Current US-China Relations

Henry C.K. Liu

Part I:   A Lame Duck-Greenhorn Dance
Part II:  US Unilateralism
Part III: Geopolitical Dynamics of the Korea Proliferation Crisis
Part IV: More Geopolitical Dynamics of the Korea Proliferation Crisis
Part V:  Kim Il Sung and China

Part VI: Korea under Park Chung Hee

In 1954, South Korea proposed at the UN Geneva Conference to hold a general election to unite the country. This proposal was rejected by North Korea on ground that South Korea was a US colony and no election would be free as long as the US forces occupied South Korea. Since the South has twice as many people as the North, holding a general election is a suicidal affair for North. This problem remains true today.

After 15 years of repressive government, Syngman Rhee (1875-1965), the US-installed puppet president of the Republic of Korea, was forced out of office into exile on April 26, 1960 by student mass demonstrations against widespread corruption and despotic rule. On May 16, 1961, amid general political chaos and paralysis, Major General Park Chung Hee (1917-79) carried out a military coup d’état followed by an anti-corruption campaign which was welcome by the general public. Early in his military career, Park had participated in a communist cell within the South Korean army but later served with distinction during the Korean War and was rewarded with a year of special training at Fort Sill, Oklahoma.

As president, Park instituted central planning and industrial policy and looked to pre-war Japan as a model for developing the Korean economy. The Park administration was ultra-nationalistic and anti-market, harking back to a Confucian culture that does not hold merchants in high esteem. Park nationalized Korean banks and imposed strict control on foreign exchange to use sovereign credit to develop the Korean economy through industrial policy and subsidized export, taking advantage of US anticommunism to get preferential access to the US market during the Cold War. Following the Japanese model, Park established three key agencies for modernizing the Korea economy: the Economic Planning Board (EPB) to set economic plans; the Ministry of Trade and Industry (MTI) to support industrial policy and export and the Ministry of Finance (MoF) to make use of sovereign credit to finance economic plans. A fourth agency, the Korean Central Intelligence Agency (KCIA), formed under the guidance of the US CIA, was Park’s apparatus for domestic security. Park normalized relations with Japan in 1965 amid massive popular anti-Japan protest at home.

Park leaned on the chaebol, large family-controlled conglomerates that responded profitably to government development plans, reserving basic industries such as steel for state-own-enterprises. Park proved that a planned economy with intelligent application of industrial policy was a more effective system for promoting rapid industrialization and national prosperity for a developing economy than market fundamentalism.  Under Park, South Korea sent 300,000 troops to Vietnam, and was rewarded by the US with war purchases that helped the Korean economy and political tolerance that consolidated his rule.

Korea Victimized by Neo-liberalism

Park was assassinated on October 26, 1979 while enjoying a Japanese-style geisha party at a KCIA safe house in Namsan. The assassin was the head of the KCIA, Kim Jae Kyu who worked closely with the US CIA. The assassination, as with all political assassinations, remains a mystery. It was common knowledge that the KCIA could not have made any move without the approval of the US CIA which suspected Park of being a Communist. It was also a time when US foreign policy was strong-arming its autocratic Cold-War allies all over Asia, in Korea, Taiwan, Singapore, the Philippines, Indonesia and other countries into token political reform towards “democracy”.  The assassination of Park excised the cancer of communist sympathy at the top in South Korea.

Exploiting US-Soviet Détente, Park initiated moves toward Korea unification. The principles of Korea national reunification were laid down in the historic July 4, 1972 Joint Statement when the South was under Park after a visit in May by KCIA Director Lee Hu Rak to Pyongyang, the capital of North Korea. The movement toward unification was abruptly shelved after assassination threats were made on Park who was forced to dismiss Lee as KCIA chief and to replace him with Kim Jae Kyu at US CIA insistence.  Park’s assassination postponed Korean unification development for three decades.  It echoed the geopolitical undercurrents that led to the resignation of President Nixon on August 8, 1974 which many observers believe was not unrelated to domestic opposition to his historic opening to communist China.

After the Watergate scandal broke open, Nixon’s policy of Détente stalled along with momentum on normalization of US-China relations. Under President Carter, the terms of US-China normalization changed from letting the Taiwan issue be resolved as a Chinese internal affair to allowing Taiwan to remain as an obstacle for full normalization with the passage of the Taiwan Relations Act, a US domestic law that blatantly interferes with Chinese sovereignty and internal affairs. The justification for US military defense of Taiwan was that the regime has since become a “democracy”. US advice to Chiang Jing-guo, the president of the Republic of China on Taiwan at the time, was that US support for Taiwan was contingent on political reform.

