to 1,625 won per kilogram, whichever is higher. A quota duty is applied in order to lower a duty rate when there is emergent needs, such as a steep price rise of imported goods. This is also applied to limit the quantity of import and serves as a trade barrier. It is applied to 98 items, including plasma powder and the rate varies between zero percent to 20 percent. An import quota is a typical non-tariff barrier that limits the quantity of imported goods. It applies to 40 items, including rice. In addition, import restrictions are applied to imported goods for diversification of foreign business connections, trading goods of North-South Korea, and agricultural, livestock and marine products for export. Other trade barriers, which we do not cover here, are not used currently.

Investment Restriction Policy

Korea? outbound foreign direct investments amount to about 18.5 billion dollars, excluding the purchase of real estate since September 1992, and foreign investments in Korea about 23.5 billion dollars. In total, capital inflow is larger than capital outflow. Since 1990, however, there has been more capital outflow than capital inflow. There are two major reasons for the larger outflow. First, domestic business environment turns less favorable in the recent than in the past. The labor costs rose greatly and various regulations made business activities more difficult. This made for outflow of capital. Second, various regulations on inbound investments of foreigners have obstructed foreign investments. Net capital outflow can be seen one of the causes for recent foreign exchange crisis in Korea. A major reason for imposing restrictions on FDI in Korea may be to protect infant industries. In addition, there are several, though not too many, cases where investments were restricted for other public interests. The Korean government imposed numerous restrictions on inbound foreign direct investments. Some of such restrictions are lately being removed or relaxed. On May 6, 1998, the Ministry of Finance and Economy announced that the industrial sectors where foreign investments were limited will be reduced from 42(18 closed; 24 partially open) to 31(13 closed; 24 partially open). Here, the closed(partially open) sectors refer to ones where the investments are completely restricted (partially open).

2) Evaluation of Trade Protection and Investment Restriction Policies in Korea

The Causes of Trade Protection

A history of trade protection is considered to be as old as a history of trade. It indicates strong desires of individuals and companies for trade protection. Why is trade protection adopted in the real world even when free trade opens up a path toward wealth and prosperity in theory? What are the causes of trade protection? As discussed, trade barrier is a sort of regulation. Thus, we can apply the economic theory of regulation to understand the causes of trade protection. In a word, trade protection results from the capture of public authorities by interested parties. We call it the capture theory of regulation when individuals or companies, which need protection, form special interest groups and lobby the government to enact desired regulations, i.e., tariff and/or non-tariff barriers. These special interest groups limit competition by prohibiting or restricting the import of foreign competitors goods through trade protection. Prices of domestic products go up as a result of restrictions on competition from foreign competitors. Then, some may argue that trade protection will be impossible when general public lobbies against it. However, general public does not strongly concerned with the issue because the benefits for general public from the opposition to specific trade policies may be small but the costs for the opposition may be great. This accounts for the continuation, or even expansion, of regulation such as trade barrier. Trade protection is formulated to protect the interests of special interest groups. 3)

Let's take an example of rice to see how the capture theory of regulation applies. Rural population in Korea has more interests, at least, regarding the needs of trade protection, than urban one. The former is also more monolithic and cohesive at the time of crisis than the latter. Farmers, in terms of size, form the largest interest group among occupational groups. In addition, rural population is over-represented in the National Assembly. For instance, while one representative is chosen for every 200,000 in rural districts, one is elected for every 300,000-400,000 in urban areas. It is inevitable that more legislative activities should be directed to rural areas, rather than urban areas. Furthermore, special interests of farmers are easily aggregated into National Assembly through rural leaders, agricultural co-operatives and New Village Movement leaders. The support to farmers and rural population in Korea now seems to have an ideological status. Seen in this perspective, various trade barriers regarding rice can be understood as measures to represent the rural interests, rather than public ones. In short, the capture theory of economic regulation can apply to the protection of rice production in Korea very well.

An infant industry argument has a difficulty in explaining trade protection for rice production. Agriculture has been protected by various measures, including trade barriers since the beginning of economic development. Yet, the competitiveness of agriculture has declined. The argument can not explain the existence of trade barriers.

