Policy, Research, and External Affairs
WORKING PAPERS
Trade Pollcy
Country Economics Department
The World Bank
October 1991
WPS 781
The Korean Consumer
Electronics Industry
Reaction to Antidumping Actions
Taeho Bark
Antidumping actions by importing countries do not protect their
own consumers. What protects domestic consumers is competi-
tion - and the wise choice of opening domestic markets to
international competition. It is Korean consumers who are
paying for the development of Korean industry, not consumers
in the countries that import Korean goods.
The Policy, Research, and ExteTnal Affais Complex distnbutes PRE Working Papers todisseminate thefindings of woik in progress and
to encourage the exchange of idea- among Bank staff and all others intrested in developmcnt issues. These papers catry the names of
the authors, renect only theMr vievws, and should be used and cited accordingly. The findings, interpretations, and conclusions are the
authors' own They should not be attributed to the World Bank, its Board of Directors, its management, or any of its member countnes.



Policy, Research, and External Affairs
30 -                 S S S
Trade Policy
WPS 781
This papcr- - a product of the Trade Policy Division, Country Economics Departient - is part of a larger effort in
PRE to understand the economics of the emergencc of "fairness" as a standard for regulatinig international trade, its
implications for the continued openness of the international trading system, and its continued flunctioning as an
important sehicie fordevelopment. This was funded by the research project on "Regulations Against Unfair lmports:
Effects on Developing Countries" (RPO 675-52). Copies are available free from the World Bank, 1818 H Street NW,
Washington DC 20433. Please contact Nellie Artis, room N10-01 3, extenision 37947 (21 pages). October 19991.
A kev element of Korea's industrial development          Korean consumers from having access to the same
strategy has been to maintain stringent import           variety and prices of goods as consumers in markets
restrictions while promoting the development of a few    that are truly opcn to intiernational competitioni.
large domestic firms. This strategy implies minimal           Bark stresses two major lessons to be learned
competition in the domestic market, and allows           about antidumping policy. First, antidumping actions
Korean firns to maintain lucrative prices there. High    by importing countries do not protect dieir own
profits from domestic sales give firms an important      consumers. What protects domestic consumers is
source of capital for investment. Across the economy     competition - and the wise choice of opening the
as a whole, this policy strategy shifts the distribution  intemnal market to international competition. In the
of income from worker-consumers to entrepreneur-         consumer electronics industry, the impact of U.S.
investors, helping to keep consumption low and           antidumping actions; has been to improve the situation
investment high.                                         of Korean consumers, with only minimal effect on
Korean companies h -we reacted to antidumping        U.S. consumers or producers.
actions by lowering the pi ies they charge in Korea           There is a risk, however, that U.S. producers will
rather than by raising their export prices. Korean       push further. for negotiated cxport constraints. Such
companies followed Lhis course because they have         restraints would n  only raise costs to U.S. consurn-
significant market power in Korea but virtually no       ers but, by removing the incentixe for Korean
power to price other than competitively in any market    companies to set lower prices aLt home, would imilpose
open to international competition.                       a bu.-den on Korean consumers as well.
Specific conCerns expressed by Korea's trading           ,v.o.,U, II.  , i.Lk.,u,III. III  ;. iii Li,u, ii. Lui Il,
pariners (notably the United States) have been           import Korean goods who are paying for the develop-
complemented by internal pressures for a higher          ment of Korean industry. Those consumers get what
standard of living -  for higher wages and lower         they pay for; there is little "excess" or "rent" in those
import restrictions. The result has been to open the     prices. It is Korean consuniers \k ho are paying.
Korean market considerably to international competi-          Finally, from the perspective ol the exporting
coununr, Bark strongl) suggests the need to imple-
But problems remain. First, the austerity            ment progressive import liberalization policies that
program, introduced to deal with recent domestic         will allow foreign comieptition in the Korean market.
macrocconomic problems and social concerns,              Impori policy regimes in exportiing countries have
created skeplicis;m about Korea's commitment to          pl yed a critical role in creitiig an environment that
liberalized trade policies. Second, Korean industrial    makes it possible for profit-miaximizing firms to
Jo.,  ich Gw;  U'sc mt}i  ajr K-ofCjnal pfuduLkcs o f  fiiovo  a priec-discrimnimingi inarketing strategY.
consumer electronics products, also own or control       Progrcssivc liberalization will eliminate the incentive
most of the retail outlets for consumer electronics and  for following such a niarlktinn suatep \ as monopoly
appliances. This distribution system dampens the         profits are slow ly coxied.
cTec's of lowercd imlpoi banrics and prevcnts
The PRE Working Paper Serics disseminatcs the findings of \orTk undcr u as in tle Hank' . Pi.5  \, Rkiowach, and IL\1nIAl
AffairsComplex. Anobjccris'c ofthe series is tn get these findings oul qluickl<! . ev en if plTc'seltdlieis are le.s Ihii r.,l~ 1 lh.hed
The fimr.ings. intcrpretationc, and conclusions in thcsc papers do not necezsanjl\ re):'CenrL i'l t ltJ' Ii  - Bk 11p !t
Produced hy the PRE )i-cemination Cente.r



