By Troy Stangarone
If 2017 was the year of “fire and fury,” 2018 saw the United States and North Korea turn from the rhetoric of war to diplomacy as U.S. President Donald Trump met North Korean Chairman Kim Jong-un at the first ever U.S.-North Korea summit in Singapore.
If 2018 was the year the diplomacy on the Korean Peninsula, it was also a year of frustrations as the United States and North Korea have been unable to make progress on agreeing to a path towards the dismantlement of North Korea’s nuclear weapon and missile programs, or in taking steps to build the new relationship promised in Singapore. With U.S.-North Korea relations stalled, North-South relations have been unable to move forward at the pace hoped for despite more extensive agreements on inter-Korean cooperation.
While North Korea dominated the headlines in 2018, the past year began with South Korea’s successful hosting of the Winter Olympics. It saw the United States and South Korea agree to revise the U.S.-Korea FTA (KORUS), but South Korea also become caught in the United States trade war with China. The United States and South Korea also failed to reach an agreement on burden sharing.
On the domestic front, the Moon Jae-in administration implemented a series of new policies to advance an income lead approach to economic growth, but so far has yet to see the results hoped for from its reforms.
As we take our annual look back at the events that helped to shape the Korean peninsula during the past year, it is also an opportunity to review the events we highlighted on The Peninsula in our annual 10 Issues to Watch for on The Korean Peninsula in 2018 blog and the events we didn’t see coming.
Looking back, we largely touched on what would be the key issues on the Korean peninsula in 2018, but we missed on the sudden shift to summit diplomacy on the Korean Peninsula and what in one poll has been identified as the top news story in the United States in 2018 – the summit meeting between Trump and Kim. Here are the issues we identified:
Coming into 2017, tensions between the United States and North Korea had been growing. Pyongyang’s December 2017 inter-continental ballistic missile (ICBM) test demonstrated it had the ability to reach anywhere in the continental United States, even if it had not yet completely mastered ICBMs. Despite the increasing threat of war, we were largely right in our analysis when we said that “war can, and most likely will, be avoided as long as cooler heads in Washington and Pyongyang prevail.” What we largely didn’t foresee is that war would be avoided not just because “cooler heads” would prevail, but that would lead to a year of North Korean summits with South Korea, China, and the United States.
With the movement towards dialogue between the United States and North Korea, our prediction that North Korea would continue to test missiles fell flat. For all of 2018, North Korea refrained from conducting missile tests to either demonstrate new capabilities or to express its displeasure at the progress of talks with the United States. At the same time, there is every indication that our second prediction was correct. Kim Jong-un pledged in his 2018 New Year’s Address that North Korea would continue to expand its supply of missiles and fissile material and has yet to shut down its nuclear facilities at Yongbyon or its missile production facilities.
On the surface, sanctions have worked. Exports to China, North Korea’s primary trading partner have fallen to under $200 million through November. At the same time, despite sanctions causing declines in exports to China and other countries, there are signs that the markets are remarkably stable. In data published by DailyNK, the exchange rate and the price of commodities in markets have been fairly stable. Contrast this with Iran, where the U.S. withdraw has caused the Iranian Rial to drop in value. While the North Korean economy is not in a good position, the effect of sanctions seems to be less than many would have expected.
By all measures the 2018 Winter Olympics in Pyeongchang were a success. South Korea finished tied for sixth for the most medals won, and concerns about attendance were ultimately relieved as the organizers came within their goal of selling 90 percent of the tickets. Most importantly, North Korea took part in the games easing concerns that it could disrupt the festivities and its participation helped to jump start a year of diplomacy.
The United States and South Korea have yet to conclude discussions on a new Special Measures Agreement to determine how much South Korea will contribute to the non-personnel costs of U.S. troops in South Korea. While the failure to conclude an agreement has not yet affected the alliance, the current agreement expires at the end of 2018. Indications are that the talks are stalled over an insistence by the Trump administration that South Korea raise its contribution to burden sharing by potentially twice as much as South Korea was previously contributing.
The United States and South Korea were able to quickly reach an agreement on modest adjustments to the KORUS FTA. With the National Assembly having approved the changes and the U.S. trade deficit with Korea continuing to decline, the concerns around the KORUS FTA have begun to dissipate.
However, the KORUS FTA was not the only trade issue in the U.S.-Korea economic relationship. As we noted last year, the U.S. used a Section 232 national security investigation to push South Korea into agreeing to a quota on its steel exports to the United States equal to 70 percent of its shipments over the last three years, and also imposed tariffs on Korean washing machines as part of a safeguard case. South Korea may not be out of the woods yet, as a decision will likely come on a Section 232 case on automobiles and automotive parts early next year. South Korea is only major automotive producer to not receive some type of assurance that it will not have tariffs imposed on its exports if automotive imports are found to have national security implications.
As we foresaw at the beginning of the year, China’s pressure over the decision to deploy THAAD has moderated rather than disappeared. Despite South Korea and China agreeing in October of 2017 to normalize economic relations, Lotte is in the process of closing its Lotte Mart stores in China, and the effects on tourism can still be felt. Based on the latest data from the Korea Tourism Organization, a bit more than 400,000 Chinese tourists traveled to South Korea in November. This is up from just under 300,000 at the same point last year. However, despite the increase in Chinese tourism in November, it is still below its pre-THAAD highs. All told, the South Korean economy has lost more than $13 billion from the decline in Chinese tourism alone.
