The Korea Herald

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[Editorial] Facing headwinds

Korea Inc. struggling with many challenges

By Korea Herald

Published : Sept. 10, 2017 - 17:38

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Korea Inc. is under siege from all sides. A combination of internal and external risk factors are surrounding Korean businesses as Asia’s fourth-largest economy sails through rough waters like a low-growth trap.

Among the external factors, the crisis over North Korea’s nuclear and missile threats may be top of the list. The crisis has yet to have a direct impact on the Korean economy, but the level of crisis -- as seen by the UN’s move to impose the harshest sanctions against the North -- is different from those seen in the past. It could strike financial markets and other sectors of the economy at any time.

The North Korean crisis has generated another unexpected headwind from China, with major Korean firms like Hyundai Motor and Lotte taking the brunt of retaliatory measures choreographed by the Beijing government in protest of the deployment in South Korea of a US anti-missile system.

Chinese retaliation is expected to intensify as South Korea and the US completed the deployment of the Terminal High Altitude Area Defense battery last week. Reports in Chinese media indicate the Chinese partner of Hyundai Motor could end their joint venture partnership.

One more headwind is coming from the US over trade issues. The planned renegotiation of the South Korea-US Free Trade Agreement -- or in the worst-case scenario its termination as suggested by some in Washington -- could sway Korean exporters. What’s most certain is that some parts of the 5-year-old agreement would be revised in a way less favorable to Korean firms.

These external risks are not the only ones that cast a dark cloud over Korean businesses. They also face an onslaught of government policies that are negative to businesses.

Since the May presidential election, businesses here, especially family-controlled chaebol, have braced themselves for a different business environment under the new administration led by a liberal president.

The Moon Jae-in administration took power riding the wave of anti-establishmentism sparked by the corruption scandal involving ousted conservative President Park Geun-hye and her confidante Choi Soon-sil. It has since rolled out a series of policies unfavorable to businesses.

Moon’s first public appearance as president was at Incheon Airport, where he announced a drive to convert irregular workers in the public sector to regular ones. It would be strange for major businesses not to try to comply with the president’s initiative.

Measures taken by the Moon administration with a call to expand protection of the underprivileged also included the increase of the legal minimum wage by the highest margin yet and a push to shorten the workweek.

A recent court ruling that ordered Kia Motors to recalculate its base wage for workers and pay at least 422.3 billion won ($376 million) in unpaid allowances is also cause for concern among other firms.

On top of the upward pressure on labor costs came the government’s decision to raise taxes for companies and wage earners in the highest income bracket. Never in recent years have businesses faced such massive threats to their bottom lines as they do now.

The business sector has been made the scapegoat for whatever the Moon administration blamed as the legacy of the past administration, including widened bipolarization between the poor and rich and the failure to protect the underprivileged and workers.

The hostile environment causes huge losses to businesses and erodes their competitiveness. Research institutes estimate that the increase of the legal minimum wage alone will force businesses to take up additional labor costs amounting to 16.2 trillion won each year.

The bigger problem is that all these moves came without concrete measures to beef up the competitiveness of firms, such as a push for deregulation and labor market flexibility.

The Korean economy, which grew 1.1 percent in the first quarter, managed to expand 0.6 percent in the second quarter.

It is certain to go down further if businesses have to keep bearing the brunt of hostile, strong headwinds.