Contents
The growth of the Korean electronics industry  1
Characteristics of the Korean electronics industry 2
Oligopolistic market structure 2
Lack of foreign competition in the home market  3
Relative importance of protection and industrial policies 3
Lack of international market power 4
Antidump4ng actions against Korean companies  5
Cases against Korean conoimer electronics firms  5
Reasons for the antidumping actions  6
Reactions in Korea to the antidumping cases  7
Awareness of high domestic prices  7
The response of the Korean electronics firms 7
Recent import liberalization in Korea  10
Recent trade issues 12
Summary and conclusion  13
References 15
Noten  20



The Korean Consumer Electronics Industry:
Reaction to Antidumping Actions
Taeho Bark
The growth of the Korean electronics industry
The modern Korean electronics industry began in 1958, with the
production of radios on an assembly line. By 1988, production in the industry
totaled $23.5 billion, of which almost two-thirds ($15 billion), was exported
(table 1). Growth in the industry has been impressive, even by Korean
standards: 35 percent annual growth in output since 1970, and even more rapid
growth of exports. It is now the largest industry in Korea and generates more
than one-quarter of the country's export earnings. The industry employs over
half a million people, or 11 percent of Korea's industrial labor force.
In 1980, the Korean industry's share in the world electronics market (by
value of production) was only 1.1 percent, which put it in fourteenth place
(table 2). By 1988, its share had risen to 4 percent, making it the sixth
largest electronics producer in the world. Its share in the consumer
electronics market was considerably larger, however, at 14.9 percent, placing
it second only to Japan. Korea was the third largest producer of parts and
components (7.1 percent), following Japan and the United States. In industrial
equipment production, however, which constitutes 66 percent of the world
electronics market, Korea lagged considerably behind other producers, with a
1.2 percent share.
Like other industries in Korea, the electronics industry benefited from
the government's development strategy of promoting industrialization tor
export.' To boost domestic production capacity and speed tecmnology
development, the government supported its domestic industry in various ways.
Direct subsidies were provided for research and development. Tax exemptions,
accelerated depreciation allowances, and preferential loans were given to
manufacturing companies that invested in new facilities.2
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The international dimensions of the Korean government's industry support
program have also been important. The government has actively supported
foreign investment to develop the intermediate parts and components industry,
while prohibiting foreign investment in companies producing finished goods.
And during the formative years of industrial development in Korea, imports of
competing products were banned. On the export side, the government's promotion
policies were equally extensive. Korean firms with letters of credit for
exports automatically received access to preferential loans.S Export
companies were exempted from various indirect taxes and received tax breaks
for depreciation and tariff payments; they also had access to duty-free
imports of capital goods. The Korean electronics industry was a major user of
a free-trade zone that exempted exports from tariffs or taxes. Perhaps most
important, the Korean government maintained a stable real exchange rate, which
enabled Korean companies to weigh foreign against domestic costs and revenues
on a stable basis that correctly reflected underlying scarcities.'
Characteristics of the Korean electronics industry
Oligopolistic market structure
The Korean consumer electronics industry includes more than 150 small
firms but is dominated by three: Gold Star Co., Ltd., the flagship company of
the Lucky-Gold Star Group; Samsung Electronics Co., Ltd., the fastest growing
part of the Samsung Group; and Daewoo Electronics Co., Ltd.,' whose position
in the Daewoo Group is growing increasingly more important. Each of the parent
industrial groups is among Fortune magazine's list of the top fifty firms
outside the United States (Jun 1988, 38).
Through the 19809, the big three accounted for virtually 100 percent of
Korean production of all major consumer electronics products: washing
machines, refrigerators, color television sets, video cassette recorders, and
mitcrowave ovens (table 3). Gold Star and Samsung each have about twice the
- 2 -



output of Daewoo. Smaller firms tend to specialize in smaller items, such as
audio tapes, audio recorders, calculators, or wrist watches.
Lack of foreign competition in the home market
Imports of consumer electronics goods were prohibited until the 1980s.
Beginning in 1982, imports of color TVs were allowed, but each import shipment
required the recommendation of the Korean producers association. Later in the
19809, imports of other consumer electronics products were allowed on the same
basis (table 4). The recommendation requirement was lifted in 1986 for color
TVs and microwave ovens and somewhat later for other products, so that imports
were restricted only by a customs tariff. Tariffs on consumer electronics
products were 50 percent ad valorem in 1981 and 40 percent in 1983. As late as
1986, the tariff ranged from 35 percent to 40 percent; by 1990, it was down to
15 percent to 20 percent.
Import restrictions, supported by the ban on foreign producers of
consumer electronics in Korea, protected the market position of the Korean big
three (table 5) and allowed them to charge monopoly prices in Korea. The
domestic market thus served as a "cash cow" for the Korean electronics
industry, providing it with a substantial financial base for its ventures into
international markets.
Relative importance of protection and Industrial policies
A simple calculation gives a notional idea of the importance to the
Korean electronics industry of import restrictions and other protective
measures reiaLive LO Lhe support provided througn direct subsidies and tax
breaks. In 1985, the tariff on consumer electronics products was 40 percent.
Since other, more direct import controls were still in effect, the tariff ratc
can be taken as a minimal measure of the degree of protection. Because of the
noncompetitive structure of the Korean market, Korean producers could collect
on their domestic sales the entire 40 percent premium over the competitive
prices they would have to charge in export markets, where they had no monopoly
-3-



