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World Trader - June11
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June/July 2011
Volume 8 | Issue 3

World Trader

From the President

Upcoming Events

IC-DISC Still Offers Permanent Tax Savings for Exporters
by Pappu Periakaruppan

Recap of Manufacturing in Mexico vs. China: A Comparative Overview

First Networking Event a Success!
by Kevin Johnson

International Arbitration and the Globalization of Minnesota Business
by Alan M. Anderson

Country of the Month: South Korea
by Kevin Johnson

MGTA Announces International Trade Scholarship Recipient
by Jason Lloyd

Who Said it?


From the President

by Mark Toth, MGTA President

Mark TothGreetings, MGTA members.

I hope your summer has begun on positive note. The board is moving forward with several initiatives that we hope benefit the membership. If any of you have had the chance to enjoy our social gatherings…they are fun and are filling the mingle needs that the MGTA has missed in recent years. Poor Richard’s in West Bloomington (Hwy 100 x 494 S.E. corner) has monthly gatherings over the lunch hour (check website calendar for details).

We had our first riverboat cruise, with more than 50 people joining the adventure in St. Paul. I enjoyed the ride and the yummy treats that were included. I look forward to it next year. Feedback on these initiatives is welcomed. I want to thank the volunteers that make these events happen! This was an event sponsored by the Membership Committee.

Exciting news for the Twin Cities, The MGTA and myself. President Obama wants to double exports in the next five years. The plan is called NEI (National Export Initiative). As MGTA President for 2011, I was chosen to serve on a steering committee with state and local politicians, DEED, trade organization representatives, Carlson School of Management representatives, and members of the Brookings Institute. We are about 20 members total. This committee is tasked with developing plans to boost exports from our region. By the end of 2011, the ideas shared will be submitted to the Obama Administration and rolled out in other cities, coined the MEI (Metropolitan Export Initiative). Four cities were chosen for the framework: Syracuse, NY; Portland, OR; Los Angeles, CA, and of course, Minneapolis and St. Paul, MN. I am honored to represent the MGTA in this and all capacities. If you have any ideas that you wish to funnel to the group, please contact me via email, mark.toth@mgta.org. More info on this initiative here: NEI/MEI Brookings Institute.

Our next large gathering is the favorite of many, the Annual Golf Outing. Hope the weather is good; plan to see you all there. Again, be sure to check the calendar and/or LinkedIn frequently for all events. Please support our cooperating organizations as well.

Thank you in advance for your time.

Mark Toth, MGTA President
Business Development Executive, Hellmann Worldwide Logistics

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Upcoming Events


9th Annual Midwest Global Trade Association Golf Tournament

August 17, 2011
10:30 am - 7:00 pm
Crystal Lake Golf Club, Lakeville, MN

The MGTA Golf Tournament is an excellent place to network with your peers and others in the industry. Register now before the tournament fills up. All golf fees are included in the registration cost as well as dinner with an award ceremony, polo shirt, and a chance to win door prizes. Golfers can also participate in the various proximity contests including the hole-in-one contest, where you could win a new car. Register now


Member Networking Event

September 13, 2011
11:15 am - 1:00 pm
Poor Richard’s Commonhouse, Bloomington, MN

RSVP: Email Paul at paulh@mgta.org

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IC-DISC Still Offers Permanent Tax Savings for Exporters

by Pappu Periakaruppan

If your closely held company earns significant income from exporting US-made products – or from engineering or architectural services on foreign construction projects – consider forming an interest charge domestic international sales corporation (IC-DISC).

An IC-DISC is relatively inexpensive to set up and operate, and it can reduce your federal tax rate on a portion of net export income by up to 20 percentage points.

To make the most of this strategy, it’s a good idea to act soon. The IC-DISC’s tax-saving opportunity is dependent upon the favorable 15 percent tax rate on qualified dividends received by individual taxpayers, which Congress recently extended – but only through 2012.

What is an IC-DISC?
A domestic C corporation must request and receive IRS approval to be treated as an IC-DISC for federal tax purposes. It also must maintain its own bank account, keep separate accounting records, and file US tax returns. But it need not have an office, employees, or tangible assets, nor is it required to perform any invoicing or provide services.

