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South Korea’s opening leaves wishy-washy Japan farther behind

by Jochen Legewie

Special To The Japan Times

On July 1, 2011, the European Union-South Korea free-trade agreement took effect, promising to significantly facilitate the exchange of goods and services and give both nations a major economic boost. The conclusion of the deal demonstrated the huge European interest in South Korea’s economy and markets.

Six months later, Tokyo is still trying to convince the EU to at least start official negotiations on a similar accord with Japan. But the talks are stalling as interest in Europe seems limited. Even before the euro crisis, Japan, unlike its neighbor, was not a top priority for EU officials. The reasons are manifold.

Over the past few years, Japan did more than just lose its status as the world’s second-largest economy. It is also facing the acute risk of being overtaken by South Korea in many areas.

In its annual rankings of national economic competitiveness, Switzerland-based think-tank IMD let Japan — the world’s top-ranked competitor in 1990 — slip to 27th place in 2010, allowing it to be overtaken by South Korea for the first time in 23rd place. The same thing happened in 2011.

Japan was also eclipsed by South Korea for the first time last year in Germany’s BDI survey — an annual ranking of the world’s most innovative countries. South Korea placed 18th in the survey while Japan slipped to 19th.

A similar situation emerges when we look at three of Japan’s showcase industries.

In steel, South Korea’s Posco group overtook Nippon Steel as the world’s most efficient steel producer long ago. But South Korean manufacturers also have beaten their Japanese counterparts in electronics and automobiles.

While the Japanese had already surrendered the market for flat-panel TVs to the Koreans, the same is already happening in one of the electronics industry’s few growth areas: smart phones.

In the third quarter of 2011, Samsung Electronics grabbed the largest share of the global smart phone market. Interestingly, it did so by successfully adopting OEL display technology, the research for which was originally led by Sony. And Samsung did this very profitably — in 2010 its profits exceeded those of all its Japanese competitors combined.

Even in the automobile industry, the market’s focus no longer appears to be on Toyota, Nissan or Honda, but on Hyundai. Top executives at such giants as General Motors and Volkswagen have been quoted as saying they consider Hyundai their greatest threat.

Hyundai’s global sales have grown rapidly, and this was accomplished not only with attractive prices, but with attractive products as well.

In the United States, the Japanese automakers have to offer $2,000 in sales incentives for each car, while Hyundai’s incentives have already fallen below $1,000 per unit.

All of these developments made think tank IHS Global Insight forecast that South Korea will surpass Japan in economic output per capita within the next 20 years. IHS calculates that South Korea’s per capita GDP will reach $72,400 in 2031, versus $71,800 for Japan.

Of course, there is no guarantee that such a rosy scenario for South Korea will eventually come true. South Korea is sandwiched between high-cost Japan and low-cost China and Southeast Asia. So far, it has benefitted from this by intelligently leveraging its cheaper labor costs. But with labor costs rising, it will be less and less able to do so.

South Korea also faces huge uncertainties about developments in North Korea. The political turmoil and social upheaval in the North probably present the biggest threats to the sustainability of the South’s economic success story.

But the South Korean government is doing all it can to make such success possible. Opening up its industry to overseas competition is a key pillar in these efforts. Seoul is following up the FTA with the EU by enacting a similar agreement with the U.S. South Korea’s National Assembly ratified the deal less than two months ago.

To succeed with this liberalization course, the South Korean government had to overcome major domestic opposition, especially from the agriculture sector. It broke that resistance with an intelligent mix of promises, concrete subsidies and simple persistence.

Prime Minister Yoshihiko Noda can definitely draw a lesson from this approach by making a smooth entry into the Trans-Pacific Partnership Agreement. This could be done in two stages.

Step 1 would be to overcome domestic opposition to reforms as symbolized by the farm lobby.

Step 2 would be to play a key role in combining the TPP initiative with inner-Asian efforts at trade liberalization, which was originally proposed by China back in 2002.

Japan is the only country that can unite the U.S.-led TPP initiative with inner-Asian trade liberalization centered around China, South Korea and Japan. If Tokyo succeeds, it will regain substantial status and strength. But this will only be possible if it is preceded by thorough domestic reforms and the further opening of several sectors to international competition, such as Seoul decided to do.

Actually, there are few viable alternatives to such an approach if Japan is to stay prosperous in the long run. In the short run, this course of action would succeed in bringing EU officials to the bargaining table to do an FTA with Japan.

But so far, the Europeans and others see too few signs of clear political will in Japan to embark on such a course.

Jochen Legewie is president of German communications consultancy CNC Japan K.K. See his blog at www.cncblogs.jp