September 11, 2017 10:00 am JST
William Pesek

Moon's make-Korea-great-again plan gets Trumped

Trump`s threats against a key ally are misplaced

In bashing South Korea to tame Kim Jong Un, Donald Trump is giving geopolitical brinkmanship a bad name. Economic logic, too.

Most Asians long ago concluded U.S. President Trump's White House cannot shoot straight, either rhetorically or policy-wise. But his plan to tear up the five-year-old Korea-U.S. trade deal and attack Seoul for "appeasement" of North Korea shocked the 124-day-old Moon Jae-in administration. It also greatly complicates plans to increase job growth, wages and innovation.

The kind way to categorize Trump's broadside, delivered via Twitter on Sept. 3: a ploy to make Moon reconsider plans to resurrect his "sunshine policy" of detente with the North. It is an incredibly risky gamble. Trump may end up alienating the two nations -- rival China and ally South Korea -- he most needs to curb Kim's nuclear provocations. It is also a fresh headwind as Moon tackles the mess left to him by his predecessor Park Geun-hye.

Park was removed from office on March 10 amid a bribery and influence-peddling scandal that ensnared Samsung, South Korea's biggest company. She entered office in February 2013 pledging to rein in Samsung and other family-run conglomerates towering over the economy. The monopolistic behavior of these chaebols hogs most of Korea's innovative oxygen. They hoard wealth and talent, bully subcontractors and play by opaque governance rules that undermine the Kospi stock index. They impede small enterprises, buying up any startup that might challenge their dominance.

Instead of "democratizing" the economic pie, as she put it, Park got coopted by the chaebol system. Six months into her presidency, Park turned to the chaebol she promised to curb to help Seoul boost national growth. Then she shook them down, through an emissary, for about $70 million of "donations." On Aug. 25, Samsung leader Lee Jae-yong was sentenced to five years in prison related to Park's downfall.

Enter Moon, who won over voters with a reputation for rectitude and pledges to raise gross domestic product by at least 3%. His manifesto includes reducing the 9%-plus youth unemployment rate, lowering record household debt and morphing export-dependent Korea into an innovation and services powerhouse. That blueprint is even more daunting to deliver as Trump misaims his trade-war cannon Seoul's way.

Trump's threatened China tariffs of between 35% and 45% are worrying enough. Anything that hurts the growth of Korea's biggest trading partner would have Seoul relying more on fiscal stimulus and lower interest rates than structural upgrades. Korea does almost double the amount of business with Xi Jinping's China than it does with Trump's America.

If Trump does kill a trade deal initiated in 2006 by then-President George W. Bush, Americans will pay higher prices for their Hyundai SUVs, Samsung smartphones and LG televisions. For Korea, the stakes are much higher. America is the biggest market for Samsung, which alone generates at least 20% of Korea's gross domestic product. They do not call it Republic of Samsung for nothing.

To revitalize an aging nation, Moon is targeting "trickle-up growth." The chaebol system Park's father, dictator Park Chung-hee, championed in the 1960s and 1970s made Korea too top-heavy. In 1997, their excesses toppled the economy. Twenty years later, Korea remains too focused on protecting jobs and income at the top of economic food chain, not enough on generating new ones from the ground up. Moon's plan is to use tax incentives and government programs to generate more Silicon Valley-like energy among his 50 million people.

That means wrestling power away from the tycoons with anti-trust crackdowns, taxes on companies hoarding cash that could be used fattening wages, higher taxes on the super-rich, reducing real-estate speculation and encouraging risk-taking. Such steps require an iron will from the presidential Blue House in the best of times. Trump's provocations make efforts to effectively turn Korea Inc. upside down a tougher sell to a change-averse parliament.

This is especially true with taking on politically connected chaebols. The good news is that the conviction of Samsung's Lee could be a rallying cry. Lee sitting in a jail cell matters less than whether he stays there. The well-worn pattern is that chaebol chieftains cool their heels in minimum-security holding before being pardoned. Lee's father, Lee Kun-hee, was absolved of a bribery conviction in 2009 and back running Samsung soon after. Step one is for Korea's institutions to ensure Lee the younger serves his time.

Next, the president must get radical in setting free Korea's animal spirits. Moon could propose, for example, tax holidays -- or a nominal rate -- for new startups. He could offer tax incentives for cutting-edge research and development to move South Korea up the value ladder. Much of what Korea does very well -- cars, ships, improving on the technological revolutions of others -- is being commoditized as China, India, Indonesia and other upstarts raise their game. Seoul must reinvent its core competencies, lest it becomes an expensive, unproductive property in a low-cost neighborhood.

Sadly, Trump does not know this neighborhood well enough to work with Moon, rather than against him. Any expectations Moon might have had 18 weeks ago about the challenges of making South Korea great again are being revised. As Trump and Kim trade barbs, Asia's No. 4 economy must brace for incoming fire from all sides.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the world can learn from Japan's lost decades." He is a former columnist for Bloomberg.

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