South Korea in a Changing International Order

Few countries have benefited more from the international order that developed after World War II than South Korea. But that order is now coming under increasing strain and could shroud South Korea’s economic future in uncertainty.

In the most recent U.S. National Security Strategy, the Trump administration stated that China and Russia’s efforts to assert international influence mark the return of great power competition. While the Trump administration has taken steps to address the challenges from China, specifically on the economic front, great power competition also has implications for U.S. friends and allies abroad.

For U.S. allies such as South Korea, the question is not so much whether great power competition has returned, but rather how that competition will be conducted. If competition takes place within a rules-based system, the rules may change, but the essential system will remain intact. However, the consequences for South Korea would be different if the system were to break down as a result of great power politics.

While the post-war order has changed and evolved over the decades, it has largely moved in the direction of an increasingly open rules-based order. That order also faced prior challenges from strong actors in the system seeking to alter the rules, such as the unilateral decision of the Nixon administration to end the convertibility of the U.S. dollar into gold in the 1970s.

The evolution of the system can be seen in the development of the World Trade Organization (WTO). The WTO as it exists today is the culmination of rounds of trade negotiations that at first reduced tariff barriers among a more limited group of countries, but later grew to encompass most nations with the end of the Cold War. The WTO itself was formally established in 1995 and served as perhaps the first significant change of the post-Cold War era, with the inclusion of a dispute settlement mechanism to resolve trade conflicts between members. This innovation is now one of the areas of contention with the United States in the international system.

Despite the international system’s flaws, it has also allowed countries other than the great powers to flourish. South Korea’s GDP has grown from nearly $4 billion in 1960 to more than $1.5 trillion in 2017, or a 38,581 percent increase. Over the same period, South Korean exports have grown from $32.8 million to $574 billion.

Much of the credit for South Korea’s success belongs to South Korean policymakers, but the rules-bound trading system supported by the United States in the aftermath of World War II created the environment in which countries such as South Korea could flourish.

However, with the United States now questioning whether the current trade structure serves its national interests, and with China’s use of forced technology transfers setting off a broader conflict between the United States and China, the international trade regime that has allowed South Korea to flourish is under stress.

In recent years, South Korea has seen a preview of how a breakdown of the rules-based order might affect it. After Seoul’s decision to deploy the U.S. Terminal High Altitude Area Defense (THAAD) system on Korean soil, China utilized gaps in its WTO and free trade agreement commitments with South Korea to informally apply economic pressure in an attempt to convince South Korea to reverse its decision. Despite Seoul and Beijing agreeing to normalize economic relations in 2017, the effects of the THAAD decision – and China’s economic retaliation – continue to linger.

While China may have found ways to stay within the rules to pressure South Korea over THAAD, the episode provided a glimpse of the type of tactics South Korea could increasingly face if the rules-based economic order begins to loosen or break down.

However, China has not been an exception in this regard. Under the Trump administration, the United States has taken to using the national security exemptions to international trade obligations to gain leverage in negotiations. For instance, when trying to convince Japan to negotiate a bilateral FTA, President Donald Trump issued a blunt warning: “You don’t have to negotiate, but we’re going to put a very, very substantial tax on your cars if you don’t.” He has made similar comments about the EU.

If the United States and China are increasingly willing to go outside the rules to achieve their objectives, there will be a further erosion of the rules-based order, placing countries such as South Korea at a disadvantage.

Although it is the world’s 11th largest economy, South Korea has limited options for dealing with the current tensions. The first step is to manage its trade relations with its two most important trading partners, the United States and China.

South Korea was able to reduce tensions with the United States by amending the KORUS FTA and agreeing to limit exports of steel to the United States. However, Trump’s recent executive order on the national security implications of automotive imports still leaves open the possibility that the United States could impose restrictions on automotive imports from South Korea in the future.

In the case of China, the losses from the THAAD dispute may be declining but with the trade conflict between the United States and China ongoing, South Korean exports to China are down 14.1 percent through the first four months of the year.

In addition to managing its relations with the United States and China, South Korea is also looking to reduce its dependence on both by expanding its trade ties to other nations. The Moon administration has pursued its New Southern Policy in an effort to expand economic relations with Southeast and South Asia. As part of these efforts South Korea is looking to upgrade its FTA with ASEAN, while negotiating separate agreements with countries such as Indonesia and the Philippines. It is also taking part in the Regional Comprehensive Economic Partnership (RCEP) talks, which bring together all 10 ASEAN members plus the six countries that have existing FTAs with ASEAN: Australia, China, India, Japan, New Zealand, and South Korea.

Outside of Asia, South Korea is looking to become an associate member of the Pacific Alliance, a free trade bloc in Latin America.

In the past, South Korea has also expressed an interest in joining what is now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The Moon administration is considering taking part in the CPTPP; doing so would align it with other countries looking to improve the rules-based order.

While no one country outside the United States, or perhaps China, could significantly influence the current rules-based order on its own, a group of countries working in concert could maintain the order and work to evolve it in a direction that, in time, could convince one or both of the two largest powers in the system to become more committed members. If the international rules-based order is to be maintained, South Korea may need to work with like-minded partners such as the EU, Canada, and Australia to support the current system.