In short, trade protection is formulated and implemented for private interests, rather than for public ones.

The Costs of Trade Protection

Let's estimate the costs of trade protection by taking the example of rice. The domestic price of rice is about five to eight times larger than the international one. When the import of rice is completely liberalized, we will rely almost completely on imported rice. The direct cost of trade protection will be the amount of difference between domestic and international price, multiplied by the total amount of domestic consumption. However, this represents only a tip of iceberg. Trade barriers protect inefficient producers. If the import of rice is liberalized, inefficient producers of rice will be selected out. How many inefficient rice producers, i.e., farmers, are there? Yet, a variety of trade protection measures make inefficient producers survive. Consequently, production of rice is inefficient. If a domestic price is much higher than an international price, then smuggling and a black market emerge. For instance, a recent rise of sesame smuggling is due to a price difference. Since law can not protect economic agents in the black market, organized crime groups, which are called an underground government, are formed to protect them. Economic agents in the black market have to pay a lot to the protection of organized crime groups. Since these agents do not pay taxes, others have to pay more taxes relatively. Trade protection allocates resources to the inefficient producers of rice. Many inefficient companies and industries can not come into being without trade protection. This is also a part of the costs. Farmers waste their resources in order to lobby the National Assembly to oppose to the liberalization of rice import.

On the other hand, ordinary people have to reduce consumption and savings due to the high price of rice. In other words, incomes are redistributed from non-farmers to farmers to the extent that there is a difference between the domestic and the international price of rice. This is also a part of the costs from trade protection. At present, the import of rice is not completely prohibited. The import of rice is partially allowed and imported rice is used as materials for cookies and other food products. To obtain or facilitate authorization for rice import, bribes are offered and, therefore, corruptive practices are increased. The government allocates some resources to supervise and control over the distribution of the imported rice to prevent its circulation as rice. All of these are the costs deriving from protection of rice production. Total costs of trade protection in a country as a whole are anything but small.4) The size of the costs is not known because we can not precisely estimate them. It would not be small at all, considering the size in other countries.

True Causes of Dumping and Its Adverse Effects

Is dumping possible? When there is a remarkable discrepancy between an export price and a normal price in an exporting country, we call this dumping. In the most countries of the world, the duty corresponding to price discrepancy is imposed. This duty is called as the dumping preventive duty. It is legislated based on the proposition that dumping exists. We demonstrated theoretically why dumping is impossible. Here, we are going to present a specific example.

From the late 1980s to the early 1990s, labor-intensive industries in Korea gradually lost competitiveness for the rise of wage. Chinese labor-intensive goods came to acquire worldwide competitiveness by utilizing cheap labor force. One of those Chinese goods was wooden (or bamboo) chopsticks. Production of wooden chopsticks does not need huge capital and advanced technology. On the contrary, it requires primitive technology, small capital and unskilled labor force. Needless to say, there was a big difference of price between domestically produced wooden chopsticks and Chinese ones. The difference in quality does not matter because wooden chopsticks are generally used only once in a time. Though the Chinese chopsticks were crude and low quality, most public restaurants used them because of low price. As the Chinese products were imported, Korean producers could not compete against Chinese ones. Above anything else, labor costs in Korea were too high. Faced with strong competition of Chinese products, domestic producers began to make products differentiated from the Chinese ones. Korean manufacturers began to produce high-quality wooden chopsticks. The Korean products were too good to be disposed after only one use. This made it more difficult for most public restaurants to use the Korean products. The Korean wooden chopsticks were used only in some high-class restaurants. It took only some time for the Chinese producers to take over the Korean chopsticks market. As the Chinese chopstick producers took over the market, domestic manufacturers brought a case to Trade Commission for dumping. After reviewing process of dumping, chopstick production in Korea was protected by dumping preventive duty. The price of the Chinese chopstick was not very different from that of the Korean ones because of the very duty. When the import price of Chinese wooden chopsticks rose for the dumping preventive duty, most public restaurants did not use both the Chinese and Korean wooden chopsticks because the price of them was too high. In most public restaurants, steel replaced wooden chopsticks.5) After all, the domestic manufacturers were hardly protected. The government imposed the dumping preventive duty on Chinese wooden chopsticks but because it intended to protect domestic manufacturers not because there was dumping.To obtain the protection of the government, producers have to make unproductive efforts. They have to use resources to prepare documents, to petition the government and to make recommendations. Bureaucrats and personnel of Trade Commission need resources to investigate whether or not dumping is made. After dumping is determined, inefficient domestic producers continue to manufacture goods and this leads to higher production costs. All these efforts and resources are wasted.