Due to its status as an IC-DISC, the company pays no federal income taxes and reduces the exporter’s tax liability by effectively converting a portion of net export income, which is taxable at ordinary income rates as high as 35 percent, into qualified dividends generally taxed at 15 percent.

To qualify as an IC-DISC, a corporation must also:

  • Be incorporated in one of the 50 states or in the District of Columbia,
  • File an election with and receive approval from the IRS to be treated as an IC-DISC for federal tax purposes,
  • Maintain a minimum capitalization of $2,500 of authorized and issued shares,
  • Have only a single class of stock, and
  • Meet an annual qualified export receipts test and a qualified export assets test.

The last requirement means that at least 95 percent of an IC-DISC’s gross receipts and assets must be related to the export of property whose value is at least 50 percent attributable to US-produced content. There is an important exception for engineering and architectural services related to construction projects outside the US which may also generate qualified export receipts.

How does an IC-DISC reduce taxes?
By virtue of the fact that the C corporation qualifies as an IC-DISC, it is presumed to have participated in the export sales activity for which it is entitled to earn a commission. Your company (the related exporter) is then required to pay tax-deductible commissions to the IC-DISC which are equal to the greater of: 1) 4 percent of your company’s gross receipts from qualified exports, or 2) 50 percent of its net income from qualified exports. Your company’s taxable income is reduced by the amount of the commissions paid to the IC-DISC and such commissions are deductible as ordinary income tax deductions.
The IC-DISC, as a tax-exempt entity, pays no tax on the commission income. When the IC-DISC distributes its income to its shareholders, the dividend income is taxed at the qualified dividend rate of 15 percent. The qualified dividend rate is available only to individuals; thus, you’ll need to structure the IC-DISC so that dividend payments are considered to be received by individuals.

If your company is a pass-through entity – such as a partnership, S corporation, or LLC – you can form an IC-DISC as a subsidiary. Dividends the IC-DISC distributes to your company will retain their character and be passed through to individual shareholders and qualify for the 15 percent rate.

If your company is a C corporation, however, you’ll need to have the corporation’s individual shareholders form the IC-DISC. If you set up the IC-DISC as a subsidiary, the dividends will be paid to the corporation and taxed as ordinary income, i.e., no tax savings.

An IC-DISC in action
Let’s assume an S corporation has $20 million in qualifying export sales and $5 million in net export income on those sales. If the company has an IC-DISC subsidiary, it can pay the IC-DISC commissions up to the greater of 50 percent of its export net income or 4 percent of its export gross receipts. In this case, the maximum commission is 50 percent of net income, or $2.5 million.
The following calculation shows how the owners can save a combined $500,000 in federal income taxes:

Without IC-DISC

Net export income

$5,000,000

Tax rate

35%

Tax

$1,750,000

With IC-DISC

Net export income

$5,000,000

Commissions

(2,500,000)

Net income after commissions

$2,500,000

Tax rate

35%

Tax

$875,000

Commissions paid out as dividends

$2,500,000

Tax rate

15%

Tax

$375,000

Total tax

$1,250,000

Note: The example assumes that the IC-DISC distributes all of its income and that each of the company’s shareholders is an individual in the 35 percent tax bracket.

Other benefits
Although an IC-DISC isn’t required to perform any services, having it do so may enhance its benefits. Services might include promoting your company’s export activities or purchasing receivables from your company at a discount, or "factoring.” Just like commissions, income from these services can be distributed to shareholders at the qualified dividend tax rate.

It is also possible to use an IC-DISC as an estate planning tool or to incent employees involved in your export business. There is no requirement that an IC-DISC’s shareholders be the same as the exporter’s shareholders or that they own their shares in the same proportions. However, caution is advised in the event that shares of an existing IC-DISC are transferred – there are obvious valuation issues to be considered.

Finally, you can defer tax on commissions related to $10 million of export sales per year that are left in the IC-DISC by making modest, annual interest payments to the IRS. These interest charges (the "IC" in IC-DISC) are tied to Treasury bill rates, which, in recent months, have been only a fraction of 1 percent.