power. That premium, collected on the one-third of output sold domestically,
amounted to a 20 percent bonus on the two-thirds of production that was
exported. In other words, Korean producers collected from Korean consumers a
20 peicent bonus on each TV set, video cassette recorder, microwave oven, or
other electronic product they sold to foreign consumers.
Evidence from countervailing duty cases provides a measure (an inflated
measure, some would argue) of the value of direct bonuses, tax benefits, and
other programs that might be construed as subsidies. In the 1980s, firms in
the United States and in other developed countries were searching for ways to
restrain Korean exports, and countervailing duty cases were one of the methods
they used. While there were no countervailing duty cases against Korean
consumer electronics firms, cases against other Korean firms that received
similar subsidies (steel, for example) resulted in determinations of subsidy
margins of between 1 percent and 3 percent.° That means, at a very
conservative estimate, that the transfer from Korean consumer-taxpayers to
Korean producers through restrictions on import competition were worth at
least four or more times as much to Korean producers as direct subsidl-8 and
tax advantages.7
Lack of Interns tional market power
The international market for consumer electronics isn very competitive.
Jun (1988) lists twenty producers that sell color TV sets in the U.S. market
under their own brand names. But even this understates the competitiveness of
the market because there are also major retailers, such as Sears, K-Mart, and
.  . i.-.-.y, that scll cno=cur el^ctr.nics u_dcr thalr c.w br^r.d name.
The intensity of competition in the industry is well illustrated by the
change in relative prices. Over the twenty years 1967-86, the U.S. consumer
price index more than tripled. Over the same period, the prices of TVs and
tape recorders actually fell, in nominal terms, while the prices of radios and
sound equipment went up by less than 10 percent. This competition in the
industry has been a great boon for consumers.
- 4 -



Not only do Korean companies face intense competition in world markets,
but they compete in the most price-sensitive segment of the market. Companies
such as Bang & Olufson, Sony, Philips, and Matsushita (Panasonic) maintain
their position ir the market through brand identity. Korean companies operate
at the other end of the spectrum, where brand identity is minimal (or
nonexistent, in the case of producers supplying the large retailers) and price
is the major dimersion of competition. Korean firms have relied heavily on the
original equipment manufacturers system for their exports because their
technology is still at a relatively low level, most parts and intermediate
components have to be imported, and they have relatively little international
marketing experience.8 Only recently have the Korean big three firms begun to
establish their own brand names in international markets. In their niche in
the price-sensitive segment of the market, Korean companies compete directly
with companies such as Tatung and Sampo of Taiwan and Sanyo and Toshiba of
Japan.9 Despite the intense competition, Korean firms have managed to gain
relatively high market shares for color TV sets and video cassette recorders
(table 6).
Thus an abundance of competitors and minimal brand identity mean that
Korean firms must bring themselves into accord with the prices the market
sets. They are price-takers, not price-makers in international markets, where
they compete with many other companies as well as among themselves (Jun 1988,
31).
Antidumping actions against Korean companies
Cases against Korean consumer electronics firms
During the 19809, Korea supplied less than 2 percent of world exports
but was a respondent in 6 percent of the world's antidumping cases.10 The
nature of Korea's development policies and the success of its exporters
explain the high incidence of case against Korea. The development policies
allow Korean firms to maintain high internal prices, well above the
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competitive level they must match in international mackets, while the export
success of Korean firms tends to displace local producers -- to cause "injury"
as it is defined in GATT and national trade remedies laws. Not only consumer
electronics products, but steel, chemicals, automobile tires, batteries, and
most other Korean manufactured exports have come under antidumping threat or
action.
Fifteen antidumping cases were initiated against Korean electronics
exports between 1973 and 1989, and nine cases resulted in the imposition of
dut'es. Of the nine, four were imposed by the European Community (on video
tapes, video cassette recorders, compact disk players, and small color TVs),
two each by Australia (fluorescent lamps and audio tapes) and the United
States (color TVG and color picture tubes), and one by Canada (microwave
ovens). I examine the cases of color TV sets, microwave ovens, and video
cassette recorders because of their particular importance in the Korean
electronics industry and to the Korean economy.
Reasons for the antidumping actions
The major reason for the initiation of antidumping actions against
Korean consumer electronics products seems to have been a rapid expansion in
exports during the year preceding the action (table 7). In other words,
import-competing firms in developed countries demanded antidumping
restrictions against Korean exports as they saw their domestic market shares
erode with the onslaught of Korean exports.
In most of the antidumping cases initiated against Korean consumer
cl_'trozica products, international unit valeue were lower than domestic unit
values. I do not intend here to decompose and analyze these price
discrepancies to determine whether the charges of dumping were "justified."
Rather, I argue that two characteristics of the Korean consumer electronics
industry make price discrepancies between domestic and international markets
nearly inevitable: an oligopolistic st-ucture in the domestic market and
protection from imports. In this situatior, of segmented markets, Korean
-6-