The two-decade-long rule of Park left a lasting legacy that affects Korean politics to this date. Applying the cui bono (who gains) theory of conspiracy, the US and the chaebol both benefited from Park’s assassination.  The US prevented Korean unification and the chaebel gained much market freedom from state control.  These chaebel subsequently launched Korea on the path of neo-liberal market fundamentalism which two decades later, plunged the Korean economy into bankruptcy in the 1997 Asian financial crisis.

When financial contagion hit Korea in December from Thailand, where the problem started on July 2, the 1997 Asian financial crisis showed itself as not a local problem but global one.  The New York Times reported that the US administrative decision to rescue Korea was reached by Treasury Secretary Robert Rubin in the last minute before a Korean default on its sovereign debt because of the surprise discovery that Brazilian banks were holding a lot of Korean bonds and total return swaps (TRS) contracts used to capture “carry trade” profit from interest rate differential between pegged currencies. A Korean default would quickly spread to South America with more direct impact on the US economy than previously realized. US multinational banks, the US Treasury and the Fed colluded on the classification of non-performing loans in Korea for regulatory purposes to safeguard the exposure of US bank. But the local banks in Korea enjoyed no such flexibility.
(See: The Dangers of Derivatives

Both the South Korean and Japanese development model had been closely studied by Chinese reformers during the 1980s and 90s, until the 1997 Asian financial crisis exposed neo-liberal market fundamentalism as a false god and globalization as an ocean of predatory sharks. Since 1997, both South Korea and Japan have been looking to developing close bilateral trade relations with China as a promising potential for a new economic order for Asia.

Park sought constitutional revisions in 1969 to run for a third term. Running unsuccessfully against Park was opposition leader Kim Dae-jung, a Catholic and the presidential candidate of the New Democratic Party in 1971. A year after the election, President Park imposed martial law, banned all political activities and pushed through the Yushin (revitalizing reform) Constitution through the National Assembly which gave the president power for life. Kim Dae-jung led campaigns against Park’s regime in the US and Japan. In August 1973, agents of the Korean Central Intelligence Agency abducted Kim from a Tokyo hotel. Strong reactions from the US and Japan resulted in his release in Seoul a week later and was immediately placed under house arrest.

On March 1, 1976, Kim joined other democracy activists in issuing the “Independence Day Declaration for Democratization.” Subsequently, he was sentenced to five years in prison but was released and put under house arrest in 1978. Soon after Park’s assassination in October 1979, the civil and political rights of Kim were restored. A few months of political unrest later, another military group seized power and Kim Dae-jung was again imprisoned in May 1980 on charges of treason. In November 1980, a military court sentenced him to death, but the sentence was commuted to life imprisonment, and then reduced to a 20-year term. In December 1982, his prison term suspended, he was allowed to travel to the US where his exile ended two years later in early 1985. Back in Seoul, he was immediately put under house arrest by  Korean authorities. In June 1987, Kim was cleared of all outstanding charges with full restoration of civil and political rights. He ran but was defeated in presidential elections in 1987 and 1992.

In December 1997, when contagion from the Asian financial crisis hit Korea like a tsunami, Kim was elected to the presidency with 40.3% of the votes. Taking over the government in the midst of an unprecedented financial crisis, Kim was forced to accept International Monetary Fund (IMF) conditionalities based on the Washington Consensus to pull the country back from the brink of bankruptcy. Reforms and restructuring that began early in his Administration still continue today, plunging the economy into permanent decline with little prospect of full recovery.  Whatever partial recovery that did occur was in spite of, rather than because of Kim’s misguided economic policies as dictated from Washington. Harvard economist Martin Feldstein argued that the financial crisis did not reflect a systemic failure of the pre-crisis Korean model of economic development, but rather the failure of the IMF to respond appropriately to cross-border hot money movement. It was a financial market failure of globalization through deregulated financial markets. Many otherwise efficient and successful Korean industrial companies, unable to withstand the financial stress, went bankrupt not because of failure to produce goods in strong demand but because of failure to withstand sudden wide swings in interest rates that went to over 100% and foreign exchange rates that plunged the Korean currency to a fraction of its pre-crisis level. During Kim Dae Jung’s presidency, Daewoo Corporation, then the second-largest conglomerate in South Korea went under. The wholesale destruction of the chaebol system deprived the South Korean economy its powerful engine of growth, while Korea was unable to find a workable substitute to compete effectively in the global economy.