Act now
An IC-DISC’s tax benefits aren’t retroactive – in other words, these benefits are available only for export sales made after the IC-DISC is established. And with the 15 percent qualified dividend rate set to expire at the end of 2012, the sooner you act, the greater your tax savings. If this favorable rate does expire, dividends may once again be taxed as ordinary income, eliminating the IC-DISC’s ability to reduce your tax rate.

Of course, Congress may decide to extend the qualified dividend rate beyond 2012. But even if it doesn’t, IC-DISCs will continue to provide an opportunity to shift income to lower income tax brackets (taking advantage of the difference between ordinary-income tax rates rather than qualified dividend rates), as well as to defer taxes on export sales.

If you have questions or would like more information on this topic, please call Pappu Periakaruppan at 612.876.4612, or email at pappu.periakaruppan@bakertilly.com

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Recap of Manufacturing in Mexico vs. China: A Comparative Overview

May 19, 2011 – Hosted by Skyline Exhibits, St. Paul, MN

The intro gave us a history of the host company, Skyline Exhibits, which is in 40+ countries and heading to Germany next. Next, Focus Business Solutions® talked about how they became involved in MGTA and brought the idea of having The OffShore Group® present on the comparison of doing business in Mexico (MX) vs. China (CN).

The OffShore Group® is a legal entity in MX as an "umbrella/shelter” for companies that would like to have manufacturing locations there. The individual companies that utilize its services have control of the manufacturing process. The OffShore Group® requires that you hire a production manager or send one from the US Company; other staff can be recruited by The OffShore Group ® as necessary. The company employs and pays the bills for 13,000 people and 55 manufacturing sites (4 million square feet) in MX (most operate in a secure industrial park) and employs about 100 people of its own. The core competencies are labor, import/export, facilities management and regulatory compliance. The individual companies are responsible for the raw materials, equipment, skills, etc. Goods are delivered to a cross dock in the US and then The OffShore Group® will facilitate the US export, the MX import, and IRS filing/audits. The company develops cost models to show that the gap between CN & MX is closing.

During the presentation, both CN and MX were compared with regard to salary expectations, hours worked, volumes, transit time, quality, etc. The labor for MX included the regulatory requirements of taking care of staff meals, medical care, onsite daycare, increasing and decreasing (large severance package is required) labor as well as the benefit of ensuring timeliness of staff with busing to and from the manufacturing site. CN included meals and lodging as they are more commonly required in that country.

The enlightening presentation wrapped up with some additional questions.

How many FTAs does MX have? MX has agreements with 40+ countries which are the most anyone has. Duty rates can be high from CN to MX, with some ADD rates at 200-300%. What is the fastest growing manufacturing sector? That would be Automotive in Central MX. Aerospace is also growing. What is the best geographic area for manufacturing in MX? You would need to look for skill set availability. Cheap labor can equal low productivity. Border areas can be more educated, experienced and dependable. No companies have left The OffShore Group® due to violence or criminal behavior. This is somewhat due to the Industrial Parks being secure locations.

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First Networking Event a Success!

by Kevin Johnson, Best Buy Co., Inc.

On June 15, the MGTA Membership Committee held an industry networking event over the lunch hour at Poor Richard’s Commonhouse in Bloomington. Fifteen people representing an array of industries from steamship lines, NVOCCs, Forwarder/Brokers, banks, surety companies, retailers and trucking companies to consultants were in attendance. This event proved to be a good forum to make contacts with individuals in different capacities throughout the Global Trade industry, and in some cases re-connect with old relationships, all in an informal environment. The next networking event is scheduled for Tuesday, September 13, from 11:15 a.m. to 1:00 p.m. at Poor Richard’s Commonhouse in Bloomington. Come on out and say hello!

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International Arbitration and the Globalization of Minnesota Business

by Alan M. Anderson, Alan Anderson Law Firm LLC

To paraphrase Thomas L. Friedman, "The world is flat and getting flatter.” Friedman argued in The World is Flat that what he described as "Globalization 3.0” was "shrinking the world from a size small to a size tiny and flattening the playing field at the same time.” Companies that want to survive and grow in the new global, flat economy need to adapt and change. Those companies "that recognize—faster than their competitors—everything new that the flattening of the world enables and everything new that it enjoins and are the first to develop strategies to exploit the new possibilities and to cope with the new requirements” are the ones that will succeed. Similarly, a company’s counsel must be able to adapt and change in light of the increasing "flattening of the world.”

