Moral Hazard and the US-ROK Alliance

In its alliance with South Korea, America’s status as a global power gives it certain bargaining advantages over Seoul. At the same time, though, the bilateral relationship’s importance to Washington’s larger geo-strategic interests, particularly in the context of the rebalance to Asia, creates moral hazard that gives Seoul greater leverage in other areas. Put simply, the U.S. presence and ironclad security commitment allows South Korean to slack on defense because it knows the U.S. will ultimately bear the burden, given its own strategic considerations and concerns over the safety of United States Forces Korea (USFK) forces.

From another angle, South Korea could be described as relatively dependent upon its superpower patron, and leveraging this dependence to its own advantage. From Seoul’s perspective, this behavior is rational and provides concrete material benefits, and helps the ROK avoid costs it might incur if it were compelled to adopt alternative policies in the political, diplomatic, fiscal, and budgetary realms. Moreover, moral hazard problems are related to fears of abandonment and entrapment, and potentially are linked to problems surrounding escalation and crisis management.

The more extreme critics of moral hazard and alliance exploitation, such as Republican presidential candidate Donald Trump, accuse the ROK of free-riding on U.S. protection without paying for it. Others, such as Doug Bandow, offer a far more informed and nuanced analysis of the alliance, yet still suggest the U.S. should remove its troops from South Korean soil and end “military welfare” for the ROK. Robert Kelly believes that U.S. alliances with Japan and the ROK are disincentives for Seoul and Tokyo to reconcile and improve bilateral security cooperation. Some analysts push Kelly’s reasoning to argue that Japan and the ROK would quickly become close allies to balance against China and the DPRK if the U.S. were to withdraw from East Asia.

We disagree both with Trump’s factually baseless rhetoric and Bandow’s overall conclusions. Although we are sympathetic with Kelly’s views, we believe domestic politics in South Korea would push Seoul to choose internal balancing through increased defense spending, or even to acquire its own nuclear deterrent, before reaching out to Tokyo to replace a terminated alliance with the U.S. While we support South Korea’s efforts to take on an increasingly independent role for its own national defense, we are skeptical regarding proposals for a sudden or fundamental change to such a long-standing and relatively successful security architecture. With this in mind, we hope a critical analysis of the role that moral hazard plays in the alliance, can provide insight for alliance management and the maintenance of peace and stability in Northeast Asia.

Defense Modernization

Moral hazard is clearly manifest in relation to several aspects of South Korea’s ongoing defense modernization efforts. For example, since 2006 the ROK has been developing its own indigenous Korean Air and Missile Defense (KAMD) system. Nevertheless, the KAMD system remains dependent on U.S. early-warning satellites to provide initial detection of missile launches, U.S. and ROK ground-based and sea-based radar systems to track incoming missiles, and a central operations center known as the ADM-Cell at Osan Air Base to collect and process this information. And in case a deployed KAMD system were activated to intercept an incoming missile, it would make no sense not to utilize a broad spectrum of tracking data processed through the Pacific Integrated Air and Missile Defense Center under the U.S. Pacific Command (PACOM). In our view, failure to do so would be dereliction of duty and renunciation of the solemn commitments under the U.S.-ROK Mutual Defense Treaty.

The ROK has made significant efforts to upgrade the KAMD system and take on a greater role in its operation. Nevertheless, in the meantime, while the immensely expensive and time-consuming process of technological upgrades and training takes place, the U.S. will keep its own assets deployed in-theater. Furthermore, if South Korea is unable to deploy a robust and effective KAMD system, for whatever reason, the U.S. remains committed to peninsular defense.

The U.S. also plays an important role in South Korea’s efforts to upgrade its intelligence, surveillance and reconnaissance capabilities (ISR). In 2013, in preparation for the now indefinitely delayed transfer of operational control, Seoul announced plans to develop and deploy advanced reconnaissance satellites to monitor North Korea more effectively and to provide early warning capabilities that are crucial in security crises. Although capable of mobilizing various intelligence assets, a senior South Korean military official admitted at the time that the ROK still relied on the U.S. for much of its intelligence due to the limited vision of its own multipurpose satellites. The recent successful launch of the Arirang-3A undoubtedly signaled an upgrade in South Korea’s intelligence capabilities as well as its overall space program. The trend continued when Northrop Grunman recently announced that production has started on the four RQ-4 Global Hawk surveillance drones purchased by the ROK, a sale that the U.S. government approved in 2014.

