The Asia-Pacific became a new important horizon for trade after Latin America began to liberalize its economy in the late 1980s. High-growth Asia-Pacific nations, as export markets and capital sources, could contribute to the Latin American goal of diversifying international economic relations away from an excessive dependence on the United States. and Europe. In this sense, the hard-to-define term "Asia-Pacific" has been used to mean Pacific-shore Asia or East and Southeast Asia, although it generally include North America, Pacific South America, and Oceania.

Japan has been Latin America's undisputed Asian trade and investment partner owing to its economic importance in the post-war world. Korea (South Korea), Taiwan, Singapore and Hong Kong, the so-called Asian Newly Industrializing Economies (NIEs) with their fast economic growth, have joined the category. China and other Southeast Asian nations including Thailand, Indonesia, and Malaysia, have recently also become important partners for Latin America and the Caribbean. During the 1990's Korea has been the most prominent runner-up to Japan in consolidating economic relations with the region in terms of trade and investment. Not only statistically, but also institutionally, Korean relations with the region have been strengthened.

However, the 1997 Asian financial crisis, to which Korea became the last country to succumb, devastated its momentum in establishing a stronghold in Latin America. The crisis paralyzed Korean conglomerates or chaebols, with their large debts, and forced them to reduce the debts by stopping operations and liquidating assets. Government relations also suffered a stalemate, lacking official attention from top decision-makers, during the period of restructuring and economic reform which has taken place under the close scrutiny of the International Monetary Fund (IMF) and the U.S. Stronger relations with Latin America have also suffered a setback as a result of the international financial crisis finally affecting Latin America’s emerging markets, and finally by Brazil’s economic recession. Meanwhile, in a seemingly paradoxical development, Korea pursues free trade with Chile, the first negotiation of this kind between an Asian and Latin American country.

The purpose of this paper is to explore the recent developments in Korean-Latin American economic relations and their future prospects: What motivated the recent aggressive Korean penetration into Latin American markets? What does the Korean financial crisis mean for Korean-Latin American economic relations? What kind of strategies are there as options for their relations in the near future, given that both are undergoing the bust part of the international financial cycle?

By the second half of the 1980s, Korean-Latin American relations were dominated by the "three traditional pillars": anti-communist ideology, international emigration, and limited commercial relations.¹ Korea’s international political concerns had been based on anti-North Korea policies and relations with its four influential neighbors: the Soviet Union (Russia), China, Japan and the U.S. At the international economic level, Korea had been concerned with relations with its major trading partners, the U.S. and Japan. Hence, Korea’s relations with Latin America were very limited. They followed the general trend of Asian-Latin American relations in that both region’s economies were quite protective of their industries and competed with each other.

In the mid-1980s, Korea began to become substantially involved in Latin America and the Caribbean for both international and domestic reasons: the 1984 U.S. preferential trade policy for Central and Caribbean countries in 1986; the Korean current-account surplus, and the subsequent liberalization of overseas direct investment.² Taking advantage of the Reagan Administration’s Caribbean Basin Initiative (CBI), Korean exporters invested in Central American and Caribbean countries as springboards into the U.S. market. Even the early 1990s investments in Mexico were made in the maquiladora (in-bond) industries as another way to enter the U.S. market; they were not targeted at the local market even though the Mexican economy was booming.

It was in the 1990s that Korea’s economic relations with Latin America picked up pace with a rapid increase in trade volumes (See Table 1). Korean firms had to look for new frontiers beyond the increasingly conflictive industrial markets like the U.S. and Europe, and needed to move abroad to escape from the high-wage domestic environment with its consequent loss of international competitiveness. In parallel, trade liberalization on the wake of the debt crisis, the subsequent economic recovery and regional integration in Latin America prompted Korean companies to look into these regional markets.