With increasing globalization comes global problems. Although companies never enter into commercial relationships expecting a dispute to arise, one sometimes does. If a dispute arises between a Minnesota company and its Asian distributor, how and where should that dispute be resolved? If a buyer in Romania refuses to pay for products, claiming they are defective, how should a Minnesota seller attempt to collect? Would a judgment obtained in state or federal court in Minnesota in either of these scenarios be enforceable in another country? What if the foreign company obtains a judgment in its home court against the Minnesota company? More important, how should a company’s counsel advise a global business in order to address these issues? As Friedman recognized, "The flatter the world gets, the more we are going to need a system of global governance that keeps up with all the new legal and illegal forms of collaboration.”

As will be shown, an effective "system of global governance” does exist in the form of international arbitration. Minnesota’s economy is already engaged globally to the extent that Minnesota businesses need to be concerned about transnational dispute resolution; so also must any international business operation. Unfamiliar and unexpected problems await the company or counsel that relies on traditional legal means, i.e., going to court, to resolve the dispute when an international transaction or commercial relationship fails. International arbitration offers an effective alternative method that is widely embraced by most companies based outside the United States. Counsel for companies engaged in international business should understand the special characteristics of this dispute resolution mechanism as they and their clients together adapt to the "flattening of the world.”

Minnesota’s Global Business

Figure 1: Minnesota Manufactured Exports ($billions), 2002-2010

Minnesota possesses a large global economy. In 2008, more than 8,000 Minnesota businesses exported goods and services around the world. For the past several years, Minnesota’s exports have ranked as the 20th largest among all states. The top five product categories exported by Minnesota in 2009 were computers and related electronics, machinery, transportation equipment, medical products, and food. Since 2002, the annual value of Minnesota’s exports has nearly doubled, from $9.5 billion to $17.2 billion in 2010. Minnesota’s exports have shown a remarkable resilience despite the recent Global Financial Crisis. (See Figure 1.)


Figure 2: Minnesota Exports by Region, Fourth Quarter 2010

Minnesota’s businesses sell their products worldwide, from Australia to the United Arab Emirates. The top five countries for Minnesota’s exports in the fourth quarter of 2010 were Canada, China, Japan, Mexico, and Germany. Its top markets by region are North America (Canada), Asia, and the 27 member countries of the European Union. (See Figure 2.)

With all this global activity, it is natural that some international transactions inevitably result in disputes. And often, the parties turn to traditional methods — litigation in the courts — to resolve them. Such litigation may be filed in the United States or in a court in another country. While the Administrative Office of the United States Courts does not track or identify cases based on whether one of the parties to a civil action in a U.S. district court is a foreign (non-U.S.) company, an informal review of new civil actions filed in the District of Minnesota reveals an increasing number of such cases as Minnesota’s economy has internationalized. The same phenomenon generally is true in other federal courts. But if the litigation is in U.S. courts or in the courts of a foreign country, is the playing field level? Will a business in the Minnesota global economy likely obtain a satisfactory result in the form of a judgment that it can enforce and collect? What advice can its counsel provide in this regard? Read more

Reprinted from Bench & Bar of Minnesota, the magazine of the Minnesota State Bar Association.

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Country of the Month: South Korea

by Kevin Johnson, Best Buy Co., Inc.