To find alternatives out of the financial chaos, Kim Dae-jung began to pursue a policy of engagement toward North Korea to give new momentum to his failed economic policy, resurrecting Park Chung Hee’s unification initiative of three decades earlier. A unified Korea with strong trade relations with an emerging China would provide Korea with possibilities of economic revitalization that conventional IMF globalized market fundamentalism failed to provide.

In the July 4 1972 Joint Statement, the North and South agreed upon the following principles for the reunification: First, the reunification must be achieved with no reliance on external forces or interference. It must be achieved internally. Second, the reunification must be achieved peacefully without the use of military forces against the other side. Third, both parties must promote national unity as a united people over any differences of ideological and political systems. Such principles were not music to Washington’s ears and all progress was halted and finally buried with Park’s assassination in 1979.

On June 15, 2000, Kim and North Korean leader Kim Jong-il signed a joint declaration on unification. Almost thirty years after Park’s initial move, the joint declaration signed by President Kim Dae-jung of the Republic of Korea and National Defense Commission Chairman Kim Jong-il of the Democratic People’s Republic of Korea was the result of a historic meeting and summit talks in Pyongyang from June 13 to June 15, 2000, “in accordance with the noble will of the entire people who yearn for the peaceful reunification of the nation.” For his contribution to Korean unification, Kim was awarded the 2000 Nobel Peace Prize which was not awarded to Kim Jong-il, the other signer of the joint declaration, reflecting the ideological bias of the Nobel Committee.

The five points of the 2000 Joint Declaration are:

1. The South and the North have agreed to resolve the question of reunification independently and through the joint efforts of the Korean people, who are the masters of the country.

2. For the achievement of reunification, we have agreed that there is a common element in the South's concept of a confederation and the North's formula for a loose form of federation. The South and the North agreed to promote reunification in that direction.

3. The South and the North have agreed to promptly resolve humanitarian issues such as exchange visits by separated family members and relatives on the occasion of the August 15 National Liberation Day and the question of unswerving Communists serving prison sentences in the South.

4. The South and the North have agreed to consolidate mutual trust by promoting balanced development of the national economy through economic cooperation and by stimulating cooperation and exchanges in civic, cultural, sports, health, environmental and all other fields.

5. The South and the North have agreed to hold a dialogue between relevant authorities in the near future to implement the above agreements expeditiously.

President Kim Dae-jung cordially invited National Defense Commission Chairman Kim Jong-il to visit Seoul, and Chairman Kim Jong-il will visit Seoul at an appropriate time.

The key words in the declaration are in the first point: “agreed to resolve the question of reunification independently and through the joint efforts of the Korean people, who are the masters of the country.” Independently means without the interference of foreign powers. This means the US, China and Japan.  The declaration established clearly that there are no unsolvable domestic issues blocking peaceful reunification.

On August 3, 2004, Chung Mong-hun, 55-year-old heir to Hyundai, South Korea’s largest industrialist giant with 57 subsidiaries and assets of $60 billion in 1997, who was the chaebol leader behind the South’s policy of reconciliation toward North Korea, committed suicide by jumping from the 12th floor of the company headquarters building. Chung was facing trial on charges that he secretly passed $100 million from the South Korean government to North Korea in the spring of 2000. The payment was said to have been an inducement to Kim Jong-il, the North Korean leader, to receive Kim Dae-jung, then president of South Korea, on a visit to the North Korean capital, Pyongyang. Shortly after the June 2000 inter-Korean summit meeting Kim received the Nobel Peace Prize.

Chung’ father, Chung Ju Yung, the founder of the Hyundai conglomerate, was born to a peasant family in North Korea. The son handled Hyundai’s dealings with North Korea. The father ran unsuccessfully for president in 1992. Earlier in 2004, Hyundai was implicated in illegally arranging a total of $400 million in payments to North Korea, not only to ensure that the 2000 summit meeting would take place, but also to win contracts for a tourism enclave, an industrial park, a sports complex, dams, an airport, telecommunications infrastructure and power generation. The contracts make Hyundai the leading “foreign” business player in North Korea.

The 2000 summit meeting was the beginning of a process of reconciliation between the two Koreas that endures in the form of railway and commercial projects, including plans to build a vast industrial park in Kaesong, North Korea. Hyundai Engineering and Construction, which remains as one of the core companies of the Hyundai Group, was to be one of the primary contractors in the project.