companies would naturally charge a higher markup at home than abroad to
maximize profits. In this classic case of international price discrimination,
it was the high price in the domestic market, not the low price in the foreign
market, that led to the imposition of antidumping restrictions.'1
Reactions in Korea to the antidumping cases
Awareness of high domestic prices
The United States imposed the first antidumping duties on imports of
Korean color TV sets from the big three producers in 1983. At the first annual
review of these duties in 1984, the preliminary dumping margins against all
three companies were substantially increased -- the margin levied on TVs from
Samsung Electronics was raised to 52.5 percent. The U.S. antidumping action
against Korean color TVs came as a great shock not only to the Korean
electronics industry, but also to the Korean government and the general
public. This was the first serious restriction against a major Korean export,
and it was imposed bv the United States, whizh Koreans had long regarded as a
friend and source of economic assistance.
The U.S. antidumping cases also awakened Korean consumers and
politicians to the fact that Korean consumers were being asked to pay
considerably higher prices than foreigners for Korean products. This
discriminatory pricing became a hot political issue, leading eventually to a
special hearing by the Committee on Trade and Industry of the Korean National
Assembly in September 1984.12 At the hearing, the trade minister was soundly
criticized for allowing the situation to reach the point where U.S.
restrictions were imposed against Korea's major export. Korean conglomerates,
particularly Lucky-Gold Star, Samsung, and Daewoo, were also severely
criticized for charging higher prices for the same good in the domestic
market. During this hearing, for perhaps the first time, the welfare of Kore'an
consumers was put ahead of that of special interest groups and large
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corporations. A major recommendation of the committee was to lower the
domestic prices of color TV sets.
The response of the Korean electronics firms
What is the rational response of companies in the position of the Korean
consumer electronic producers? They have significant control over their prices
in Korean markets and so could easily make adjustments there. But in their
export markets, they are at the mercy of market forces. To raise their export
prices by the amount necessary to avoid antidumping duties would be to price
themselves out of these markets. Thus the better business alternative would
seem to be to reduce prices in Korea -- which provides, after all, only one-
third of their sales.
The evidence supports the conteintion that the major adjustment Korean
producers would make would be to the prices they charged in Korea. Take the
case of color TV sets. Before the U.S. antidumping case, export prices
(approximated by unit values) had been declining sharply -- by 13 percent from
1980 to 1983. The antidumping order did not change this downward trend: export
prices fell another 6 percent from 1983 to 1984 -- and 12 percent more by
1988. AA for prices in Korea, their trend before the U.S. Rntidumping case was
level -- the same in 1983 as in 1980. But when the Korean companies began to
adjust to reduce the bite of the antidumping order, Korean prices began to
fall. By 1985, they were 19 percent below their level in 1983; by 1988, they
were 30 percent below.
Similar patterns are apparent in the cases of microwave ovens and video
ca^cztt racorders. After Canada imposed antidumping restrictions on Korean
microwave ovens, Korean export prices declined slightly -- by 8 percent from
1981 to 1983. And that downward trend continued: export prices fell another 11
percent from 1983 to 15. and 22 percent more by 1987. However, Korean
companies significantly reduced domestic prices after the Canadian antidumping
restriction. By 1984, Korean prices were 20 percent below their 1981 level,
and by 1987, they were 45 percent lower. In the case of video cassette
- 8 -



recorders, Korean export prices had been increasing slightly before the EC
antidum?ing restriction -- by 5 percent from 1985 to 1987. After the
antidumping restriction, export prices did not change; they were the same in
1988 as they had been in 1987. Prices in Korea, however, had been declining
sharply even before the EC antidumping actions -- by 35 percent from 1985 to
1987. After tha antidumping order, domestic prices fell another 12 percent
between 1987 and 1988.
What about the quantity adjustments of Korean consumer electronics
companies facing antieumping restrictions? In the case of color TV sets,
Korean exports to the United States actually increased for several years after
they were first hit with antidumping restrictions in 1983: not until 1987-89
did they register a dpcline. However, that decline may be attributable more to
the appreciation of the Korean won and high domestic wages in Korea than to
the antic-umping measures.13 But it is important to note that when Korea's
exports of color TV sets to the United States came under antidumping
restriction, its color TV exports to other markets increased substantially.
Exports to the EC increased so dramatically that the EC brought antidumping
charges against Korean color IIs in 1987.
The same thing happened with Korea's exports of microwave ovens. After
Canada imposed antidumping restrictions against Korean microwave ovens in
1982, there was no evident decline in the volume of Korea's exports to Canada.
Rather, as ir. the case cf color TVs, the result was a substantial
diversification cf markets. And, again as in the case of color TVs, as exports
to the EC expanded rapidly, the EC brought antidumping charges against imports
of Korean microwave ovens in 1986. These cases, however, ended with a
negotiated voluntary export restraint. Only for Korea's exports of video
cassette recorders to the EC was there an immediate decline in export volume
in the period following imposition of antidumping measures. Although this
decline could have been due in part to the appreciation of the won and rising
wages in Korea, which began in 1988, this is a clear case in which Korea's
-9-



