Is Lee Myung-bak out? -- FTA with U.S. to blame

June 17, 2008

South Korea elected Lee Myung-bak as President in February in a landslide, but he is already facing violent protests of 100,000 who have called for his resignation. President Lee's major sin was agreeing to accept U.S. beef as part of the new free trade agreement (FTA). Protestors believe Lee is selling his people out to the U.S. and exposing them to beef that is possibly tainted with mad cow disease.

The real issue is increasing nationalism on the part of South Korea's young people driven by a declining economy. South Korea's comparative advantage is suffering -- it is not as low-cost as China, nor as high-tech as Japan. Lee's solution is to attract more foreign direct invesment (FDI), increase public spending and decrease taxes. This, however, would add to South Korea's public debt, already 25% of GDP.

Lee's acceptance of beef was meant to convince U.S. Congress to approve the FTA, which would be the second largest after NAFTA. Protestors feel Lee is putting his people's health at risk, especially since Japan and China won't accept beef from cows more than 30 days old. Younger cows are seen as less likely to have mad cow disease. (Source: IHT, Seoul protest threatens to topple government, June 10, 2008)

What it means to you:

South Korea is the third largest economy in Asia. If Mr. Lee is ousted, then it would mean a return to protectionism, and a slower South Korean economy.

High food and oil prices are also causing economic disruption. U.S. bio-fuels programs, and long-standing consumption of oil, are being blamed for this. Much of the growing nationalism is a result of anti-U.S. sentiment.

As President Lee said in a recent Asia-Europe Meeting,"... the rising prices of oil food and raw materials has generated the largest crisis since the oil shock in the 1970s." (Source: Manila Bulletion, Asian, European finance ministers note resilience of their economies, June 17, 2008)

Failure of the FTA would be negative for the U.S. as well. The agreement would eliminate 94% of tariffs between the two countries, especially benefiting the auto, textile and service industries. It would immediately eliminate tariffs on $1 billion worth of agriculture exports to South Korea.

Background on South Korea (2006)

Democratic government successfullly manages a solid economy based on consumer electronics, automotive and agriculture.

• 49 billion people, (smaller than Italy but larger than Spain)
• GDP - $1.196 trillion, larger than Canada
• GDP growth rate - 5%
• GDP per capita - $24,500 (better than Greece)
• Unemployment rate - 3.3%
• Inflation - 2.2%

Action steps:

Check with your financial planner to make sure your emerging markets funds include South Korean and other Asian companies. Growing anti-U.S. sentiment could mean declining profits for U.S. brands. The failure of the U.S. / Korea FTA could also be negative for U.S. auto, textile and agricultural industries.

For more articles on South Korea, see the Top Ten Economic Trend - Growth of ASEAN

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