[Special Report] Redesigning the System for Implementing Trade Policy in the Next South Korean Government: Proposal for the Establishment of a Ministerial-Level Dedicated Department

(Editor's Note)

Following China's trade retaliation due to the THAAD deployment decision, pressure from the United States, advocating for 'fair trade,' is also showing signs of intensifying. This is because U.S. Vice President Mike Pence, during his visit to Korea, expressed intentions to pursue revisions to the Korea-U.S. FTA. Furthermore, with the need for additional negotiations on the Korea-EU FTA following Brexit, the pursuit of a Korea-UK FTA, and the upgrade negotiations for the Korea-China FTA emerging as immediate tasks, Korea will face a situation in the next 2-3 years where it must prepare for FTA renegotiations with the world's three largest economic blocs. This is a critical juncture for Korea, where trade accounts for over 90% of its GDP. However, the authors argue that the current system has limitations in effectively responding to such rapidly changing trade environments. Therefore, they propose the establishment of a ministerial-level dedicated department capable of performing offensive and defensive roles, as well as a midfield role coordinating both, for a more proactive response.

I. Introduction(Executive Summary)

South Korea's trade policy stands at a crossroads. As a 'trading state' where trade exceeds 90% of GDP, South Korea has, over the past decade, strived to expand its free trade zone (or 'economic territory') by dramatically increasing the number of Free Trade Agreements (FTAs) signed, thereby securing economic benefits and achieving considerable success. However, in 2017, the external trade environment is poised to engulf South Korea with formidable challenges from multiple directions. The nation must engage in renegotiations or upgrade negotiations for major FTAs already concluded (Korea-U.S., Korea-EU, Korea-China), respond promptly and consistently to trade pressures from the Trump administration under the guise of 'fair trade,' and counter China's trade retaliation. It must also actively participate in the race to establish mega-FTAs unfolding in the Asia-Pacific region to safeguard national interests. Sticking to existing trade policies risks shipwreck. It is time for Korea to establish a trade policy paradigm suitable for the rapidly changing environment and redesign its policy implementation system accordingly.

Reflecting on past trade policy history, the system for implementing trade policy has undergone several changes with each change in government. Notably, in 2013, the Park Geun-hye administration, upon its inauguration, dismantled the Office of the Chief Negotiator for Trade, which had been in place for 15 years since 1998, and transferred its functions to the Ministry of Trade, Industry and Energy (MOTIE). However, evaluating the past four years, the actual reform effects have not been positive. Now, with the inauguration of a new administration, to avoid repeating the mistakes of politically motivated and impulsive decisions, closed-door processes, and fragmented functional adjustments among ministries, it is imperative to accurately assess the changes in the external environment, set the direction for trade policy that meets domestic demands, and then carefully design the organizational structure.

1. Changes in the Trade Environment of the 2010s

The formidable challenges confronting South Korea in 2017 are emerging from five directions:

(1) Increased Trade Pressure from the U.S.The Trump administration in the U.S. is employing protectionist trade policies as a key means to revive American manufacturing and the middle class. By publicly declaring strong pressure on countries with trade surpluses with the U.S., such as Korea, to correct trade imbalances, it is signaling an intensification of trade remedy measures, demands for market opening (e.g., agricultural products), and the introduction of border adjustment taxes. Therefore, Korea must be fully prepared to defend against this multi-faceted U.S. offensive.

(2) Simultaneous Response to Major Trade NegotiationsThe U.S. has declared its intention to renegotiate the Korea-U.S. FTA. Given the intense domestic political controversy and turmoil surrounding its ratification, future renegotiations are expected to cause significant domestic political and economic repercussions. In particular, sensitive issues such as further opening of the beef market and the rice market are likely to be raised. Without careful negotiation strategies and domestic coordination measures, this could lead to another period of national confusion. Meanwhile, additional negotiations on the Korea-EU FTA following Brexit, the pursuit of a Korea-UK FTA, and the upgrade negotiations to enhance the Korea-China FTA, which currently features a low level of liberalization, are also immediate tasks. In essence, the next administration must prepare for FTA renegotiations with the world's three largest economic blocs within the next 2-3 years.