Along with Southeast Asia and China, Latin America emerged as one of Korea’s most dynamic regional trading partner and a locus of strategic investments. Korea’s exports to Latin America increased faster than those to any other export market, while the highly credit-rated Korean conglomerates could afford to make direct investments in the region by freely borrowing from the international capital markets. Among other developments in Latin America’s economy, the Southern Common Market (MERCOSUR) appealed to the interests of Korean entrepreneurs. Its member countries’ political economic stability and market potential prompted Korean businesses to enter Latin America targeting the local market. The earlier Korean focus on Central America, the Caribbean and Mexico contrasted with its new concentration on local markets and meaningful investments in South America, particularly in Brazil. As of December 1993, there had been almost no Korean direct investment in Brazil; since 1995, Korean investors have rushed into Brazil (See Table 2). Furthermore, Brazil’s import tariff hikes, adopted in early 1995 to correct its trade deficit, favored local investors and prompted Korean firms to produce locally. Rules of origin in MERCOSUR and the North American Free Trade Agreement (NAFTA) again forced Korean entrepreneurs to change their business plans. "Global management" became the new motto for Korean corporate executives in order to achieve higher competitiveness.

Thus, the penetration strategy for the region changed from "detour" to "localization". Latin America would no longer serve as a mere consumer market for finished products or an alternative export market needed to efficiently manage industrial markets. This meant that Korea, shedding an obsolete foreign policy toward Latin America which no longer mirrored the changing international political and economic reality, began to consider Latin American countries as major strategic partners in its new focus on globalization. In 1996 and 1997, according to IMF’s data, Korea’s trade volume with Latin America accounted for 3.9 percent and 4.3 percent respectively, of Korea’s total trade, the highest ratio among Asian countries (See Table 3). This meant that the Latin American market became more significant to the Korean economy than to any other Asian economy, including Japan. While trade and investments were targeted to major Latin American economies, development cooperation was provided to smaller economies through the Economic Development Cooperation Fund (EDCF), and the Korea International Cooperation Agency (KOICA).³

Korea's President Kim Young Sam’s first-ever state visits to Guatemala, Chile, Argentina, Brazil and Peru in September 1996, and to Mexico in June 1997 reconfirmed this changed strategy. More than a hundred business leaders accompanied him, and announced more than two billion dollars worth of investment projects in the fields of automobile manufacturing, electronic appliances, telecommunications, mining, etc. This signaled a diversification of investment sectors and conversion into capital and greater emphasis on capital and technology-intensive industries, rather than on the formerly dominant labor-intensive ones. Korea’s investments in Latin America in 1997 were the highest in history, US$627 million, accounting for a record-high 11 percent of Korea’s total overseas investments. Investment was also encouraged by the elimination of the remaining regulations on overseas investments in June 1996 and August 1997.

The 1996 presidential trip set a milestone in Korea's relations with Latin America in various other aspects. A government think tank had prepared a report for a new policy direction toward Latin America analyzing political and economic situations in the region and reviewing Korean-Latin American economic relations. It suggested a diversified and comprehensive approach towards improving relations and also proposed an Asian-Latin America summit meeting (ALAM).⁴ Subsequently, several new initiatives were decided upon through a series of high-level consultations among bureaucrats, scholars, and businessmen.⁵ These initiatives included founding a Council on Latin America, upgrading the foreign ministry’s office for the region to director-general level, and joining the Central American Bank for Economic Integration (BCIE).

Korea’s financial crisis of November 1997 and the subsequent economic recession had a number of negative implications for Korean-Latin American relations.