Theoretical Contradiction of Dumping Preventive Duty

Prices differ across time and places because they vary constantly. It is no wonder that the domestic price of a product is different from that in foreign market under different economic environment. On the contrary, it may be a problem if two prices are the same. However, in the current regulations regarding dumping, an ambiguous phrase, The normal price in an exporting country, is used. What is the normal price? In the domestic market, the price of a good differs across time and places. It is because demand and supply purely determines the price. If so, how and on what basis can we determine the normal price? Such an ambiguous phrase is included in the regulations because they intend to protect the domestic producers even if dumping is not existent. This is a theoretical contradiction in the current dumping-related regulations.

Adverse Effects of Investment Restrictions

Restrictions or prohibitions of foreign investments in the domestic industries block the entry of foreign competitors into the domestic market and cause harmful effects on competition. Wire telephone services were monopolized up to recently by Korea Telecom. Lately, Dacom began to provide long-distance and international telephone service. In the area of local telephone service, a new competitor will soon come into being to challenge the monopoly of Korea Telecom. Yet, competition is restricted in two respects. The Ministry of Information and Communication regulates prices of services and the market is open only partially to foreign investors. As a result, wire telephone services charge high but low quality. Recently, there was a report that a company set up a communication center to receive calls from the U. S. and sold them at a low price to local users through an exclusive wire system. There was also news that a communication company in the U. S., which received telephone numbers from Korean customers, provided service to customers by making calls in the U. S. and connecting calls to Korean customers. All these are happening because the restrictions on foreign investors into the Korean market suppress competition. Foreign competitors provide two-way communication service, utilizing TV networks. This is made possible because of advanced technology. However, such service is not available in Korea due to the restrictions on foreign investment. All of these are adverse effects of restricting foreign investments. In addition, these restrictions hinder the creation of employment. Finally, restrictions on FDI may cause the shortage of foreign exchange, which makes companies to rely excessively on short-term foreign capital and makes economy vulnerable to external shocks. This is the indirect adverse effect of the restrictions on FDI. Restrictions on FDI prohibit transfer of technology and management skills. In order to prevent the adverse effects of restricted competition and receive the foreign advanced technology and skill, there is no other way than to completely remove restrictions on FDI.

Imports of Contaminated Agricultural and Marine Products

Laws which regulate the contamination of agricultural and marine products are Fishery Act, Quarantine Act, Food Sanitation Act, Livestock Epidemics Prevention Act, Natural Environment Conservation Act, Act Regarding Protection and Hunting of Birds and Beasts, and Plant Epidemics Prevention Act. Import of contaminated agricultural and marine products is directly related to the public health and welfare. Contaminated agricultural and marine products have the problem of asymmetric information. Producers or sellers of agricultural and marine products generally have more information on the products than consumers do. When agricultural and marine products are exported, for example, lots of agricultural chemicals are used for long-term storage. In this case, exporters have more information than consumers do. The issue of asymmetric information is not limited to the agricultural and marine products. For instance, asymmetric information is at stake between producers and consumers and between employers and employees. To resolve the issue, someone needs to gather information and let others to use it. To do that, the government established Agency of Food and Drug Safety. It examines the degree of contamination of imported agricultural products and takes various measures, such as disposal of the products, if necessary. Regulations on imported agricultural and marine products are justified by the existence of information asymmetry. It is argued that the government should engage in the operation of market in order to prevent the damages which occur due to the information asymmetry. In addition, issuance of license or certificate to doctors, pharmacists and lawyers aim to resolve the issue of information asymmetry, too. Regulations on imported agricultural products, especially on contaminated ones, are considered to serve the role of issuing license or certificate. But, in a market, customers can resolve the issue of information asymmetry through trial and error. Costs of resolving the problem of information asymmetry will be smaller in the market than through the government intervention. Resources are necessary for the production and distribution of information. In other words, information is a variety of goods. Since private sectors are almost always more efficient in producing and distributing information than the government, it should not intervene in them Even when there was no action for customers before problems occur, it is possible to ask producers to take responsibility for the products after problems occur and to resolve them. In other words, we can liberalize the import of agricultural and marine products and ask the importers to be responsible for the damages resulting from contamination. In fact, we can use such a method for the damages following the use of agricultural chemicals, e.g., herbicide.

