Blue Pill – Red Pill Moment for Korean Trade and Investment Policy

The Bottom Line.

In this Insight, Soo-Hyun Lee (Asan Institute, Seoul) discusses developments in South Korea’s trade and investment climate. Borrowing the blue pill – red pill image from The Matrix, he places South Korea’s approach to liberal policies into the broader and more global context of political and economic alliances with the West, and particularly the United States. The blue pill, on the one hand, equals safety and stability. The red pill, on the other hand, would bring some public interest and independence, provided of course that the country departs from its current ways. The question overall comes as follows: could South Korea follow a different roadmap in the future?

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Blue Pill – Red Pill Moment for Korean Trade and Investment Policy

[By Soo-Hyun Lee]

In perhaps one of the most iconic scenes in contemporary science fiction, Morpheus and Neo of The Matrix discuss free will through a choice between two pills: a blue pill, which represents the comforts and security of continuity, and a red pill, which offers uncertainty but freedom through recognizing the truth of reality.

To some extent, one may allude this to the current dilemma facing South Korean foreign policy, especially in relation to international trade and investment.

Korea is a blue pill addict. For long, the country has based its policy decisions on those of its traditional economic partners, namely the United States. But time has come for a red pill shift, as altering the domestic approach to international trade and investment in ways that diverge becomes as important as exploring new futures in economic integration.

This insight examines how current policy steps by the Korean government seem to be moving towards the latter. Increasingly, indeed, Korea is showing signs of departing from its traditional stances on trade and investment and towards one that is more self-defined and fit-to-purpose in terms of the public policy goals of the country. This is a highly welcomed trend that if consistent and comprehensive can lead to inclusive economic growth.

Blue pill prescription: creating normality and stability.

In line with modern practice, South Korea’s export-dependent economy and external economic relationships depend on a variety of alignments the country has operated to match international dynamics and standards.
One factor of this success would appear to be an alignment with international liberal economic dynamics. After South Korea accepted the economic structural benchmarks required by the International Monetary Fund (IMF) in 1998 – which consisted in a series of policy reforms that liberalised and privatised the South Korean economy – its sovereign credit rating would rise irrespective of the incidence of a North Korean provocation.

Another alignment, undoubtedly, would be with pro-trade and investment policies as they are now practiced by most capital-exporting economies. Free trade and investment agreements with global partners such as the United States were undoubtedly an essential step in creating a stable regulatory climate, especially when considering geopolitical vicissitudes involving North Korea and South Korea’s own legacy of being a state-led economy.

These added to Korea’s trading legitimacy in joining global supply chains, permitting many Korean goods and services abroad (and foreign goods and services in Korea) to compete on level playing fields. Economic partnerships is about building trust in systems, making trade alliances and creating confidence. Korea’s efforts in creating those partnerships helped it to become one of the leading economies in Asia.

Korea’s blue pill policy in part resulted in Standard and Poor’s most recent assessment of “reduced geopolitical risks” and “favourable policy environment” as two underlying reasons for what has been since 2016 the third highest rating of “AA”.

Figure 1. Standard and Poor’s (S&P) sovereign credit ratings versus DPRK provocation, 1989-2018. Source: World Government Bonds, the BBC, and author’s calculations.

One may indeed argue that this stability-oriented policy permitted Korea to maintain its relatively high sovereign credit rating – despite its Northern sibling’s nuclear temper and serious provocations.

Blue pill prescription set to expire.

Said more concisely, South Korea has over time become dependent on its own blue pill medication, because normality meant stability. Yet, its prescription seems to be coming to an end for numerous reasons.

  1. A general rise in protectionism, perhaps led by the United States, has resulted in trade restrictive barriers and in the initiation of anti-trade measures. Two high profile initiations include large residential washers to the U.S. and import restrictions on Japanese steel.
  2. The political use of regulatory measures by China triggered adverse economic impacts. In fact, the Korean government is examining options to lodge a complaint with the WTO concerning the use of nontariff measures by China effectively preventing Chinese tourists from traveling to Korea.
  3. Korea recently lost for the first time an investor-state dispute involving a claim initiated by a foreign investor (thus as a respondent state) in Dayyani v Korea. Following this ruling, three additional initiations by foreign investors are currently underway, each in some way involving a lack of corporate governance and inappropriate government measures. The circumstances of these alleged violations by the Korean government bear resemblances to Korea’s first investor-State dispute (LSF-KEB v Korea) dated 2012, which suggests that the Korean government is increasingly facing considerable criticism – not only because these disputes are arising, but also because of the amount of public finance being used for legal proceedings.

Taken together, as well as in observation of recent policy movements by the government, it therefore seems that Korea’s blue pill conservative, security and stability-focused approach to trade and investment might soon come to an end – or at the very least, be met with greater reluctance.

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The Red Pill: shifting in progress?

While it is too early to predict the future of Korean trade and investment policy, there have however been signs of a potential departure down the rabbit hole (for those who haven’t watched The Matrix, this reads departure towards an opposite or radically different direction).

Shifting away from U.S. policy?

The Korean government has long emphasized the centrality of the U.S. in its investment and trade policy, which resulted in it dragging its feet on certain policy issues.