(3) Preparation for Strategic Trade Policy CompetitionMajor powers such as the U.S., China, and Japan are elevating the status of trade as a strategic issue directly linked to national security. At the national strategy level, they are engaged in a rapid competition for leadership in the Asia-Pacific trade order, pursuing RCEP, Korea-China-Japan FTA, and exploring TPP-11 and a U.S.-Japan FTA. To protect its national interests, Korea must closely monitor global trends and adopt a more strategic and agile policy-making posture.

(4) New Trade Norms and Negotiation DevelopmentsThe content of trade negotiations is also undergoing significant changes. In the new global trade environment of the 21st century, the direction of trade policy is shifting from 20th-century measures like tariff adjustments to establishing institutional environments that facilitate the integration of cross-border trade, investment, and services. This includes strengthening intellectual property rights, rules of origin, capital movement, labor mobility, competition policy, and infrastructure services, leading to the adoption of new norms such as enhanced regulation of exchange rates and stricter regulations for fisheries resource protection. These norms are primarily agendas of interest to developed countries and pose considerable burdens to latecomer nations like Korea.

(5) Expansion of Scope and Subjects in Trade NegotiationsTrade issues are increasingly linked with other issue areas, expanding the scope of negotiations for trade agreements. For instance, recent developments show that issues such as exchange rates, fair trade, and financial crises are being linked with trade and applied to trade agreements. Furthermore, issues that were not originally economic, such as the conflict between China and South Korea over THAAD, are increasingly becoming trade issues. The Trump administration in the U.S. is demonstrating a strategy of linking pressure on North Korea with trade negotiations with China. Consequently, trade negotiations have reached a stage where they require comprehensive consideration and judgment of not only traditional trade interests but also financial, monetary, labor, environmental, diplomatic, and security interests.

To adequately respond to these challenges, the trade organization of the next administration must become an all-around player. While the former Ministry of Foreign Affairs and Trade/Office of the Chief Negotiator for Trade demonstrated an aggressive stance for a 'catch-up' strategy in the FTA negotiation race, the Ministry of Trade, Industry and Energy (MOTIE) system, by focusing on the linkage between trade negotiations and industry, has been characterized by a defensive and reactive approach to negotiations. As a result, while the former was criticized for prioritizing the number of FTAs signed and relatively neglecting their economic effects, the latter has been criticized for missing opportunities to join negotiations like the TPP and failing to assert its presence in multilateral negotiations like RCEP due to its defensive paradigm.

Currently, South Korea is constantly exposed to trade pressure from the U.S. and China and faces defensive tasks such as renegotiating the Korea-U.S. FTA. Simultaneously, it must actively participate in the mega-FTA competition of the post-TPP era and proactively respond to the establishment of new trade norms. In short, there is an urgent need to design a new organization that functions as an all-around player, engaging in both offense and defense while also coordinating these efforts as a midfielder.

2. Basic Objectives for Designing a New Trade Organization

To develop a blueprint for a new organization, several basic objectives must first be established.

(1) Establish Trade as a Core National Strategic TaskKorea must move beyond viewing trade merely as an issue of commodity exchange and expand its scope to encompass matters directly related to national security. Under the recognition of trade as a strategic task, institutional designs should be sought to ensure continuous presidential and cabinet attention.

(2) Strengthen the Control Tower Function for TradeGiven that trade issues encompass diverse sectors and involve extensive issue linkage, it is urgent to secure coordination functions and mechanisms that can harmonize and finalize various opinions from the perspective of the entire government or nation, rather than being influenced by the interests of specific ministries or industries.

(3) Proactively Respond to the New Trade Environment and IssuesWhile past trade policies focused on achieving FTA signing results, the future trade paradigm is shifting towards more comprehensive matters, including the establishment of new trade norms and rules through multilateral frameworks, the expansion of diverse trade issues due to issue linkage, and the proliferation of trade friction resulting from protectionism and import restrictions. Therefore, a dedicated organization with expertise is needed to proactively address current trade issues.