History
An independent Korean state or collection of states has existed almost continuously for several millennia. Between its initial unification in the 7th century — from three predecessor Korean states — until the 20th century, Korea existed as a single independent country. In 1905, following the Russo-Japanese War, Korea became a protectorate of imperial Japan, and in 1910 it was annexed as a colony. Korea regained its independence following Japan's surrender to the United States in 1945. After World War II, a Republic of Korea (ROK) was set up in the southern half of the Korean Peninsula while a Communist-style government was installed in the north (the DPRK). During the Korean War (1950-53), U.S. troops and UN forces fought alongside soldiers from the ROK to defend South Korea from DPRK attacks supported by China and the Soviet Union. An armistice was signed in 1953, splitting the peninsula along a demilitarized zone at about the 38th parallel. Thereafter, South Korea achieved rapid economic growth with per capita income rising to roughly 17 times the level of North Korea. In 1993, Kim Young-sam became South Korea's first civilian president following 32 years of military rule. South Korea today is a fully functioning modern democracy. President Lee Myung-bak has pursued a policy of global engagement since taking office in February 2008, highlighted by Seoul's hosting of the G-20 summit in November 2010. Serious tensions with North Korea have punctuated inter-Korean relations in recent years, including the North's sinking of the South Korean warship Cheonan in March 2010 and its artillery attack on South Korean soldiers and citizens in November 2010.

Geography
Area: 98,480 sq. km. (38,023 sq. mi.); slightly larger than Indiana.
Cities (2009): Capital – Seoul (10.5 million). Other major cities – Busan (3.6 million), Daegu (2.5 million), Incheon (2.7 million), Gwangju (1.4 million), Daejeon (1.4 million), Ulsan (1.1 million).
Terrain: Partially forested mountain ranges separated by deep, narrow valleys; cultivated plains along the coasts, particularly in the west and south.
Climate: Temperate, with rainfall heavier in summer than winter.

People
Nationality: Noun and adjective – Korean(s).
Population (2010): 48,636,068.
Annual population growth rate (2010): 0.258%.
Ethnic groups: Korean; small Chinese minority (about 20,000).
Religions: Christianity, Buddhism, Shamanism, Confucianism, Chondogyo.
Language: Korean; English widely taught in junior high and high school.
Education: Years compulsory – 9. Enrollment – 11.5 million. Attendance – middle school 99%, high school 95%. Literacy – 98%.
Health (2010): Infant mortality rate – 4.24/1,000. Life expectancy – 78.81 yrs. (men 75.56 yrs.; women 82.28 yrs).
Total labor force (2009): 24.37 million.
Labor force by occupation (2007): Services – 67.7%; industry – 25.1%; agriculture – 7.2%.

Government
Type: Republic with powers shared among the president, the legislature, and the courts.
Liberation: August 15, 1945.
Constitution: July 17, 1948; last revised 1987.
Branches: Executive – President (chief of state); Prime Minister (head of government). Legislative – unicameral National Assembly. Judicial – Supreme Court and appellate courts; Constitutional Court.
Subdivisions: Nine provinces, seven administratively separate cities (Seoul, Busan, Incheon, Daegu, Gwangju, Daejeon, Ulsan).
Political parties: Grand National Party (GNP); Democratic Party (DP), formerly known as United Democratic Party (UDP); Liberty Forward Party (LFP); New Progressive Party (NPP); Pro-Park Alliance (PPA); Renewal Korea Party (RKP).
Suffrage: Universal at 19.
Government budget (2009): Expenditures – $227.2 billion.
Defense (2008): 2.5% of GDP.

Economy
GDP (purchasing power parity in 2009): $1.364 trillion.
Real GDP growth rate: 2007, 5.1%; 2008, 2.3%; 2009, 0.2%.
GDP per capita (2009, current U.S. $): $17,074.
Unemployment rate (2009): 3.6%.
Inflation rate (consumer prices): 2008, 4.7%; 2009, 2.8%.
Natural resources: Coal, tungsten, graphite, molybdenum, lead, hydropower potential.
Agriculture: Products – rice, root crops, barley, vegetables, fruit, cattle, pigs, chickens, milk, eggs, fish. Arable land – 16.58% of land area.
Industry: Electronics, telecommunications, automobile production, chemicals, shipbuilding, steel.
Trade (2009): Exports – $363.5 billion: semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, petrochemicals. Imports – $323.1 billion: crude oil, food, electronics and electronic equipment, machinery, transportation equipment, steel, organic chemicals, plastics, base metals and articles. Major export markets (2009) – China (23.2%), U.S. (10.1%), Japan (5.8%), Hong Kong (5.3%), Singapore (3.6%). Major importers to South Korea (2009) – China (16.8%), Japan (15.3%), U.S. (9.0%), Saudi Arabia (6.1%), Australia (4.6%).