The Moon administration continued to implement its income lead growth policies in 2018 taking steps to shorten the work week and raising the minimum wage for the second year in a row. However, the results have been mixed, especially with slowing job growth in August and September. South Korea also saw estimates for its GDP growth in 2018 and 2019 revised down. Some of this revision is due to external factors, but declines in investment and job growth are also weighing on the economy. The new year will be an important period for determining whether the current challenges are due more to the markets adjusting to the new policies or whether the policies themselves will need to be adjusted.
The ruling Minjoo Party won a resounding victory in the 2018 local elections. The party won 14 of the 17 mayoral and gubernatorial posts up for grabs, as well as 11 of 12 by-elections for the National Assembly. Seoul Mayor Park Won-soon also won a third term as mayor.
The growth of K-pop around the globe was one of the major stories in 2018, even being highlighted by the BBC as BTS became the first Korean group to enter the UK Top 40 and land in the top spot of the iTunes album chart in 60 countries. Despite still facing challenges in China as part of the fallout from THAAD, K-pop saw growth in Japan and in Latin American markets. However, the big success for K-pop came in its breakthrough in the United States. BTS had two albums reach the top of the Billboard 200 and three songs on the Billboard Hot 100. However, the success extended beyond BTS as four other Korean acts landed albums in the top 40 of the Billboard 200 and BLACKPINK saw its video Ddu-Du Ddu-Du gain the fifth most views on YouTube in a 24 hour period among all genres.
The Bonus Issue: Will There Be Constitutional Reform?
While the Moon administration pushed for a package on Constitutional reform to be concluded in time for the local elections, ultimately reform efforts stalled in the National Assembly.
Beyond the events that we expected, here is a look at some of the unexpected events that helped to shape 2018:
Prior to 2018 no sitting U.S. president had met with the leader of North Korea. That changed in 2018 as U.S. President Donald Trump altered the normal protocol of only meeting a foreign leader, especially one such as Kim Jong-un, until after a series of deliverables have been agreed to by both sides. The summit in Singapore produced an outline for moving relations forward, but there has been virtually no progress in talks with North Korea, despite the United States canceling military exercises with North Korea. In spite of the lack of progress, Trump has professed his goodwill for Kim saying “And then we fell in love, OK? No, really, he wrote me beautiful letters, and they’re great letters. We fell in love.”
If meeting a sitting U.S. president was an historic moment, it was preceded by Kim Jong-un being the first North Korean leader to cross into South Korea, even if only to the South Korean side of the DMZ. Your author was in Seoul at the time watching Kim cross the demarcation line live on his cell phone in a taxi to the National Assembly. What struck me at the time was lack of coordination on the North Korean side as the delegation walked to the DMZ and the lighthearted nature of Kim Jong-un as he invited South Korean President Moon Jae-in to briefly visit North Korea before their meeting.
Kim’s visit made an impression on South Koreans as well. Prior to the April Summit Kim had an approval rating in South Korea of 10 percent, though that rose to 31 percent after the summit. More impressive, after the summit a new poll found that 78 percent of South Koreans saw Kim as trustworthy. A degree of goodwill remains as 60 percent of South Korea would have welcomed Kim to Seoul had he come in December as expected.
In addition to the April summit, Kim and Moon held two additional summit meetings – a second summit in the DMZ and Moon’s visit to Pyongyang. These summits resulted in the Panmunjom and Pyongyang Declarations which laid out steps to improve inter-Korean relations. While sanctions related to North Korea’s weapons programs have prevented significant movement on inter-Korea relations, the two Korea’s did take steps to advance relations in 2018. In addition to the summit meetings, the two Koreas held the first family reunion since 2015, took steps to reduce military tensions and implement a new military agreement in the DMZ, and conducted a joint survey and groundbreaking ceremony for a project to reconnect the railways on the Korean Peninsula.
North Korean has become one of the world’s most active cyber powers and despite the diplomacy with the United States and South Korea, Pyongyang kept up its activities in 2018. According to Group-IB, since the beginning of 2017 approximately two-thirds of the theft of cryptocurrency has been by North Korea, netting the regime $571 million. It also used the Pyeongchang Olympics and summit meetings with Kim Jong-un as potential bait for phishing attacks.
In a globalized world where countries are part of supply chains, tariffs are an imprecise tool and South Korea found itself one the countries most exposed to a trade war between the United States and China. More than 40 percent of South Korea’s GDP is accounted for by exports, while China and the United States are South Korea’s top two trading partners, respectively. For most of 2018, South Korea had managed the conflict fairly well by increasing exports to China and resolving the issues around the KORUS FTA. However, in the year’s last quarter South Korea began to see declining demand for its top export to China, semiconductors, while overall sales of automobiles began to decline significantly in China – signs that the effects of the trade war are beginning to set in.
Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America (KEI). The views expressed here are the author’s alone.
Image created by Juni Kim is the Program Manager and Executive Assistant at KEI.