What will happen if the resolution of information asymmetry is left to the operation of market? Customers may pay considerable costs in a short-term period because of shortage of information. But, once information is available, customers will act reasonably. It will be well known that information spreads rapidly among people. When people come to know that Chinese plant or materials for oriental medicines were raised with plenty of chemicals and very harmful to human body, people react reasonably. There are three modes of reaction. A first reaction is to buy less contaminated materials from Korean producers. A second one is to continue to use Chinese materials. A third one is not to take oriental medicines at all. We find that most people take one of the first two modes. At the time of choosing one of two modes, what matters is price. More contaminated Chinese materials are cheaper than the Korean materials. If the import of the Chinese materials is prohibited or strictly regulated, then those who choose the second reaction may not take materials due to high expense or they will reduce the use of the materials. This shows that consumers in the market prefer to take materials, though contaminated, at a low price, rather than they drastically reduce the use or abstain from the use. Those who are in high-income brackets and wish to avoid contaminated agricultural products will use the Korean materials. When regulations on import are removed, various kinds of materials, price of which will vary, depending on the degree of contamination and medical effects, are available. The regulations on import raise the price of materials and remove the goods under a certain price from the marketplace. Trade liberalization of agricultural products is desirable, because it expands the choices for consumers to choose. Free trade of agricultural products leads consumers to react reasonably to the information asymmetry and, in a long-term perspective, it will increase the consumer welfare by expanding the opportunity to choose.

 

4. Direction for Reform

1) Abolition of Various Import Barriers

There are lots of import restrictions in Korea. Import of even those items, of which domestic and international prices show a great difference(e.g., rice), is limited. Such import restrictions impose burdens to households and companies. It is clear that such restrictions lower competitiveness of economic agents in Korea. We suggest that various import barriers and duties should be abolished as fast as possible.6)

2) Abolition of Restrictions on Foreign Direct Investment

There are restrictions on the FDI in 31 industries. We need to abolish these restrictions completely so that foreign capital and technology can freely flow into any industrial sectors in Korea and pave a way to wealth and prosperity. The 31 industries, including partially liberalized sectors, are: common grain production, meat-cow farming, near-sea fisheries, coastal fisheries, meat wholesale, other air transportation services, medical insurance, industrial accident and social welfare insurance, radio broadcasting, TV broadcasting, news agency, horse-racing and other games operation, and casino. Part of these sectors will be liberalized in the future. The partially liberalized industries include: alcohol brewing, tobacco manufacturing, book publishing, newspaper publishing, periodical publishing, special biological extract manufacturing, inland passenger transportation, inland luggage transportation, regular air transportation service, irregular air transportation service, wire telephone service, wireless telephone service, other electric communication service, local banking, trust company, cable broadcasting, and power-generation.

3) Measures To Eliminate Environmental Contamination

It is desirable to abolish all regulations on import of agricultural products contaminated by agricultural chemicals and etc. If this happens, there will be considerable damages in a short-term period. But, in a long-term period, there will be no problems because economic agents will do best to minimize the damages. Even for a short-term period, it will be better to have cheap, though contaminated, agricultural and marine products available, rather than to remove them from the market.

4) Repeal of Trade Commission

Trade Commission was established to protect domestic producers from competition from foreign suppliers. When trade protection measures are abolished, there is no reason to maintain Trade Commission.