PEOPLE

Population
Korea’s population is one of the most ethnically and linguistically homogenous in the world. Except for a small Chinese community (about 20,000), nearly all Koreans share a common cultural and linguistic heritage. With 48.6 million people inhabiting an area roughly the size of Indiana, South Korea has one of the world's highest population densities. Major population centers are located in the northwest, southeast, and in the plains south of the Seoul-Incheon area.

Korea has experienced one of the largest rates of emigration, with ethnic Koreans residing primarily in China (2.4 million), the United States (2.1 million), Japan (600,000), and the countries of the former Soviet Union (532,000).

Language
The Korean language is related to Japanese and Mongolian. Although it differs grammatically from Chinese and does not use tones, a large number of Chinese cognates exist in Korean. Chinese ideograms are believed to have been brought into Korea sometime before the second century BC. The learned class spoke Korean, but read and wrote Chinese. A phonetic writing system ("hangul”) was invented in the 15th century by King Sejong to provide a writing system for commoners who could not read classical Chinese. Modern Korean uses hangul almost exclusively with Chinese characters in limited use for word clarification. Approximately 1,300 Chinese characters are used in modern Korean. English is taught as a second language in most primary and secondary schools. Chinese and Japanese are also widely taught at secondary schools.

Religion
Freedom of religion is protected under South Korea’s constitution. Roughly half of the South Korean population actively practice some form of religion. Most religious believers in South Korea follow Christianity (29.2% of the population) and Buddhism (22.8%). Although only 0.2% of South Koreans identify themselves as Confucianists, Korean society remains highly imbued with Confucian values and beliefs. A small minority of South Koreans practice Islam, Shamanism (traditional spirit worship), and Chondogyo ("Heavenly Way"); 46.5% of South Koreans practice no religion.

GOVERNMENT AND POLITICAL CONDITIONS

The Republic of Korea (commonly known as "South Korea”) is a republic with powers nominally shared among the presidency, the legislature, and the judiciary, but traditionally dominated by the president. The president is chief of state and is elected for a single term of 5 years. The 299 members of the unicameral National Assembly are elected to 4-year terms; elections for the assembly were held on April 9, 2008. South Korea’s judicial system comprises a Supreme Court, appellate courts, and a Constitutional Court. The judiciary is independent under the constitution. The country has nine provinces and seven administratively separate cities — the capital of Seoul, along with Busan, Daegu, Daejeon, Gwangju, Incheon and Ulsan. Political parties include the Grand National Party (GNP), Democratic Party (DP), Liberty Forward Party (LFP), New Progressive Party (NPP), Pro-Park Alliance (PPA), and Renewal Korea Party (RKP). Suffrage is universal at age 19 (lowered from 20 in 2005).

Principal Government Officials
President – Lee Myung-bak
Prime Minister – Kim Hwang-sik
Minister of Strategy and Finance – Yoon Jeung-hyun
Minister of Education, Science and Technology – Lee Ju-hoo
Minister of Foreign Affairs and Trade – Kim Sung-hwan
Minister of Unification – Hyun In-taek
Minister of Justice – Lee Kwi-nam
Minister of National Defense – Kim Kwan-jin
Minister of Public Administration and Security – Maeng Hyung-Kyu
Minister of Culture, Sports and Tourism – Yu In-chon
Minister of Food, Agriculture, Forestry and Fisheries – Yoo Jeong-bok
Minister of Knowledge Economy – Choi Kyung-hwan
Minister of Health, Welfare and Family Affairs – Chin Soo-hee
Minister of Environment – Lee Maan-ee
Minister of Labor – Bahk Jae-wan
Minister of Gender Equality – Paik Hee-young
Minister of Land, Transport and Maritime Affairs – Chung Jong-hwan
Director of the National Intelligence Service – Won Sei-hoon
Senior Secretary to the President for Foreign Affairs and National Security – Chun Yung-woo
Chairman of Financial Services Commission – Chin Dong-soo
Ambassador to the U.S. – Han Duk-soo
Ambassador to the UN – Park In-kook

Korea maintains an embassy in the United States at 2450 Massachusetts Avenue NW, Washington, DC 20008 (tel. 202-939-5600). Consulates General are located in Atlanta, Boston, Chicago, Honolulu, Houston, Los Angeles, New York, San Francisco, Seattle, and Hagatna (Agana) in Guam. Korea also has a mission to the United Nations.

