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Korean Companies look to U.S. While Dreaming of a 'New Silk Road'

Oct 20, 2015
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When the South Korean President Park Geun-hye visited Washington, DC, last week, she brought along a small army of business representatives: 166 in all. 

The reason isn't a mystery: Korea's growth is slowing, falling to about 2.7 percent from 6 percent just a few years ago. Exports account for about half of South Korea's GDP, and the biggest single trading partner is China, which is slumping.  "The Korean companies are looking to expand elsewhere," says Martin Dresner, chair of the department of logistics, business and public policy at the University of Maryland's Robert H. Smith School of Business. And the U.S. is prime territory for that expansion.

But South Korea finds itself in an awkward place, economically speaking, Dresner points out. Its labor costs are higher than those of China and other developing nations, so its companies are outsourcing manufacturing, which hurts that sector of the economy. Those labor costs — the sign of a developing economy — also means South Korean companies can't compete internationally on price alone, which forces them to go toe-to-toe with innovation leaders like Apple.  (In the smartphone arena, Samsung is hanging in there as an Apple rival, but barely.) Since South Korea's labor costs are still less than in the U.S. or Germany or Japan, some companies target a space in which they approach the quality produced of American or European or companies, while undercutting them on price (see: Hyundai).

South Korea and the United States are united in wanting to prevent North Korea from getting the bomb. But economic forces are driving Korea to get a little cozier with Russia and China than the U.S. State Department would like.  Through an initiative sometimes called the New Silk Road, China is trying to increase rail transport of goods to Europe, by way of the Middle East. Korea would very much like to be a part of that venture — but North Korea cuts it off, geographically. (President Park speaks of a "Eurasia initiative," which encompasses more than rail and envisions the free flow of goods and ideas across the Eurasian landmass.).  

Dresner attended a symposium last month, in Seoul, which also featured top transportation officials from Russia, Korea, and Europe. "With the conference, South Koreans were trying to build interest among the Chinese and the Russians for using their influence on North Korea to allow that connection between the rest of Asia and South Korea," Dresner says. The South Koreans "think of themselves as an island," he says.

Rail transit through North Korea may be years off, if it happens at all — Kim Jong-un is not exactly the most reliable negotiating partner. But if it does happen, it could transform the geopolitics and economics of the region, simultaneously removing a damper on the South Korean economy prying open North Korea. The world's economic center of gravity is already shifting toward Asia. Such an opening could speed the trend.

The Washington Post recently pointed to additional evidence of the complex economic dance among China, Russia, and the two Koreas. In the Chinese city of Hanchun, not far from the remote spot where the borders of China, North Korea, and Russia meet, Hyundai and Posco, a South Korean steel-making company, have come together to build a massive distribution center. The location makes little sense, unless North Korea grants access to its Rajin port, currently closed to foreigners. South Korean businesses, the Post writes, "are preparing for when North Korea opens up — or when it fails."

China also appears to be betting, long-term, on North Korea opening the port: This month it plans to open a $7 billion, 225-mile-long high-speed railway line linking Hunchun to Changchun, the capital of Jilan province, the Post noted. If North Korea opens up, Hunchun becomes a stop on the New Silk Road.

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