beyondbrics

Lee Myung-bak, South Korea’s president, can be expected to be all smiles on his visit to Washington. After a very long haul, his country’s landmark trade agreement with the US looks set to pass through the US Congress on Wednesday.

When he gets back, he needs to get the deal to work on the Korean side. As with so much in Korea, that will boil down to emotion.

First comes ratification at Korea’s national assembly. Legislators are famed for playing to TV cameras with fire extinguishers and mallets but controlling that kind of behaviour is the easy bit. The left-wing opposition will surely call for clauses of the “unfair” trade deal to be revised. Ultimately though, they will probably have to accept the will of the ruling conservative majority and ratify the deal.

Then the hard slog starts. Companies from the US and EU (which implemented an even bigger trade deal in July) are likely to find the accords offer only minor help when faced with Korea’s growing trade ties to China – and its protectionist instincts.

Lifting of trade tariffs is unlikely to mean much. Korea is the master of non-tariff barriers. Apple’s iPhone was kept out of the country until late 2009 by obscure telecommunications laws related to national security, infuriating tech-savvy young Koreans who reckoned the government was merely protecting Samsung and LG from competition.

Similarly, foreign banks setting up in the country have been forced to build data servers in Seoul at huge expense, prompting complaints that regulators were pandering to domestic banks eager to hobble the competition.

The message is clear. If influential Korean businesses want to block you, they will find ways to do so. Foreign investors need a tough hide. And that’s before they meet Korea’s unions.

More important than tariffs is the ability to forge links with local king-pins and middlemen. Then, you must win hearts and minds. Korea’s first trade deal – with Chile in 2004 – was successful because it fired an emotional reaction from Korean consumers. Koreans bought Chilean wine because of a feeling of solidarity with the first nation to agree a trade pact with Seoul. (In practical terms, though, Korean consumers went on being fleeced by importers who did not pass on the tariff reductions.)

Will the trade deal with the US elicit such warm feelings of solidarity? That seems unlikely. Korea’s ailing and heavily protected small businesses face painful restructuring. Big trade deals with the US and EU threaten to make the process uglier than it might have been. If the deal is seen to cause job losses on farms, in services and in drug companies – the most vulnerable sectors – foreign business will be on the back foot in the battle for hearts and minds.

Seoul’s response is likely to be back-door protectionism that will enrage its trading partners. The EU trade agreement has already provided an example. Soon after they approved the deal, lawmakers put limits on areas where supermarkets could open, to protect small family-run corner shops. This inhibits expansion by Tesco, for example, whose biggest operation outside the UK is in Korea.

EU diplomats say the measure directly contravenes the trade agreement – but protecting small shopkeepers was more important to legislators than respecting the deal. South Korea vows to end all protectionism – like cut-rate electricity for farmers and industry – but it’s hard to see that happening any time soon.

US businesses looking to come to Korea will need to learn how this game is played. They should spend less time poring over the letter of the trade agreement and more doing TV commercials in Korean costume and drinking hard liquor with local partners. Some things in Korean business will be very slow to change.

Related reading:
S Korea: no place to hide, beyondbrics
S Korea: meddling with business, beyondbrics