First, Korean entrepreneurs’ aggressive investments in the region were suddenly halted. They suddenly found themselves piled with debts accumulated under their "global management" schemes and surrounded by rather hostile international and domestic creditors. The IMF program and the parallel government corporate reform initiatives altogether worsened the family-controlled business groups or chaebols’ stance on overseas investments. The president-elect Kim Dae-jung, a longtime critic of chaebols, pressured them to follow a five-point corporate restructuring program in December 1997. The program demanded an early preparation of consolidated balance sheets, an early phase-out of mutual credit purchases between chaebol subsidiaries, an improvement of the financial structure of all chaebol firms, a streamlining of the profligate chaebol business operations so as to focus on core operations only, and measures to hold the owners responsible for management decisions. While the government forces chaebols to reduce their debt-to-equity ratio to 200 percent or lower in two years, the formerly powerful business groups no longer enjoy political support for their expansionary projects. Many promises to invest in Latin America were cancelled, reduced in size or indefinetely postponed. Statistics show that Korea’s total investments in Latin America in 1998 decreased by almost half, compared to the previous year. Among others, the delay of Asia Motors’ Bahia project has been controversial. Due to its financial problem, the project has been dormant since the official groundbreaking ceremony of August 1997. Asia Motors and its major affiliate Kia Motors later were merged with Hyundai Motors, another Korean automobile manufacturer. No immediate decision regarding to the Bahia project was issued from the new owners, and it soon became a bilateral hot issue between the two countries.

Second, the Korean currency won’s devaluation rapidly recuperated Korean products’ price competitiveness, and caused a rush of Korean products into Latin American markets. In the meantime, the Korean crisis-managing government accelerated exports. As South Korea needed liquidity to service foreign debt, the government sought to retain its trade surplus by encouraging new foreign direct investments. Although the won’s devaluation of late-November 1997 did not directly result in a sharp increase of Korea’s total exports to Latin America, there were apparent sharp increases to several countries and by sectors. (See Table 4 and Table 5). Latin American economies responded to the Asian shock with preventive restrictions, establishing tariff and non-tariff barriers. Specifically, the Korean product influx caused sporadic, potential trade frictions though no official dispute has so far erupted. Mexican and Colombian textile industries moved to enforce anti-dumping measures, and Colombian automobile makers pushed the Colombian government to adopt safeguard measures against alleged damage by Korean car imports.

Third, the Korean recession meant a sharp reduction of imports. Traditionally, Korea had imported from Latin America, primary products such as iron ore, copper, steel, aluminium, pulp, and agricultural products, etc. As many factories came to a halt or operated far under capacity, the demand for raw materials and intermediate goods experienced a drastic contraction. In 1998, imports from the region decreased 46.1 percent. The sharp decrease in imports and the moderate 2.3 percent increase of exports combined to produce a greater trade imbalance. As shown in Table 1, the trade balance has been in favor of South Korea since 1977 except during the Latin American debt crisis of 1982-1986. The trade imbalance has been aggravated in recent years due to the slow growth in imports from Latin America compared to the rapid expansion in exports. Slow growth in imports has been ascribed to primary goods' price reductions, the weakening of Latin America’s price competitiveness due to the appreciation of its local currencies, and a Korean reliance on Southeast Asia for many of its raw material needs. A Latin American ambassador complained in a meeting that "The imbalance ratio was two to one before the crisis, and is now four to one."⁶ The current trade imbalance has become the most popular theme at every Latin American diplomatic meeting.

Korean-Latin American economic relations have had a hard time coping with the preventive adjustments and economic recession in Latin America, and the more recent spread of the international financial crisis to the region. The preventive austerity and recession in South America’s major countries such as Brazil, Argentina, and Chile has meant a decrease of the demand for Korean capital and consumer goods. The return of a crisis mood in Latin America has reminded many Korean entrepreneurs and policymakers, who had previously had high expectations for a regional boom, of the notorious 1980s’ debt crisis. Such haunting chronic image of the region dissuaded them from their previously aggressive activity and investment in Latin America. Immature institutionalization of Korean-Latin American relations is also responsible for the vulnerability of the boom and the deterioration of economic relations.

The question now is where do Korean-Latin American relations go from here. Do the recent troubles mean an end to the short honeymoon or are they mere bumps in the road to a deepening relationship?

