Korea's U.S. Beef Brouhaha

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South Korean protesters clash with riot police arround a police bus as they try to march to the Presidential House after a candlelight vigil against US beef imports, in Seoul on June 8, 2008. Kim Jae-Hwan/AFP/Getty Images

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The brouhaha over beef is interfering with Lee's plan to institute pro-business reforms. He is pushing to privatize government assets that would free up tens of billions of dollars to stimulate the economy as well as an ambitious tax reform package. Also on the agenda: a tougher hand with labor unions and deregulation of the financial-services sector. "Lee's blueprint for change is fading badly even before he opens it," says Park Gil Sung, a sociology professor at Korea University.

Seoul is hoping Washington can step in with a diplomatic solution to defuse the crisis. On June 9, Lee dispatched a team of negotiators to Washington, asking them to make sure shipments of beef from cattle older than 30 months won't be allowed. At the weekend, Lee called Bush for a 20-minute phone conversation during which Bush, who is scheduled to visit Seoul in July, told Lee that Washington would cooperate closely with Seoul. He said the U.S. is "ready to support American cattle exporters as they reach a mutually acceptable solution with Korean importers on the beef trade," according to White House spokesman Gordon Johndroe, who gave no further details.

The Beginning of a Trade War?

Eager to appease an angry public, Seoul is grappling for a solution. It could press for a renegotiation of the terms of the beef trade. But asking the U.S. back to the table or scrapping the existing accord could trigger calls in the U.S. for tit-for-tat amendments to the free-trade pact. Detroit's concerns that Korean cars and parts will surge into the U.S., risking even more U.S. auto industry jobs, might find a more receptive audience in Congress.

Could the tensions develop into a full-blown trade war? It's possible, says Han Sangwan, chief economist at think tank Hyundai Research Institute in Seoul. The beef dispute could become a bigger issue if it's taken up during this year's U.S. Presidential election. The Korean public could inflame tensions, too. "Unless the U.S. shows flexibility over its beef exports to address Koreans' concerns over food safety, a wholesale boycott of U.S. products could follow," says Han. "And that could trigger protectionist retaliation." The collapse of an FTA would mean a "serious chasm between the two," he adds.

Lee now appears to be reconsidering the hard-charging style that he displayed as the CEO at Hyundai Group. The forcefulness that worked at a conglomerate that has long epitomized Korea's breakneck industrialization is being regarded as a liability and the mark of a leader who is deaf to public demands. In a meeting with Catholic priests on June 9, Lee admitted that he had made policy mistakes and hinted at a Cabinet shakeup. Already seven top presidential aides have offered to resign. Winning back the public's trust won't be easy for Lee.

Moon is BusinessWeek's Seoul bureau chief.