However, Seoul has an ambitious import-substitution program for its defense industries that has two main purposes: bolstering national defense to balance against DPRK threats while reducing dependence upon the U.S., and building economies of scale in production to reduce unit costs and promote exports. Paradoxically, the first reason reduces the moral hazard problem from the U.S. perspective, even as moral hazard enables the ROK to take the time to develop and deploy advanced indigenous military assets despite some threats, such as the DPRK’s nuclear and missile programs, making direct foreign acquisition – rather than import-substitution – a more effective way to manage an immediate or imminent threat. In short, while South Korea is striving to acquire and develop more advanced capabilities, the U.S. provides its own “bridging” assets in the interim until the ROK is able to deploy the assets required to meet “conditions based OPCON transfer,” which is now open-ended but nominally supposed to happen sometime in the middle of the next decade.

This last point highlights an important element in moral hazard, namely, that the U.S. can exacerbate the problem when it denies particular foreign military sales. By denying the transfer to the ROK of certain technologies, the U.S. increases the cost and lengthens the timeline for ROK defense modernization efforts. This not only passes on significant costs to South Korean taxpayers, it forces the U.S. (again, because of its larger regional interests) to retain its own assets in South Korea and possibly deploy additional ones if the ROK is unable to meet its goals. If the relationship were not bound by a longstanding and constantly reaffirmed treaty, as well as embedded in a larger U.S. grand strategy, denial of a military sale would not carry the same implications. Granted, approval of technology transfers carries other risks, such as the technology being compromised and obtained by adversaries, or ROK defense firms infringing upon the intellectual property rights of U.S. firms in order to meet import-substitution and export-promotion objectives. In the realm of the most advanced U.S. defense technologies, the risks appear to outweigh the benefits from Washington’s perspective.

The U.S.-ROK alliance has been characterized by this dynamic from its outset. The U.S. has provided fundamental security for the ROK, including the physical presence of substantial numbers of forward-deployed U.S. troops, the U.S. nuclear umbrella, and repeated diplomatic reaffirmations of its commitments under the Mutual Defense Treaty. Alongside this commitment to ROK security, the U.S. has assisted and at times strenuously pushed the ROK to take on a greater share of the defense burden and modernize its own defense and war-fighting capabilities. For the most part, the South Korean political and defense elite have done so eagerly. However, a fundamental aspect of this process has been the role played by the U.S. in transferring material directly from USFK, facilitating ROK deals with U.S. firms, and also in setting hard limits to what they would permit the South Koreans to do.

Self-Sufficiency

Starting in the 1960s and particularly in the 1970s, the development of South Korean self-sufficiency in the production of defense material “had essentially become the formal policy of the United States,” according to one congressional investigation. This included U.S. support for Korean production of high-speed coastal patrol and interdiction craft, model 500 helicopters, conversion of M-48 tanks, M-60 machine guns, surface-to-surface missiles, and the M-16. In the case of the M-16 and M-60, U.S. State and Defense Department officials pressured executives from both Colt Industries and Maremont Corporation, respectively, to assist the ROK in building its own armament production facilities. Nevertheless, the U.S. restricted South Korea from going too far in other areas. This was clear in the specific limits the Americans placed on the range of ROK surface-to-surface missiles, and more famously in the strenuous efforts they exerted to prevent Park Chung-hee from finalizing nuclear deals with Canadian and French suppliers.

The South Koreans have also exhibited certain contradictions in their own efforts at defense modernization. While vigorously pursuing an official policy of self-reliant defense, more emphasis has been placed on weapons systems and equipment to capture a greater share of external markets rather than on military planning, resources needed for force improvements, or military technologies required to reduce dependence on the U.S.  Moreover, South Korean efforts were particularly sensitive to changes in U.S. strategy and military policy. They developed what analyst Hoon Noh called a “band aid” approach, ramping up efforts when the U.S. commitment was in doubt, and lowering them once the situation stabilized.