As mentioned above, there are many obstacles in achieving sustainable economic relations. Formerly, Korean investments in Latin America were "pulled" by the economic boom and by regional integration in Latin America and «pushed» by high Korean production costs, market-seeking, and a corporate strategy that emphasized globalization⁷. Today, few of those pull and push factors remain. Further, the low development of non-economic relations between Latin America and Korea contributes to the fragile relationship. Also, the lack of a widespread mutual cultural understanding and the end of the Cold War lessened the propensity for political cohesion. Trade restrictions on the part of Latin America, combined with Asia’s contracted demand for Latin American goods and lack of investment resources, may turn both regions’ attention to other industrialized partners. All of this implies a negative fallout for Korean-Latin American economic relations.

Policymakers across the Pacific, however, may find that the international financial crisis also entails some positive options for building better understanding, institutionalization and strategic alliance.

First, grief is best pleased with grief’s company. Korea’s first serious financial crisis since the Korean War of 1950-53 can find parallels in most Latin American economies that have accumulated more than ten years of experience with international political economic reactions to financial crises. Most Korean bureaucrats have wanted to take lessons from Latin American policy responses to the financial difficulties, international pressures and reform challenges, and their socioeconomic results. This may improve the understanding of Latin America’s economic situation and sociopolitical problems, and open the way to a humbler collaboration between them, which would contribute to remodeling relations with the region.

Second, the contemporary contagion of the international crisis has been a shared challenge for most emerging markets. Especially, a "new international financial architecture" calls for more strategic thinking on the part of emerging market policymakers. While the national proposal for an Asia-Latin America Summit was not picked up by the former Korean government, the current administration will have to deal with the Asia-Latin America Forum (ASLAF) proposed by Singaporean minister Go Chok-Tong. The implication of that proposal is the institutionalization of Asian/Korean-Latin American relations.

Korea found itself flooded with communication channels with Latin America as of early 1997. Foreign ministry bureaucrats zealously opened as many communication windows as possible to the region, this time not at bilateral levels, but at regional levels. Following Japan’s path, Korea fostered relationships with the Rio Group,⁸ MERCOSUR,⁹ and Central America.¹⁰ Additionally, the Korean Council on Latin America and the Caribbean was created in August 1996 to facilitate cooperation at the private sector level. Given the traditionally low profile of Latin America in the Korean framework of international relations and vice versa, momentum for strengthened economic relations might have been maintained if they had been well institutionalized. Unfortunately, however, the crisis occurred before all these institutionalizing efforts could mature. Thus, the international discussion on Asia-Latin America inter-regional talks may stimulate better institutionalization of existing communication channels.

Third, because of the financial crisis and the subsequent across-the-board economic reforms the Korean economy resembles that of the Latin American countries which have undergone market-oriented economic reforms and trade liberalization. This could result in enhanced cooperation. One of the immediate outcomes is the free trade negotiation between South Korea and Chile. "Free trade" is a brand-new item on the Korean policy agenda, and is the product of the latest wave of trade. The newly created ministry-level office for international trade negotiation cautiously selected Chile in early 1998 as its first negotiation partner for free trade although discussions on its feasibility have been going on for several years among scholars and diplomats.¹¹ Regardless of whether the Korean negotiators take into account South Korea’s relations with South America as a whole, the ultimate Korea-Chile free trade, unusual between countries remote from each other, will represent a new momentum for Korea’s presence in Latin America and for redefining strategy in its relationship with the region. Additionally, Korea’s free-trade initiative toward Latin America, the first of its kind from Asian countries, may ultimately promote the intra-industrial trade and cooperation aspired to by Latin Americans, and enhance economic interdependence. Latin American exports are still heavily skewed towards primary products or low value-added primary processed goods, while Korean exports are mainly manufactured goods including electronics and automobiles. Thus, Korea-Latin America trade has followed a typically North-South "inter-industry trading" pattern rather than a South-South "intra-industry cooperation" one.¹²