Chung, the fifth son of Chung Ju Yung who divided his business group among his sons, held a master's degree in business from Fairleigh Dickinson University in Rutherford, New Jersey, was to run Hyundai Electronics after it was founded in 1983, but had to give up his stake in Hyundai Electronics when the company suffered severe financial difficulties during the 1997 financial crisis and fell into the hands of foreign creditor banks and changed its name to Hynix Semiconductor. The financial restructuring at its parent Hyundai Electronic Industries Ltd. (HEI) continued in 2001.

A "liquidity crunch" created by nearly $5 billion in loans that matured in December 2000 and January 2001 was the company’s immediate problem, forcing the company to sell off nearly $1 billion in assets at home and abroad and slash 7,000 workers from its payroll. The company timed the announcement to follow a controversial decision by the state-run Korea Development Bank to roll over more than $400 million of Hyundai Electronics bonds due to mature the same month. The leniency extended to Hyundai Electronics was part of a government drive to prop up the behemoths of South Korean industry, including Hyundai Group — until 1998 the country's largest chaebol, on the theory that cash-strapped companies would endure if they made it through the first half of the year.

The Korea Development Bank also rolled over $125 million in bonds issued by Hyundai Engineering & Construction Co., the hardest-hit of the Hyundai companies, and Hyundai Merchant Marine Co. And commercial banks — largely government controlled — granted reprieves on hundreds of millions of dollars in loans. The Korea Development Bank supported corporate bonds of Hyundai Engineering & Construction, which was burdened by excessive debt. The restructuring plan calls for repayment of $4.2 billion in debts maturing in 2001, more than half of it with financing by the Korea Development Bank.

Foreign neo-liberal analysts charged that the program for supporting major companies ran counter to promises by President Kim Dae-jung to force troubled chaebol to follow through on restructuring plans and dump unprofitable entities in line with the Washington Consensus and IMF conditionalities. Despite criticism from market fundamentalists, the government’s efforts to shore up financially troubled companies appeared to have won a certain degree of confidence among investors. The Korea Composite Index, which lost about 50% of its value by 2001 to fall to around 500, was trading on September 29 2006 at 1,371.41.

Despite antitrust and patent infringement troubles and countervailing duties imposed by the US and the EU, Hynix Semiconductor continued to expand its presence of the DRAM (Dynamic Random Access Memory) market in Q2 2004 and even became the world’s second largest memory maker, after Samsung Electronics, another Korean giant.

From May 11 to 14, 2002, in a move of high political drama, Ms. Park Keun-hye, daughter of the assassinated Park and a member of the South's National Assembly, made an unofficial visit to Pyongyang at the invitation of the North’s National Reconciliation Council.  Symbolically, she took a North Korean chartered plane from Beijing to Pyongyang, and returned to Seoul by way of Panmunjom, the heavily-armed truce village at the 38th Parallel. Park’s surprise visit came in a complex political climate in the South as she withdrew from the ultra conservative opposition Grand National Party making critical attacks on its leader Ri Hoe Chang, whom North Korean officials have labeled as an “anti-nation, anti-reunification, pro-American traitor.” It also came as the presidential election race is getting heated toward December 2002 when a new president was to replace Kim Dae Jung, advocate of a reconciliatory “sunshine policy.” Ms. Park, who formed a new political party as chairperson of the Preparatory Committee for Founding the “Union for the Future Korea,” was widely considered as presidential timber.

Ms. Park’s North Korea visit was associated with the Korea-European Union, of which she is an officer and her meeting with Kim Jong-il reportedly was arranged by Jean-Jacques Grauhar, secretary general of the EU Chamber of Commerce in South Korea. For seven years Grauhar was a consultant in Pyongyang from 1986 to 1992 and had been traveling back and forth from Pyongyang to Seoul for business and guided European companies considering investing in the North. He accompanied Ms. Park on her trip to Pyongyang which reactivated momentum to stalled inter-Korean relations and to what the EU had done for Pyongyang since mid-1995 in terms of economic cooperation. Approval to establish a training center for North Korean economists in Beijing to introduce a “socialist market economy” and to produce a professional labor force to operate privatized companies and factories in the market was credited to the Europe-Korea Foundation of which Ms. Park was a senior member.  Ms. Park’s 2002 trip to the North signaled the divergence on the part of South Korea and the EU from ineffective US policy under the Bush administration on North Korea, a reversal of Clinton’s policy.

Next: Clinton Policy on North Korea – a Path to Peace