(4) Establish a Ministerial-Level Dedicated DepartmentTo participate in international trade ministerial meetings, engage in discussions and negotiations with ministerial-level counterparts from trading nations, coordinate with other relevant ministries as a control tower, and effectively provide comprehensive information and grounds for judgment on current issues to the ultimate decision-maker (the President), a ministerial-level head must be appointed.

(5) Strengthen Relations with the National AssemblyTo ensure accountability in external negotiations and provide democratic legitimacy, the role of the legislature in domestic negotiations must be enhanced to facilitate consultations at various stages of promoting external economic policy.

3. Problems with the Existing System

From the perspective outlined above, the existing system for implementing trade policy suffers from several problems.

(1) Inadequacy of the Control Tower RoleWhen trade functions are placed under a specific operational ministry, they are inevitably influenced by the interests of that ministry's stakeholders or clients. The current model, being linked to industrial interests, has limitations in policy coordination. Conversely, the past model under the Ministry of Foreign Affairs is not free from similar criticisms of prioritizing the diplomatic achievement of increasing FTA numbers over tangible economic benefits.

(2) Fragmentation of Trade FunctionsThe existing system has focused on concluding bilateral trade agreements. Consequently, despite the emergence of new trade norms, the expansion of trade issue areas, and the surge in trade friction, it has shown limitations in comprehensively identifying and handling these issues. The consolidation and dispersal of trade functions in 2013 have led to fragmentation across ministries, frequently causing duplication of work, confusion, and delays.

(3) Diminished Status of Trade FunctionsIn the current system, the Minister of Trade, Industry and Energy is responsible for numerous major national tasks, presenting physical limitations in consistently monitoring trade activities that occur globally and frequently participating in international trade ministerial meetings. Furthermore, designating trade officials at the level of Vice Minister or below, rather than a ministerial-level official, inherently limits direct discussions and negotiations with foreign trade ministers. This has led to persistent delays in situations requiring immediate decision-making.

(4) Weakened Support Function for Top Decision-MakersWith the downward adjustment of the primary trade officials within government ministries to the level of Vice Minister-level officials, the President, as the nation's top decision-maker, has shown reduced interest in trade issues, or decisions related to trade matters have been delayed. The mechanism for providing accurate information and advice on the status and impact of trade issues to presidential aides has also been weakened.

(5) Instability of the Trade Expertise PoolFollowing the 2013 organizational reform, as trade functions were transferred to the Ministry of Trade, Industry and Energy, a significant number of trade specialists accumulated over 15 years under the Ministry of Foreign Affairs and Trade system returned to the Ministry of Foreign Affairs. Conversely, personnel at the Ministry of Trade, Industry and Energy are concentrating on industrial and resource-related affairs and tend to avoid the relatively unfamiliar trade matters. While organizational flux is common following the transfer of duties, the current organizational structure suggests a high likelihood of a future reduction in trade expertise.

4. Alternative: Establishment of a Ministerial-Level Dedicated Department

The trade policy execution system proposed in this report aims for a streamlined organization that integrates three stages: the first stage involves strategic planning and ex ante policy coordination and convergence among ministries; the second stage involves negotiation leadership by a control tower (interim); and the third stage involves consistent and efficient implementation of agreements (ex post).

With the goal of establishing such a system, an analysis of the strengths and weaknesses of the current Ministry of Trade, Industry and Energy model (Trade Negotiation Office under the Ministry of Trade, Industry and Energy) and the Ministry of Foreign Affairs model (Trade Negotiation Headquarters under the Ministry of Foreign Affairs and Trade) revealed that while both have their merits and demerits, the establishment of a ministerial-level dedicated organization is deemed appropriate to effectively address the increasing complexity, interconnectedness, and convergence of trade issues, as well as their trend towards becoming national security concerns.