In the short term, the international financial crisis and its contagion, together with resulting trade policy responses, set back a promising expansion of trade and the intensifying of investment relations between Korea and Latin America. It brought about reduced investment financing, overseas investments, demand for production inputs, and security for existing business relationships. This inevitably led to a contraction of trade, investment, and development cooperation between Korea and Latin America. In the long and medium term, however, the crisis made open and wider the opportunity and space for better mutual understanding, institutionalization and strategic cooperation or alliance between both parties resulting from similar economic, political and socioeconomic challenges at the domestic and international levels. The road both Korea and South America will embark upon depends on their policymakers' awareness of the strategic importance of interregional cooperation.

Even though some academics may try to justify and model the sequence of recent economic relations between Korea and Latin America, it will be hard to find that decision-makers maintained a coherent strategy at both public and private levels. What may differentiate one policy decision from another is whether it has been adapted to a changing environment and whether it contains within it a vision for remodeling international relations. Whether the current major decision-makers have such vision is still doubtful. Yet even incompetent decision-makers cannot dampen the potential of the Korea-Chile initiative for free trade to unexpectedly jumpstart Korea’s stalemated relations with the region.

1. See Won-Ho Kim, "Korean-Latin American Relations: Trends and Prospects", Korean Journal of Latin American Studies Vol. 1 (1998), pp. 25-48. http://plaza.snu.ac.kr/~kjlas/PDF/KIMWH.PDF

2. See Young Chul Park and Won-Am Park. "Capital Movement, Real Asset Speculation, and Macroeconomic Adjustment in Korea", in Helmut Reisen and Bernard Fisher, eds., Financial Opening: Policy Issues and Experiences in Developing Countries (Paris: OECD).

3. While Korea is putting "priority on strengthening cooperation with Pan-Pacific countries", the total assistance provided to Latin America and the Caribbean increased by 118.5% in 1997 over the previous year to 7.4 billion won (US$7.78 million), 14.1 percent of the total. See KOICA, Annual Report 1998, p. 45.

4. See Won-Ho Kim, The New Economic Order in Latin America and Korea’s Policy Directions for Advanced Economic Relations. Korea Institute for International Economic Policy, April 1996 (in Korean).

5. Among others, see Ways to Cooperate with Latin America, Symposium proceedings, Institute of Foreign Affairs and National Security, August 1996 (in Korean).

6. Jorge Lapsenson, Ambassador of Argentina, speech at a luncheon hosted by Korean Council on Latin Aemrica and the Caribbean, December 16, 1998.

7. See Taik-Hwan Jyoung, "Korean Investments in Latin America", paper presented to the conference on Regional Integration in the Americas and the Pacific Rim, University of California, San Diego, February 28, 1997. http://orpheus.ucsd.edu/las/prrptk.htm

8. The first ministerial meeting between Korea and the Rio Group Troika was held in September 1996 at the United Nations headquarters in New York.

9. The first consultative meeting between Korea and MERCOSUR was held in Asuncion, Paraguay, in April 1997.

10. South Korea opened the first annual Forum for Dialogue and Cooperation with Central America in San Salvador in August 1997.

11. It was after the visit to Chile by Korean Minister of Trade, Industry and Energy in October 1997 that South Korea seriously began to study the feasibility of free trade with Chile.

12. See Young Kon Kim, "The Economic Relationship between Korea and Latin America: Past, Present and Future Prospects", in Soo-Keun Kim et al., eds., Comparison of Development Experiences: Latin America and Korea (Seoul: Ajou University Press, 1993), pp. 239-240.

http://www.sela.org
sela@sela.org
   SELA,  Permanent Secretariat
Torre Europa, Fourth floor, Urb. Campo Alegre, Av Francisco de Miranda,
Caracas 1060- Venezuela
Tlf: (58) (212) 955.71.11 Fax: (58) (212) 951.52.92