ECONOMY

Over the past several decades, the Republic of Korea has achieved a remarkably high level of economic growth, which has allowed the country to rise from the rubble of the Korean War into the ranks of the Organization for Cooperation and Development (OECD). Today, South Korea is the United States’ seventh-largest trading partner and is the 15th-largest economy in the world.

In the early 1960s, the government of Park Chung Hee instituted sweeping economic policy changes emphasizing exports and labor-intensive light industries, leading to rapid debt-financed industrial expansion. The government carried out a currency reform, strengthened financial institutions, and introduced flexible economic planning. In the 1970s Korea began directing fiscal and financial policies toward promoting heavy and chemical industries, consumer electronics, and automobiles. Manufacturing continued to grow rapidly in the 1980s and early 1990s.

In recent years, Korea’s economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. South Korea bounced back from the 1997-98 Asian financial crisis with assistance from the International Monetary Fund (IMF), but its recovery was based largely on extensive financial reforms that restored stability to markets. These economic reforms, pushed by President Kim Dae-jung, helped Korea return to growth, with growth rates of 10% in 1999 and 9% in 2000. The slowing global economy and falling exports slowed growth to 3.3% in 2001, prompting consumer stimulus measures that led to 7.0% growth in 2002. Consumer over-shopping and rising household debt, along with external factors, slowed growth to near 3% again in 2003. Economic performance in 2004 improved to 4.6% due to an increase in exports, and remained at or above 4% in 2005, 2006, and 2007. With the onset of the global financial and economic crisis in the third quarter of 2008, annual GDP growth slowed to 2.3% in 2008 and just 0.2% in 2009.

Economists are concerned that South Korea’s economic growth potential has fallen because of a rapidly aging population and structural problems that are becoming increasingly apparent. Foremost among these structural concerns are the rigidity of South Korea’s labor regulations, the need for more constructive relations between management and workers, the country’s underdeveloped financial markets, and a general lack of regulatory transparency. Korean policy makers are increasingly worried about diversion of corporate investment to China and other lower wage countries, and by Korea’s falling foreign direct investment (FDI). President Lee Myung-bak was elected in December 2007 on a platform that promised to boost Korea’s economic growth rate through deregulation, tax reform, increased FDI, labor reform, and free trade agreements (FTAs) with major markets. President Lee’s economic agenda necessarily shifted in the final months of 2008 to dealing with the global economic crisis. In 2009, the economy responded well to a robust fiscal stimulus package and low interest rates.

North-South Economic Ties
Two-way trade between North and South Korea, which was first legalized in 1988, rose to almost $1.82 billion in 2008 before declining sharply thereafter. Until recently, South Korea was North Korea’s second-largest trading partner after China. Much of this trade was related to out-processing or assembly work undertaken by South Korean firms in the Kaesong Industrial Complex (KIC). Much of the work done in North Korea has been funded by South Korea, but this assistance was halted in 2008 except for energy aid (heavy fuel oil) authorized under the Six-Party Talks. Many of these economic ties have become important symbols of hope for the eventual reunification of the peninsula. For example, after the June 2000 North-South summit, the two Koreas have reconnected their east and west coast railroads and roads where they cross the DMZ and have improved these transportation routes. South Korean tour groups have used the east coast road to travel from South Korea to Mt. Geumgang in North Korea since 2003, although the ROK suspended tours to Mt. Geumgang in July 2008 following the shooting death of a South Korean tourist by a DPRK soldier. Unfortunately, these North-South economic ties were seriously damaged by escalating tensions following North Korea’s torpedoing of the South Korean warship Cheonan in March 2010. In September 2010, South Korea suspended all inter-Korean trade with the exception of the Kaesong Industrial Complex. As of mid-November 2010, economic ties had not seen signs of revival.