export performance to the import-restricting country has been seriously
damaged.
Recent import liberalization in Korea
By the early 1980s, it had become increasingly apparent that Korea
needed to make a fundamental change in its economic development policies."'
High import barriers had not only become a source of friction with Korea's
trading partners, the barriers were also restraining economic growth in Korea
by raising the cost of manufacturing, inputs and encouraging inefficiency. And
the high costs of both domestic and imported products had also placed a heavy
burden on consumers. Korea came to realize that its economic development could
be sustained only in parallel with a greater opening of its markets.
At the same time, Korea's trading partners were pressuring Korea to
implement broad market liberalization measures, especially after Korea began
to record a surplus in its balance of payments in 1986. And antidumping
restrictions and voluntary export restraint were not the only measures that
Korea's trading partners were using in the 1980s to induce Korea to change its
policies. The United States, in particular, exerted pressure on the Korean
government to open up its markets for agricultural products, wine, tobacco,
and beef. The United States also complained about the difficulty of getting an
import license, complicated import procedures, and the high tariff levels.
Spurred by such foreign pressure and by the realization that economic
growth required greater openness, Korea embarked on an ambitious program of
trade liberalization in the 1980s. Especially important were changes in import
licensing, import procedures, and tariff rates.
* Import licenses. A license is required to import goods into Korea.
Before the reforms of the 1980s, fewer than 60 percent of imported products
were eligible for automatic license approval; the rest required prior review
and approval. By 1V90, however, licenses were granted automatically for 96
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percent of the items in Korea's harmonized tariff classification system -- and
for virtually all (99.7 percent) manufactured goods.
Most of the few remaining items for which approval is not automatic are
agricultural products. And even for these products, licensing requirements are
rapidly being removed, despite significant domestic opposition to
liberalization of this sensitive sector. Between 1989 and 1991, automatic
license approval rose from 72 percent to 85 percent of agricultural products.
By 1994, that figure will rise to 92 percent.
In October 1989, Korea became the first developing country to announce
its intention to relinquish recourse to article XVIII, clause B of the GATT
code, which permits developing countries to apply import protection measures
in response to balance of payments problems. Based on that decision, the
Korean government will either eliminate its remaining import controls or
conform to the GATT provisions by 1997.
a Simplified import procedures. The Korean government has also sought to
streamline import procedures and reduce the technical barriers to imports by
reducing or removing such obstacles as the import surveillance system and by
completely revising technical standards and testing procedures.
The import surveillance system, introduced in 1979 to lessen the impact
on domestic industries of an unexpected surge in imports, was abolished at the
end of 1988. Since 1987, the Korean government has also eliminated import
restrictions on more than 800 items covered by twenty-five "special laws"
designed to safeguard public health and welfare. Various la-ws were also
reviewed with an eye toward reducing the pre-import recommendation requirement
for pharmaceuticals, fertilizers, and agricultural seeds. Quality
certification requirements and testing procedures for industrial goods were
simplified, and certain import-related fees were el4-fnated. Testing
procedures and technical standards in other areas have been simplified or
relaxed as well, and further action is planned along these lines.
* Tariff reduction. Korea has launched two successive five-year tariff
reduction plans, the first beginning in 1984. Korea lowered its average tariff
- 11 -



rate on all goods from 23.7 percent in 1984 to 11.4 percent in 1990, a drop of
more than 50 percent. Progressive reductions through 1994 will lower the
average tariff rate to 7.9 percent, or one-third the rate in 1983.
Recent trade issues
Despite resistance from politicians and the general public, the Korean
government has remained committed to liberalizing its domestic markets.15
Since the government embarked on its ambitious liberalization program in the
late 1980s, Korea's balance of payments began to register deficits -- and
those deficits are growing larger. Coming into 1991, Korea's trade balance
with the United States also seemed to be turning from surplus to deficit.
However, Korea's major trading partners are skeptical about its
commitment to market liberalization, in part because of a misunderstanding
about the Korean government's role in the "austerity campaign." The austerity
program was intended to address domestic social imbalances resulting from
rising wages and consumption. The government's attempt to restrain excessive
consumption, which was having a detrimental effect on the national savings
rate, was interpreted by Korean businessmen and lower-level government
officials as a ban on imports of consumer goods. To counteract these
misperceptions, the Korean government has tried to publicize the program's
goals and to ensure that the program is implemented as intended.
Another contentious recent trade issue concerns the internal
distribution network in Korea. In the consumer electronics and appliance
sector, as an example, most retail outlets are controlled by a few large
conglomerates. Since they are naturally reluctant to sell imported goods that
compete directly with their own products, imports have a difficult time
reaching the domestic market. To improve the distribution system, the Korean
government has undertaken a three-phase plan to liberalize the system over
five years. The first phase, implemented in 1989 and 1990, provides for
foreign investment in wholesale distribution enterprises. Under the second
- 12 -