For instance, the Bank of Korea has until now rarely employed fiscal policy tools such as changing the base interest rate to help control inflation. Instead, such adjustments have largely remained aligned with U.S. practice until recently, when the Bank chose not to increase interest rates contrary to Federal Reserve rate hikes.

Another example includes the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which was initially dismissed by Korean policymakers because the United States was not involved in the deal. The megaregional is now a major policy interest as it could boost Korea’s regional trade leadership.

Attachment issues?

While the government has been showing increased interest in the CPTPP as a means to overcome the rise of economic isolationism, the discussions on whether to join the CPTPP fail to deliver and public discussions featuring the same conclusions remain an ongoing trend.

Thornier issues are those involving sensitive product lines that face steep competition against similarly structured economies, namely Japan. These include automobiles and consumer electronics, two key industries in Korea’s export portfolio. Others include the legal ramifications of accession concerning its existing trade and investment legal obligations.

Having said this, the fact of the matter is that no one can really know the impacts of CPTPP and how its “comprehensive and progressive” approach shall solidify.

While Korea may not have been willing to experiment with the project in the past, the CPTPP may nonetheless be the momentum that Korea needs to shift policy directions. One can observe that Chile, Mexico, Peru and Viet Nam are also testing the waters of the CPTPP by identifying sectors and concepts that they do not wish to liberalize (Annex 9-J). So Korea might also benefit from the trend by following in their footsteps.

Korea showed that it is not averse to a comprehensive and progressive approach to its trade and investment agreements; permitting a more elastic approach to these agreements grants the flexibility to reflect matters of public interest into negotiations. This means that Korea can carve out regulatory spaces that it can use bring its trade and investment policies in line with its national public policies, such as unemployment or financial restructuring.

Pro-Korean policies to come?

However, this also means that Korea may interpret its obligations to investors from a perspective of prioritizing its public interest objectives. Such transitions can disrupt the consistency and predictability that investors depend on when considering foreign direct investment.

A tighter positioning towards foreign investors.

One can look to the amendments that Korea submitted to the Korea-US (KORUS) free trade agreement for an example of this change in direction.
For instance, in application to the rights and protections granted to U.S. investors, Korea reserved the right to consider a “totality of circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.”

Simply put, while trade and investment treaties have often been seen as tools for solidifying similar perspectives towards liberal markets and attracting foreign investors, they can also be used to protect national interests. In this manner, Korea may be shifting its policy orientation towards one that puts greater emphasis on domestic interests, a clear departure from Korea’s blue pill approach, which has historically fostered a regulatory climate that favours the investor.

Practically, Korea would therefore increasingly tighten its regulatory position on investor protections, especially with regards to two contentious issues in international investment law: fair and equitable treatment and investor-state disputes.

One force that has been encouraging this change has been a deeply souring public image of investor-state disputes. Hence, the public finance which was once used to provide fair and adequate compensation to foreign claimants (and law firms) might now dwarf the finance reserved to bolster social benefits and welfare in Korea – a major political platform for the existing Administration.

Red pill responsibilities.

Should Korea move forward with this red pill policy approach, investors might thus find that the admission and regulation of foreign investments may go through a more expansive evaluation process. This means that Korea’s attitude towards foreign investors will give more weight to the public policy interests of South Korea, even though such interests can directly impact investors, whether as competitors or shareholders.

>> Related Reading: Interventionism in Korea and Japan: Complex Investment Climates Ahead?

Saving entire cities of jobs or enforcing certain requirements for enhanced environmental stewardship are certainly legitimate policy objectives. In achieving those goals, Korea must tread carefully, because predictability and consistency are fundamental aspects to an investment climate, and those pillars are structurally questioned when the governments choose winners without a sufficient basis in proportionality.

In other words, if Korea chooses the red pill and navigates its economic policy towards a direction that in many ways is a departure from the past, it must ensure that its policy actions pay particular attention to potential damages shouldered by investors and the extent to which those measures made progress towards the policy goals it is trying to achieve.

The Korean economy is no longer in the position it was at the turn of century, so its policies, economic partnerships, treaties and agreements should reflect its new stature. Yet in that process, Korea must also keep in mind the needs of Korean companies investing abroad, new foreign investors seeking to invest in Korea and domestic policy and economic factors in need of safeguarding.

In being offered the blue or red pill, Neo was given free will over his existence… or was he? Should he have chosen the blue pill and forgotten his meeting with Morpheus, he may have very well found himself in the same place a year later. This might suggest that he was only given the illusion of choice while traveling on a pre-determined path. One may apply the same quandary to Korea’s policy dilemma: is Korea presented with an active choice or is it responding to changes in the trade and investment landscape?

Photo by Ivan J. Long from Pexels.


Soo-Hyun Lee | South Korea Expert Contributor

Soo-Hyun LEE asian trade and investment expert asia-pacific circle contributorContributor to the Asia-Pacific Circle’s insights, Soo-Hyun Lee is an expert on Asian and international trade & investment developments – which he approaches from an economic, legal and policy perspective. Soo-Hyun is a Research Associate at the Asan Institute of Policy Studies in Seoul, the Republic of Korea.

– Read more insights by Soo-Hyun Lee –

Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.



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