A dedicated trade organization can ① serve as a control tower, enabling neutral coordination and convergence of opinions that transcend the interests of specific ministries and civil society; ② be responsible for the integrated operation of trade-related tasks fragmented across various ministries; ③ enhance linkage with the highest decision-maker as a member of the cabinet, allowing for a strategic approach that considers the multifaceted nature of national interests; ④ enable rapid response to new trade environments, such as trade disputes; and ⑤ establish a system for maximizing the utilization and development of a trade expertise pool.

Regarding the housing of a dedicated trade organization, the U.S. Trade Representative (USTR) model can be considered, but it has several limitations for direct application in Korea. Unlike the U.S. where the USTR is established within the White House to manage Congress's constitutional authority over trade policy in an established parliamentary democracy, there is no particular need to place a dedicated trade department within the Presidential Office in the Korean context. Furthermore, it does not align with the contemporary call for reducing the powers of the Presidential Office. As an alternative, it could be established as an agency directly under the Prime Minister, but given the institutional ambiguity of the Prime Minister's role in a presidential system, an agency under the Prime Minister's Office also has clear limitations. Therefore, this report proposesOption 1: Establishment of a new ministry (tentatively named the Ministry of Trade) within the cabinet.

While the introduction of a new department entails various administrative, practical, and political burdens, these burdens may be amplified for a new government launching on May 10th without the preparatory work of a Presidential Transition Committee. Nevertheless, given the rapid changes in the international trade environment and the paradigm shift in trade, where trade issues now constitute a core aspect of national interests and trade disputes occupy a significant portion of national administration, establishing an independent new ministry from a long-term perspective is desirable.

If, due to the immediate political schedule and the lack of administrative, financial, and temporal capacity for establishing a new ministry, a second-best option is considered, it would beOption 2: Introduction as a separate organization affiliated with an existing ministry (Ministry of Foreign Affairs or Ministry of Trade, Industry and Energy). In this case, measures to ensure the maximum autonomy of the dedicated trade organization from the existing ministry's structure must be considered. Additionally, the head of the department must be of ministerial rank, with guaranteed access to the President, the ultimate decision-maker, and a system that allows for prompt consultations. Particularly concerning trade matters, a status that allows for genuine coordination and adjustment with other ministries must be guaranteed. In this scenario, affiliation with the Ministry of Foreign Affairs, which can possess relative autonomy from stakeholders, may offer certain advantages. In conclusion, while both the new ministry proposal and the affiliated organization proposal have their pros and cons, and the extent to which they align with institutional limitations or political realities needs to be examined, once a direction is set and pursued, various detailed challenges can likely be adjusted or overcome... (continued)

Author

Yeol Son_Professor at the Graduate School of International Studies, Yonsei University. He holds a Ph.D. in Political Science from the University of Chicago. He has served as Director of the EAI Center for Japanese Studies, Chairman of G-Net 21, Director of the Institute for Sustainable Development, and Director of the Institute for International Studies at Yonsei University. His main research areas include international political economy, Japanese politics and economy, and the political economy of trade policy. His recent publications include "The Role of South Korea in the Making of a Regional Trade Architecture," "The Abe Effect on South Korea's Trade Policy," and "Regionalization, Regionalism and the Double-Edged Public Diplomacy in East Asia."

Jaemin Lee_Professor at the Law School, Seoul National University. He holds a Juris Doctor degree from Boston College Law School. He worked as an attorney at Willkie Farr & Gallagher LLP in Washington D.C. and previously served as a professor at the Law School, Hanyang University. His main research area is international trade law, and he has served as a candidate for the national indicative list of panelists for WTO dispute settlement panels and as a candidate for panelists in dispute settlement procedures for the Korea-Chile, Korea-EU, and Korea-U.S. FTAs.

Minjoo Ku_Professor and Vice Dean of International Affairs at the Graduate School of Public Administration, Seoul National University. He holds a Ph.D. in Political Science from the University of California, Berkeley. His main research areas are international administration and trade policy. His books include The Korean Government and Public Policies in a Development Nexus and Asia’s New Institutional Architecture: Evolving Structures for Managing Trade, Financial, and Security Relations.