FOREIGN RELATIONS

South Korea joined the United Nations in August 1991 along with North Korea and is active in most UN specialized agencies and many international forums. The Republic of Korea has also hosted major international events such as the 1988 Summer Olympics, the 2002 World Cup Soccer Tournament (co-hosted with Japan), and the 2002 Second Ministerial Conference of the Community of Democracies. In 2010, South Korea hosted the ROK-Japan-China Trilateral Summit as well as the G-20 Seoul Summit.

Economic considerations have a high priority in Korean foreign policy. The ROK seeks to build on its economic accomplishments to increase its regional and global role. It is a founding member of the Asia-Pacific Economic Cooperation (APEC) forum and chaired the organization in 2005.

The Republic of Korea maintains diplomatic relations with more than 170 countries and a broad network of trading relationships. The United States and Korea are allied by the 1953 Mutual Defense Treaty. Korea and Japan coordinate closely on numerous issues. This includes consultations with the United States on North Korea policy.


Additional Resources
The following general country guides are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402:

Library of Congress. North Korea: A Country Study. 1994.
Library of Congress. South Korea: A Country Study. 1992.
Department of State. The Record on Korean Unification 1943-1960. 1961.
Department of the Army. Communist North Korea: A Bibliographic Survey. 1971.

Internet Resources on North and South Korea
The following sites are provided to give an indication of Internet sites on Korea. The Department of State does not endorse unofficial publications, including Internet sites.

ROK Embassy – www.koreaembassyusa.org
Korea Society – www.koreasociety.org; links to academic and other sites.
Nautilus Institute – www.nautilus.org; produced by the Nautilus Institute in Berkeley, California, and includes press roundup Monday through Friday.
Joongang Dailyjoongangdaily.joins.com; South Korean English-language newspaper.
Korea Heraldwww.koreaherald.com; South Korean English-language newspaper.
Korea Times – www.koreatimes.co.kr; South Korean English-language newspaper.
(North) Korean Central News Agency – www.kcna.co.jp/index-e.htm

Further Electronic Information
Department of State Website. Available on the Internet at www.state.gov, the Department of State website provides timely, global access to official U.S. foreign policy information, including Background Notes and daily press briefings along with the directory of key officers of Foreign Service posts and more. The Overseas Security Advisory Council (OSAC) provides security information and regional news that impact U.S. companies working abroad through its website www.osac.gov

Export.gov provides a portal to all export-related assistance and market information offered by the federal government and provides trade leads, free export counseling, help with the export process, and more.

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MGTA Announces International Trade Scholarship Recipient

by Jason Lloyd, TSC Container Freight

Victoria Biel received the 2011 MGTA scholarship. She will be a junior at Marquette University in Milwaukee, WI this year and is majoring in International Affairs with a minor in Spanish. Victoria has a passion for traveling and learning about the social, political, and economic climates of different countries. She looks forward to a bright future that she hopes involves working in the field of International Trade.

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Do you know an MGTA member who was recently promoted or hired to an import/export company? Know of a member who recently got married or had a new addition to the family? Share the good news with your industry colleagues by emailing JLloyd@scoular.com.

Who Said it?

"Your life is your message to the world. Make it inspiring.”
– Lorrin L. Lee

"Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude.”
– Thomas Jefferson

"The dictionary is the only place that success comes before work. Hard work is the price we must pay for success. I think you can accomplish anything if you're willing to pay the price.”
– Vince Lombardi

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Thank you Newsletter Sponsor:

Port of Seattle

2011 Annual Sponsors:

 

BremerZepol

CH RobinsonDrinkerJacobson Companies

HMMKing Solutions

Neville Peterson LLPWilliams Mullen

© 2011 Midwest Global Trade Association. All Rights Reserved.
World Trader is distributed bi-monthly to MGTA members.
Articles submitted by our membership do not express the views of MGTA or the Board of Directors. If you would like to submit an article for publication in the World Trader, please contact the MGTA office at office@mgta.org.

Midwest Global Trade Association
1000 Westgate Drive, Ste. 252 | St. Paul, MN 55114
p 651.290.7482 | f 651.290.2266 | office@mgta.org |
www.mgta.org


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