November’s U.S.-Korea Trade and Investment deal spells out a new agreement regarding digital platform competition policies. The joint statement was unusually direct about eliminating non-tariff digital barriers including for online platform regulations, and strengthening procedural fairness in competition enforcement. It also committed to ensuring that “U.S. companies are not discriminated against and do not face unnecessary barriers in terms of laws and policies concerning digital services.”  Both countries stand to gain from predictable, enforceable, trade progress – especially when both countries have dynamic technology sectors that benefit from foreign investment, innovation and trade.  Now, policymakers in both countries are grappling with next steps to advance the agreed upon trade agenda.

This week, Trusted Future hosted a conversation with leading experts on competition and trade policy to explore the impact these policies and approaches will have on the Korean and US economies, the trade relationship between the two countries, and the critical areas needing progress. The event highlighted recent research from the Competere Foundation, the Information Technology & Innovation Foundation (ITIF), the Southeast Asia Public Policy Institute (SEAPPI), and the National Bureau of Asian Research (NBR) that explores these topics in detail.

Below are four big takeaways from the discussion: 

1. South Korea’s active competition enforcement is an outlier from global best practices. The trade deal’s commitment to strengthening procedural fairness and non-discrimination towards U.S. technology companies is especially important given that the Korea Fair Trade Commission (KFTC) stands out for the scale and nature of its enforcement actions, particularly against U.S. firms. This is true even in comparison to other active regulators like the EU’s Directorate-General for Competition, raising concerns among U.S. firms that the agency’s approach can be aggressive, discriminatory, and at times apparently arbitrary. One example that came up was the frequent dawn raids by the KFTC which often appear to be carried out based on nothing more than an anonymous complaint, and many times believed to be based on a complaint from a competitor firm. These actions appear to fall disproportionately on U.S. firms and have been identified as classic non-tariff barriers to entry that can have a detrimental impact on trading partners and trade relations. 

2. Korean competition enforcement has moved away from a consumer-welfare approach. One of the other observations that had consensus among the experts is that the KFTC’s recent enforcement has moved away from a consumer welfare economic based analysis towards a competitor-first approach closer to the European Union’s presumptive, structural approach, following a “big is bad” approach, spurred by competitor – not consumer welfare – preference. Rather than focusing on demonstrable consumer harm, this EU-style regulation codifies presumptive harm without showing economic analysis and actual harm – the ex-ante rules are applied before any harm is shown. The cycle reinforces allocative, productive, and dynamic inefficiency, lowering welfare and investment in both economies.

3. The KFTC’s aggressive approach to investigations can stifle innovation and small business growth. One point that was emphasized in the conversation is that South Korea has a robust entrepreneurial culture but runs into a regulatory glass ceiling. While Korean entrepreneurs are eager to start business ventures – as is evidenced by a very active app economy – reported aggressive KFTC non-economic and targeted enforcement can have a deleterious effect on entrepreneurs and innovators. For example, a small business can neither plan for nor anticipate a non-economic KFTC raid, and the overhang of possible and seemingly arbitrary raids can result in uncertainty, chilling investment and innovation. When enforcement action does occur, tactics like office occupation and staff harassment stifle innovation even more. Additionally, KFTC policies regulating innovative platforms based in the United States alongside domestic champion-based data localization and infrastructure data policies directly harm the ability of SMEs and entrepreneurs in Korea to grow by creating an ecosystem where Korean entrepreneurs cannot take advantage of global digital infrastructure, whether it be data centers located outside their borders, digital advertising and AI-based tools to reach customers abroad, or the trust that comes with established platforms and app stores. 

4. Korea should avoid legislative proposals that effectively create new non-tariff barriers to trade despite agreeing not to in the trade agreement. The experts specifically highlighted tensions around legislative proposals targeting online platforms that are largely modeled on the EU’s discriminatory Digital Markets Act (DMA) – one of the most significant global examples of a non-tariff barrier to digital trade. The experts also noted how the latest version of this approach, the “Fairness Act”, continues to be de facto discriminatory towards U.S. firms because of its focus on the online platform sector in Korea – a highly competitive sector where many U.S. companies are market leaders – while ignoring sectors where Korean companies are actually dominant. It’s combination of broad discretion to regulators to intervene in private contracts combined with financial custody obligations is well outside global best practice and qualifies as another non-tariff barrier, despite Korean claims otherwise. Also, because of the perceived aggressive, unpredictable, and targeted nature of past KFTC enforcement, the experts explained that it has elevated concerns about the way such legislative proposals would be used to further target U.S. platforms in discriminatory ways if adopted in Korea, particularly given the DMA-style penalties it proposes of up to 10% of a company’s global sales without any of the safeguards present in the DMA. When discriminatory digital service taxes that unfairly targeted US technology companies emerged, the USTR repeatedly used section 301 to effectively and aggressively challenge these rules.  Because of the nature of these new Korean platform proposals, there seems to be movement towards putting these into their own section 301 investigation category – just like digital service taxes. Because such laws would be inconsistent with the recent trade deal, this will be an area of much focus. The trade experts noted that Korea’s digital economy performs at its best when firms in both countries are able to innovate and attract investment in the global marketplace, and when its policies help support a dynamic and trustworthy digital ecosystem that enables innovators and entrepreneurs to thrive and grow – something that these Korean policies would make much more difficult.