phase, set to begin in July 1991, the Korean government will dismantle
barriers to foreign investment in retail distribution, opening that sectot .o
foreign competition. In the third phase, Korea will enact further measures to
liberalize foreign access to the retail market.
Summary and conclusion
A key element of the Korean government's industrial development strategy
has been to maintain stringent import restrictions while promoting the
development of a few large domestic firms. Together, these two characteristics
imply minimal competition in the Korean market and allow Korean firms to
maintain lucrative prices there. From the perspective of a firm, high profits
from domestic sales are an important source of capital for investment. From
the perspective of the economy, this policy strategy shifts the distribution
of income from worker-consumers to entrepreneur-investors, helping to keep
consumption low and investment high.
The major finding of this study is that the reaction of Korean companies
to antidumping actions has been to lower the prices they charge in Korea
rather than to raise their export prices. Korean companies followed this
course because they have significtnt market power in Korea, but virtually no
power to price other than competitively in any market open to international
competition.
The specific concerns expressed by Korea's trading partners, most
notably the United States, have been complemented by internal pressures for a
0'"nda0d c.4   li v-A.Eg -- ZWZ 1Ak.    WC6r0 d4C.  u   .LLLAfr,  J L S.IL 0 LUjilLiW:Li.lkb.
The result has been a considerable opening of the Korean market to
international competition.
Problems remain, however. The austerity program, introduced to deal with
recent domestic macroeconomic problems and social concerns, created skepticism
about Korea's commitment to liberalized trade polices. A second problem
concerns the distribution network in Korea: Korean industrial groups, which
- 13 -



own the major Korean producers of consumer electronics products, also own or
control most of the retail outlets for consumer electronica and appliances.
This system dampens the effects of lowered import barriers and prevents Korean
consumers from having access to the same variety and prices of goods as
consumers in markets that are truly open to international competition.
This study provides two major lessons about antidumping policy. One is
that antidumping actions by importing countries do not protect their own
consumers. What protects domestic consumers is competition -- and the wise
choice of opening the internal market to international competition. In the
consumer electronics industry, the impact of U.S. antidumping actions has been
to improve the situation of Korean ccnsumers, with only minimal effect on U.S.
consumers or producers. There is a risk, however, that U.S. producers will
push further, for negotiated export restraints. Such restraints would not only
raise costs to U.S. consumers but, by removing the incentive for Korean
companies to set lower prices at home, would impose a burden on Korean
cons.mers as well.
A second lesson is that it is not consumers in the countries that import
Korean goods who are paying for the development of Korean indvstry. These
consumers get what they pay for -- there is little "excess" or "rent" in those
prices. It is Korean consumers that are paying.
Finally, from the perspective of the exporting country, this study
strongly suggests the need to implement progressive import liberalization
policies that will allow foreign competition in the domestic market. Import
policy regimes in exporting countries have played a critical role in creating
an environment that makes it possible for protit-maximizing tirms to follow a
price discriminating marketing strategy. Progressive liberalization will
eliminate the incentive for following such a marketing strategy as monopoly
profits are slowly eroded.
- 14 -



References
Deardorff, Alan V. 1989. "Economic Perspectives on Antidumping Law." In John
H. Jackson and Edwin A. Vermulst, eds., Antidumping Law and Practlce: A
Comparative Study. Ann Arbor, Mich.: The University of Michigan Press.
Electronic Industries Association of Korea. 1989. Handbook of Korean
Electronics: 1988-1989. Seoul. (In Korean).
Electronic Industries Association of Korea. Various years. Statlstics of
Electronic and Electrical Industries. Various issues. Seoul. (In
Korean).
Electronic Industries Association of Korea. Various years. Statistics of
Electronic and Electrical Products Imports. Various issues. Seoul. (In
Korean).
Finger, J. Michael, and Patrick A. Messerlin. 1989. The Effects of Industrial
Countries' Policies on Developing Countries. Policy Planning and
Research Series No. 3. Washington, D.C.: World Bank.
Finger, J. Michael, and Andrzej Olechowski. 1987. The Uruguay Round: A
Handbook for the Multilateral Trade Negotiations. Washington, D.C.:
World Bank.
General Agreement on Tariffs and Trade (GATT). 1990. International Trade 1989-
90. Vol. 2. Geneva.
Jun, Yong-Wook, 1988. The Structural Analysis of the Global Consumer
Electronics Industry and the Oligopolistic Behavior of Korean Firms In
Their Internationalization. KIET Occasional Paper No. 88-07. Seoul:
Korea Institute for Economics and Technology.
Kim, Suckhee, Jongki Pae, and Dongjin Yoon. 1989. The Economic Impact of
Foreign Direct Tnvestment In the Korean Electronic Industries. Seoul:
Korea Institute ror Economics and Technology. (In Korean).
Lee, Kyung-Tae, Joonhyun Kim, and Jongku Park. 1985. A Comparative Analysis of
the Electronic Parts and Components Industry In Korea, Taiwan, Malaysia,
and Singapore. Seoul: Korea Institute for Economics and Technology. (In
Korean).
Ministry of Trade and Industry, Republic of Korea. 1991. United States-Korea
aeŁ _ n ibuLp. ceou±.
Nam, Chong-Hyun. 1987. "Export-Promoting Subsidies, Countervailing Threats,
and GATT." World Bank Economic Review 1: 727-43.
Pae, Jongki, Dongjin Yoon, and Yoonae Cho. 1990. The Competitiveness of the
Korean Electronics Industry and Its Structural Changes. Seoul: Korea
Institute for Economics and Technology. (In Korean).
- 15 -



