SEOUL, South Korea, March 28 — As South Korean and American negotiators huddle in Seoul for trade talks this week, corporate South Korea is grappling with a troubling question: How can the country avoid being crushed by competition from low-cost China and high-tech Japan?

Warnings about the country’s economic future have taken on an apocalyptic tone in recent months, as the jewels of South Korea’s export-driven economy, including Samsung, Hyundai and LG Electronics, forecast declining earnings and growing competitive threats.

“We are sandwiched,” said Lee Kun-hee, chairman of Samsung, which generates 20 percent of the country’s exports and is widely seen as the country’s most competitive conglomerate.

“China is catching up fast. Japan is racing ahead. But we are running in place. In five or six years, not only Samsung but the whole South Korea could plunge into chaos.”

In January, advisers to President Roh Moo-hyun warned that South Korean businesses were not investing aggressively enough in new facilities, even as China was enjoying an unprecedented surge of investment into new, high-tech factories making everything from cargo ships to computer chips.

By 2010, analysts say, South Korean companies will enjoy few technological advantages over China in the export sectors where they dominate today, including mobile handsets, flat-panel displays and high-end steel.

A crucial part of Mr. Roh’s strategy for injecting new life into the South Korean economy is a free-trade agreement with the United States, something that neither Japan, with its politically powerful farmers, nor China, with its huge state-owned industries, is likely to achieve.

A deal with Washington would not only make South Korean exports more price-competitive in the world’s largest export market, but would also enhance the country’s credibility in the eyes of foreign investors, proponents say.

But time is running out. Negotiators must clinch a deal by Saturday to give the United States Congress time for a mandatory 90-day review before President Bush asks it to cast a yes-or-no vote without amendments.

Once Mr. Bush’s “fast track” authority expires, he will find it far more difficult to push a deal through a Democratic-controlled Congress.

Viewed from abroad, it is perhaps difficult to see why South Korea is so apprehensive.

During the four years that Mr. Roh has been in office, the economy has grown at an average of 4.2 percent annually, and exports have expanded an average 19 percent annually, to $326 billion last year.

But earnings at Samsung Electronics, South Korea’s biggest and most profitable company, slipped to 7.9 trillion won ($8.4 billion) last year, from 10.8 trillion won in 2004, as Chinese competitors gobbled up Asian market share.

Net profit at LG Electronics plunged to 212 billion won last year, from 1.5 trillion won in 2004. At Hyundai Motor, battered by labor strikes and a weak yen that made rival Japanese cars more appealing, earnings have fallen for four consecutive quarters.

The statistics, experts say, testify to the onset of obsolescence for South Korea’s role as technological middleman between China and Japan.

Corporate South Korea depends on exports of components and semifinished electronic goods to China for much of its earnings. But it still relies heavily on Japanese high-tech parts and manufacturing skill to produce those exports.

South Korea is the world’s biggest producer of computer memory chips and flat-panel displays. But Samsung, Hynix and LG.Philips factories all operate on Japanese machinery. Meanwhile, China is moving fast to build its manufacturing inputs at home, often at a cost South Korea cannot match.

In January and February, for example, Chinese shipyards won more orders than their South Korean counterparts for the first time, and China will soon overtake South Korea as the world’s largest shipbuilding country.

South Korea’s handicaps are not only cost-based or technological, analysts say.

“Japan has worked assiduously to reduce antagonism in the U.S.A. from industrial sectors,” said Usha Haley, professor of international business and director of the Global Business Center at the University of New Haven.

“For example, Toyota makes most of the cars it sells in the U.S.A. in this country — Korean car companies do not. Conversely, Korea has the most protected automotive market in the industrialized world, causing enormous resistance and umbrage in certain influential sectors.”

A free-trade deal with Washington could ultimately change that. But experts say South Korea needs more than open markets to rekindle innovation at home and lure new investment from abroad.

Tightened tax rules and other policy changes contributed to a 7 percent drop in foreign direct investment in South Korea, to $7.2 billion in 2005, according to the United Nations Conference on Trade and Development.

The free-trade agreement “is seen as a necessary evil by many Koreans, indicating the continued, deeply rooted skepticism toward opening up,” said Tariq Hussain, whose book “Diamond Dilemma,” assesses South Korea’s challenges and opportunities. “It is not a panacea for Korea’s economic woes.”


# References : http://www.nytimes.com/2007/03/29/busin … mc%3Drss