The ROK has undeniably enhanced its defense and war-fighting capabilities, developed high-tech and competitive defense firms, taken on a much greater role in alliance responsibilities, and increasingly shouldered a greater share of the financial costs of USFK deployments. That said, charting such obvious material benefits misses the significant effect this historical process has had on the cognitive map of South Korean policymakers. In short, the South Korean defense and political elite have been socialized into this process of defense modernization within the larger U.S. orbit. Despite the enormous changes that have occurred, the effects of this socialization are evident to this day.

In the mid-2000s, during the early negotiations over OPCON transfer, several groups within South Korea were vociferous in their disapproval of the negotiations as well as the Roh Administration’s approach to the alliance. This included politically powerful retired military officers, conservative politicians of the then Grand National Party (GNP), and concerned citizens, who viewed OPCON transition and other USFK realignments as a prelude to the dissolution of the alliance. However, as Moon Chung-in correctly notes, such a linkage of events “requires an enormous leap in logic.” Such a leap is very likely tied to the internalization of the alliance in the thinking of substantial portions of the South Korean defense and political elite and their hyper-vigilance regarding any signs of abandonment.

Again, as Moon writes, the U.S. operational control of ROK forces was originally designed “to bind the U.S. in times of crisis as well as gain crucial military support, thereby allowing South Korea to mitigate the fear of U.S. abandonment” and maximize its deterrence capability. Despite opening itself to entrapment, the U.S. accommodated the arrangement in order to make a credible commitment to its more vulnerable ally. When this longstanding arrangement showed signs of being fundamentally altered, and distorted during a time of U.S. global posture reviews and “strategic flexibility,” certain Koreans very openly panicked. Interestingly, even Roh’s own national security strategy was called “cooperative self-reliant defense,” joining two seemingly disparate impulses in order to reiterate that South Korean defense modernization efforts would remain consonant with the alliance.

During President Lee Myung-bak’s tenure, Seoul no longer spoke of “self-reliance” and also worked to delay OPCON transfer. Lee also revised and made cuts to Roh’s Defense Reform Plan 2020. Although budgetary concerns played a role, one might connect this to the ROK’s aforementioned “band-aid” approach. During Lee’s presidency, the U.S. began its rebalance to Asia, and the alliance “stabilized,” thus leading many Koreans to believe that Seoul no longer had to make strenuous efforts to maintain the alliance. This should not be overstated, because many Koreans continued to work hard developing ROK capabilities and taking on a greater operational role.

There appears to be a generational divide regarding the internalization of the ROK’s dependence on the alliance for national security. Just as older South Korean defense officials’ formative years were characterized by acute vulnerability and the perceived need for U.S. protection, younger officials have come of age during a time of significant shifts and a much more capable ROK. They are less bound to the hardened bipolarity of the Cold War, and they have seen the ROK overtake the DPRK in essentially every indicator of economic, political, and qualitative military strength. They are more eager than their forebears to take on greater independence.

During the recent 40th Military Committee Meeting and 47th Security Consultative Meetings in Seoul, South Korea’s ongoing efforts at defense enhancement were on full display. Yet simultaneously, so too was the importance of the U.S. and the U.S.-ROK alliance structure in guiding the process. Marine Corps Gen. Joseph F. Dunford Jr., Chairman of the U.S. Joint Chiefs of Staff, noted that such meetings are critical “as the alliance is in a transition period.” As the discussion above indicates, this “transition period” has been going on for some time. Nevertheless, there are important indications that the South Koreans are indeed taking on a greater role than ever before. This may indicate a shift away from the more severe aspects of moral hazard. However, it may also open the door to greater concerns regarding escalation, entrapment, and crisis management in an uncertain security environment. Ultimately, the bottom line remains: As long as the U.S. maintains its great power vision, with the ROK embedded within it, these issues may change shape, but they will not go away.