Table 1 Export, production, and employment data for the electronics industry in Korea,
selected yeas, 1970-88
Item                    1970       1975        1980       1985        1988
Exports (US$ bil)
Total                       0.835       5.081     17.505      30.283     60.696
Electronics industry        0.055       0.582      2.015       4.532      15.162
Share (%)                   6.6        11.5       11.5        15.0       25.0
Production (US$ bil)
GNP                         8.1        20.8       60.3        83.7      169.2
Electronics industry        0.1         0.9        2.9         7.5       23.5
Share (%)                    1.2        4.3        4.8         9.0       13.9
Employment (1000 people)
Manufacturing             i,268      2,175       2,955       3,504      4,637
Electronics industry         29        107         165        270         512
Share (%)                   2.2         4.9        5.6         7.7       11.0
Note: Values are in current prices.
Source: Electronic Industries Association of Korea (1989).
Table 2 Share of the Koiean electronics industry in world production, 1980 and 1988
(billions of U.S. dollars)
1980                                    1988
Consumer  Industrial  Parts and         Consumer  Industrial  Parts and
Countly     Total  equipment equipment components    Total  equipment equipment components
World          261.5    38.3    161.0    62.2           578.3     61.9   378.9   137.5
Korea
Value          2.9      1.1      0.4      1.4          23.5      9.2      4.6      9.7
share (%)      i.1      2.9      0.2      2.2           4.U     14.9      I.2      7.i
United States   104.3    10.6    68.3    25.4           196.8      5.2   151.1    40.5
Japan           42.7     14.4    15.1      13.2         166.9    32.0      78.8    56.1
West Germany   24.6       3.6     15.9      5.1          39.7      4.0    27.8       7.9
France          17.5      1.4    13.2       2.9          26.6      1.1    21.0       4.5
United Kingdom  17.1      1.2    12.9       3.0          25.8      1.5    20.2       4.1
Italy            8.4      1.0      6.3      1.1          15.1      0.9     12.2      2.0
Netherlands      5.3      0.4      3.5      1.4           8.2      0.2      6.2      1.8
Source: Electronic Industries Association of Korea (1989).
- 16 -



Table 3 Production shares of major Korean electronic companies, selected products, 1988
(percentages)
Rank
1st               2nd                 3rd
Product         Company Share    Company  Share   Company  Share    Total
Color TV sets         Samsung  33.0     Gold Star  31.7     Daewoo   17.5       82.2
Black and white TV sets Gold Star 32.2  Samsung   23.9      Daewoo    8.7       64.8
Video cassette recorders Samsung  46.9  Gold Star  38.3     Daewoo   14.8    100.0
Microwave ovens       Samsung  42.7     Gold Star  40.0     Daewoo   17.3    100.0
Refrigerators         Gold Star 47.6    Samsung   36.7      Daewoo   15.7    100.0
Washing machines      Gold Star 48.7    Samsung   35.1      Daewoo   16.2    100.0
Source: Pae, Yoon, and Cho (1990).
Table 4 Import liberalization process for major consumer electronic products in Korea in the
1980s
No imports        Recommendation           Complete
import
Item                  allowed         required for imports   liberalization
Color TV sets               up to 1981        from 1982 to 1985        since 1986
Mficrowave ovens            up to 1983        from 1984 to 1985        since 1986
Compact disk players        up to 1988        --                       since 1988
Video cassette recorders    up to 1983        from 1984 to 1988        since 1989
Source: Ministry of Trade and Industry.
- 17 -



