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KOREAN ECONOMIC TRENDS June 5, 2004 Issue Report Korea-US Relations: Issues and Agenda 

III. Major issues in the relations But Korea and the US must move further ahead so they can enhance the level of their cooperation in the field of security and economic relations. Broadly, they need to address the following major issues in order to repair the alliance in the coming decades. Security The United States has steadily cut the number of US forces in Korea, from the peak of 325,000 at the end of the war in 1953 to 37,000 today. In early May, the Pentagon has served notice that it will cut an additional brigade from the US Second Infantry Division in Korea. This brigade was being repositioned in Iraq to bolster the US war effort in the Middle East. South Korea has accepted this proposal, believing that the reduction of one brigade will not affect the overall fighting capability of the Korea- US combined forces command. Over the past decade, the two countries have maintained an excellent fighting capability through numerous combined exercises such as Ulchi Focus Lense and Foal Eagle. The US has also positioned more Patriot missiles to beef up the overall preparedness of the US forces in Korea. But it’s clear that the latest reduction in US troop strength will result in Koreans assuming greater defense burdens on per capita basis. Today, Koreans spend $252 per head for defense while the US spends $1,128, Taiwan $472, Japan $310 and China $36. As a proportion of gross domestic product (GDP), Korea’s defense spendings claim 2.8%, compared to 3.7% for Taiwan, 4. 0% for China, 3.2% for the US and 1.0% for Japan. South Korea needs to increase spendings for acquisition of cutting- edge weapons systems and local development of better hardware. It will mean Korea moving upward from its present place of 30th in the rank of global defense spendings. In the longer term, however, a key to resolving the perennial security crisis on the Korean peninsula lies in the resolution of the North Korean nuclear challenge, rather than spending more on defense. Moody’s and other international credit rating agencies have cited the North Korean nuclear issue as the main factor for lowering its credit ratings for South Korea. The nuclear standoff with the North has affected the South’s financial market stability. A reduction of the US forces in Korea before concluding the North’s nuclear challenge thus keeps the security risks on the Korean peninsula high. In the lead-up to the US presidential elections, the North Korean nuclear challenge has turned into an acute campaign issue, as President George W. Bush fights for his second term. His challenger from the Democratic Party, Senator John Kerry, has vowed to take a different line. Senator Kerry said he would start direct talks with North Korea to resolve the nuclear issue if elected to office. 

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