5) Abolition of Various Export Restrictions

We do not discuss the issue of export restrictions simply because they are unimportant. These restrictions are implemented for the reasons of controlling domestic price and others. These should be abolished along with import restrictions. Inspection of exported products should be abolished as well. It is urgent to enhance the competitiveness of each economic agent in export by abolishing the restrictions.


5. Summary

Many import restrictions are still in effect in Korea. though it is claimed that trade should be liberalized, They make the Korean economy inefficient. All import barriers should be abolished. Restrictions on FDI in 31 industries should also be repealed because they cost more than benefit. It is desirable to abolish all regulations on the import of contaminated agricultural and marine products. Trade Commission was established to protect domestic producers from foreign suppliers competition. There is no reason to maintain Trade Comm-ission if all of trade protection is being scraped out. Restrictions on export should also be abolished along with import restrictions.

 

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Management Science, Spring 1971.

1) An anonymous reviewer argues that it is possible to continue dumping permanently and systematically when one can use prisoners for production, as we can see in China. That the source of comparative advantage in such a case is the subsidy of government is a problem. However, we should not make an issue of where comparative advantage comes from. If we consider the source of comparative advantage, a case of high performance in study for high intelligence can be a problem for discussing comparative advantage. Similarly, comparative advantage in production of steel for the high quality iron ore can become an issue as well. Production subsidized by prisoners in China is not a case of dumping, but a special case where goods are produced extremely cheap due to exploitation of special labor force. When goods are available at low price because of taxpayers money in a foreign country, low price of the very goods benefits consumers in a domestic country. The reviewer also makes an argument that dumping can occur when foreign exporters monopolize the market. ?indows program of Microsoft is given as an example. By the definition of neoclassical school, Microsoft is a monopolist because it is only one producer of the program. However, Rothbard(1962) properly defines that monopoly is a grant of special privilege. By the state, reserving a certain area of production to one particular individual or group. Therefore, ?indows of Microsoft is not monopoly because it is not a grant of special privilege by the state. In fact, Microsoft is one producer of the program but not a monopolist. See Rothbard(1962) for the definition of monopoly.

2) Numbers in parentheses indicate the priority in applying the laws.

3) An anonymous reviewer suggests the wrong perception of legislators as another cause of trade protection. It can be contended that legislators formulate protection policy founded on a wrong theory and as a result, interest groups are formed, which lobby to continue trade protection. Though in part, this accounts for the formulation of The Monopoly Regulation and Fair Trade Act. In the case of trade protection, Trade Association, Korea Trade Promotion Corporation, Korea Chamber of Commerce and Industry, and Federation of Korean Industrialists actively involved in the formation of trade policy since the early days of economic development. It is appropriate to say that, in this process, the bureaus of the Ministry of Commerce and Industry aggregated the interests of relevant interest groups and legislated, or assisted to legislate, the regulations. Therefore, it is convincing to say that trade protection is a typical case to which the capture theory of regulation applies.

4) Kim (1996) made a first estimate of the costs of trade protection on the basis of 49 highly protected items as of 1992. According to his estimate, the loss due to trade protection is about 0.8 - 2.5 trillion won, which amounts to 0.3-1.0 percent of GNP. However, he underestimated the costs of trade protection because his estimate included a limited number of items and excluded the costs that can not be easily quantified.

5) I argue that the use of steel chopsticks has worsened sanitary conditions in the restaurants. Further research is necessary for this issue.

6) There are so many regulations and procedures to list here. If notices on Export and Import by Items, which is annually published by Agency of National Customs and Korea Trade Association, and duty rates are abolished, then the restrictions on import and export are removed.

 

About the Author
Dr. Yoong-Deok Jeon received his Ph. D. degree in Economics from the Ohio State University in 1989. He is professor of Department of International Trade at Taegu University. Dr. Jeon? research areas are price theory, the economics of free market and Korean economy. He is the author of many books and articles: The Determinants of Korean Foreign Direct Investment in Manufacturing Industries (Review of World Economics, 1992), Land Reform, Income Redistribution, and Agricultural Production in Korea (Economic Development and Cultural Change, forthcoming), The Economic Essay: Freedom and Market, and etc.