Tabk S Korema Imports of electronic products, 1983489
(millions of U.S. dollars)
Color                 Video cassette                  Microwave                Compact disk
'nV sets rwdcr                                                                    p!syers
Ratio of imports           Ratio of imports           Ratio of imports            Ratio of imports
to domestic                to domestic                to domestic                to domestic
Year        Value   production (t)    Value   production (%)      Value   production (%)      Value   production (%)
1983         9.6          1.0           0.5          0.4            na                           na           -
1984         5.4          0.6           18.0         8.4            na                           na           -
1985         3.9          0.5           12.7         4.0            na             -             na           -
1986         3.7          0.4           17.5         2.3            na             -             na           -
1987         3.5          0.3          21.2          1.9            0.4          0.06            al           -
1988         5.1          0.3          30.8          2.0            0.2          0.02          0.2          0.2
1989        17.6          1.0          30.6          1.7            1.4          0.2           0.08         0.06
Na means that data are not available.
Sources: Electronic Industries Association of Korea, Staistics of Electronic an Electrical Industries, various issues, and Stadritis of
Ekctronic and Elkcrical Prodwct Imports, various issues.
Table 6 Koran electronic fims' share in the world market for color TV sets and video cassette recordezs% 1987 and
1988
(percentages)
1987                                      1988
Color TV          Video cassette        Color TV          Video cassette
Market                      sets              recorders              sets             recorders
ULnited States                    13.4                14.6                11.7                 19.3
European Community                12.0                20.9                11.3                14.1
Japan                              2.4                 1.6                 7.0                 4.1
World                             13.2                14.6                17.6                 19.0
Note: Market shares are based on values.
Source: Electronic Industries Association of Korea (1989).
- 18 -



Table 7 Chauge In volunes and unit values of Korean consumer electronics exports In year before and during Initlatlion of
atidudmping actlon
(percentages)
Year before                      Year of
initiation of                  initiation of
Country or                   andidumping action              antidumping action
Item                      trade group                Volume       Unit value          Volume        Unit value
Color TV sets              United States                    13.9          2.3               207.0         -11.8
Color TV sets              Canada                           91.6          -3.0              -27.0         *17.8
Color TV sets              European Community              213.5          14.6              121.0           1.3
Microwave ovens             Euroepan Community             546.0         -17.3              388.0          -8.6
Video cassette recorders    European Community             363.2           0                287.3           5.2
Source: Electronic Industries Association of Korea, Statistcs of Electronic and Elecoical Induseies, various issues.
- 19 -



Notes
I would like to thank participants at the World Bank Workshop on Regulations
Against Unfair Imports: Effects on Developing Countries and at a workshop
sponsored by the Korea Institute for International Economic Policy (KIEP) for
helpful remarks. I am particularly indebted to J. Michael Finger for
insightful comments and suggestions. The views expressed in this paper are my
own and do not necessarily represent those of the World Bank or the KIEP.
1. This discussion of government industrialization and development policy
draws heavily on Lee, Kim, and Park (1985, 236-69) and Electronic Industries
Association of Korea, Handbook of Korean Electronics: 1988-1989 (1989, 371-
448).
2. The Korean government designated the electronics industry as a "strategic
export industry" and enacted the Electronics Industry Promotion Act in 1969,
entitling the industry to various government subsidies. However, interest
differentials for prelerential loans were eliminated after 1982, and the
Electronics Industry Promotion Act was integrated into the Industrial
Development Act in 1986, whose policy measure are industry-neutral rather than
industry-specific.
3. The conglomerates have been ineligible for foreign trade financing since
February 1988.
4. In March 1990, the Korean government introduced the "market average rate"
system of exchange rate determination. The won/dollar exchange rate at the
beginning of each business day is determined by the weighted average rate of
interbank transactions of the preceding business day. During the business day,
the exchange rate can fluctuate within a certain band.
5. Taihan Electric vire Company, which was the third largest firm in the
Korean industry in the 1970s, was acquired by Daewoo in 1983 (Jun 1988).
6. Nam (1987) recorded the average rate of countervailing duties against
Korean products as 2.4 percent.
7. Similar calculations by Finger and Messerlin (1989) for thLe OECD countries
found that import restrictions provide 90 to 95 percent of government
assistance to the manufacturing sector.
8. According to Kim, Pae, and Yoon (1989), more than 50 percent of Korean
electronic firms were exporting through the original equipment manufacturers
system.
9. Sanyo has production facilities in China, Hong Ko.,,               Ma oia , lay;aa,
Philippines, Taiwan, Thailand, and Singapore; Toshiba produces in four of the
same countries.
10. Korea's share of world exports was 2 percent in 1989, up from 1.1 percent
in 1980 (GATT 1990, vol.2, 3). The figure for antidumping cases is from Finger
and Olechowski (1987, 266) and covers 1980-86.
11. Deardorff (1989) points out that the import barriers within the exporting
country can facilitate the exporter's monopoly power and thus ultimately
induce the exporter to dump in the international market.
12. See Korea Daily (HanKook Ilbo), September 26-27, 1984, for an account of
the hearings.
- 20 -



13. During 1987-89, the nominal value of the Korean won appreciated by more
than 25 percent and the nominal wage rate increased by more than 45 percent.
14. This section draws heavily on Ministry of Trade and Industry (1991). The
program to liberalize Korea's capital and service markets is not discussed in
this pp-en
15. Issues related to the opening of financial markets and to agricultural
products and intellectual property rights are not addressed in this paper.
- 21 -



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