In a country that worships the pluck and bravado of a Grand Scheme, South Korea’s Grandest Scheme of all was on the brink of collapse last night.

After ten months defending entrenched positions on beef and rice, negotiators from Washington and Seoul yesterday entered the final hours of talks on a United States-South Korea free trade agreement — a deal that would boost bilateral trade between the countries by about $30 billion (£15.25 billion) a year.

If it all falls into place, the agreement would be the biggest such deal that Washington has struck since the North American Free Trade Agreement in 1994. Perhaps more crucially for Koreans, an agreement with the world’s biggest economy would deliver a pleasing dose of “great nation” credibility that neither of its arch-rivals — Japan and China — have managed to negotiate.

However, if the deadlock persists and an agreement is not completed by early today, the entire plan will miss Washington’s fast-tracking deadline of April 1. If that happens, or even if an agreement was eventually cobbled together, it means that it will probably not happen within the presidencies of either George W. Bush or Roh Moo Hyun.

For President Roh and South Korea, an agreement would be a significant anchor in what Young Sun Kwon, an economist at Lehman Brothers, described as Korea’s “year of transition” – a make-or-break period “where uncertainty rules”.

As he enters the final 12 months of office, Mr Roh must guide a heavily export-led economy through ever more competitive international markets and a possible US slowdown. He must cope with a liquidity-starved property bubble in Seoul and consumers who have not yet recovered their love of spending. High levels of hidden unemployment and the weakness of economies outside the capital must also be tackled.

Above all, Mr Roh must keep South Korea and Asia’s third-biggest economy relevant. An agreement with America would, he believes, prolong the country’s resistance to the squeeze placed upon it by a low-cost, investment-hungry China on one side and a resurgent, high-tech Japan on the other.

In Japan, aggressive government drives towards smashing cartels and improving financial transparency set up a threatening comparison with protectionist, opaque South Korea.

The great risk, one UBS economist said, is that Korea wastes its energy on more “grand schemes” rather than the more important, tougher minutiae of labour reform.

In January and February, for the first time Chinese shipyards took more orders than their Korean counterparts. The ships being ordered from China may have been lower-tech than the ones produced in South Korea, but the news was chilling.

Overtaking Japan’s shipbuilding industry back in the 1990s was a moment of intense industrial pride for Korea. Falling to the same trick by China just a decade later is a heavy blow.

If China can so smoothly adopt a business model that gave South Korea its edge, which will be the next sector to fall behind a Chinese rival? Even Lee Kun Hee, the chairman of Samsung, has issued warnings of chaos within the next half-decade.

Yet, despite the doom-mongering, some economists argue that South Korea may yet be able to thrive in the “sandwich” between China and Japan. Its ultimate path to growth may lie not in trade agreements — of which it is negotiating another five in Europe and Asia — but in Korean parents’ obsessive investment in the education of their children. The biggest evidence of that, Hyunju Yang, of Highbridge Capital, said, is in the hottest conversation topic around Seoul dinner tables: the soaring cost of property in the capital.

Seoul suffers from a chronic housing shortage, but the pursuit of homes near the best state schools has massively distorted prices. Education, one senior executive at Hyundai Motor said, is the dominant concern of Koreans because they know that it may soon be the only advantage that the country has over its competitors.

A senior manager at Samsung hints that should the free trade agreement negotiations with the United States fail, the lesson will be a useful one for President Roh: “For Korea, this is not a time for one big idea, but lots of little ideas.”

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive