Korea’s Response to the China Challenge: Implications for Latin America: Korea’s Response to the China Challenge: Implications for Latin America October 2003 Won-Ho Kim Korea Institute for International Economic Policy


Slide2: The rate of economic growth in major countries (Adapted from ADB, IMF, The statistics Yearbook of China)


Slide3: Korean economy’s recovery from the financial crisis Source: Bank of Korea


Korea’s Trade with China: Korea’s Trade with China Determinants Contrasting factor endowments Gap in the level of economic development Cultural and geographical proximities China’s rapid economic growth in the 1990s Limited trade before diplomatic relations February 1992, China bestowed MFN status upon Korea by a trade agreement Korean exports increased dramatically in 1992 (160%), and in 1993 (94%) Korean exports increased 27.4% annually


Korea’s Trade with China (2): Korea’s Trade with China (2) Recently, more industrial goods (75% in 2000) imported Electric/electronic industry is the core of bilateral intra-industry trade -> Horizontal division of labor Attributable to Korean investments, who import Korea equipments and intermediate goods and export processed products to Korea More than 10% of Korea’s total exports (2nd); 7-8% of total imports (4th) 4.5% of China’s total exports; 10.3% of total imports (4th)


Slide6: Export products from Korea to China - 1


Slide7: Export products from Korea to China - 2


Trend of Korea’s Trade with China: Trend of Korea’s Trade with China


Slide11: Changes in the shares as destinations for Korean exports


Slide12: Changes in the shares as sources for Korean imports


Recent Trends in Korea’s Investment: Recent Trends in Korea’s Investment Korea’s overseas investment has steadily increased until mid-1990s Main destinations of Korea’s overseas investment are the US and the Asian regions (in particular, China) FDI into Korea was sluggish until mid-1990s however FDI into Korea started to increase quite rapidly after the financial crisis Main source of FDI to Korea are the US, EU, Japan and the Asian regions including China


Korean Investments in China: Korean Investments in China Before 1992, thru intermediaries in HK… With diplomatic relations, an investment protection treaty was signed Remarkable in 1992-96, more than 50% of Korea’s ODI went to China Stalemate during the Asian financial crisis But rebounding fast since 1999 and China’s accession to WTO because of abundant cheap labor supply and huge market potential Chinese statistics: $18.7 billion by the end of 2000 (contracted), $10.3 billion (invested)


Korean Investments in China (2): Korean Investments in China (2) Korea is the 3rd largest investor in China after U.S. and Japan Concentrated on Shandong, Tianjin, Jiangsu, Liaoning, Shanghai Constrasted with Guangdong, Long River Delta by other FDIs 90% in manufacturing projects Electronics and telecommunication equipment, textile and apparel, petrochemical, and machinery and equipment sectors 75% of Korean investments (35% in amount) concentrated on labor-intensive, SMEs, exporting to Korea or a third country


Trend of Korea’s Investments in China: Trend of Korea’s Investments in China US$ million


Chinese Investments in Korea: Chinese Investments in Korea Recent trend US$150 million by 2000 60% concentrate on service sectors, engaging in trade and restaurant businesses Among the manufacturing investments, the electric/electronic sector takes a dominant share


Opportunities since China’s WTO Accession: Opportunities since China’s WTO Accession Lowered tariff barriers Limited China eliminates NTBs CRT, polyester filament, plastic molding,… MFA quotas phase out China import more textile yarn and fabric for more textile and clothing exports WTO ITA participation IT products Foreign firms allowed to import, distribute and retail foreign products Consumer goods, including mobile phones, automoviles, clothing…


Slide20: Lowering of tariff on export products to China


Slide21: Plan for the opening of the Chinese market - 1


Slide22: Plan for the opening of the Chinese market - 2 S E R V I C E


China Challenge since WTO Accession: China Challenge since WTO Accession China emerges as the global production base for wide range of products FDIs by MNCs and the growth speed of domestic industries make China compete in most of Korea’s major industries, in more favorable position 3 Links: The combination of Taiwanese capital and production technology with the cheap mainland labor Create highly competitive industries once Taiwanese industries compete with Korea China’s market share in the U.S. increases while Korea’s decreases Danger in other world markets and Chinese market


Slide25: China as a member of WTO & Korean economy (CHINA) (KOREA)


Slide26: China’s WTO Accession & its influence on Korean economy


Slide27: China’s WTO Accession & its influence on Korean economy (2)


Korea’s Responses?: Korea’s Responses? Short-term relief from the dynamic trade surplus from China’s expanded markets Restructuring, open-economy, complementary relations with the Chinese economy, higher-level technology, more efficient management know-how, knowledge-based industries emphasized FTA and Northeast Asian Business Hub concept has been developed


Slide30: Vision for Korea as a Business Hub in Northeast Asia 1) Korea’s geo-economic location between “continental economy” and “ocean economy” is proving to have increasing economic and social value in the newly emerging geo-political, economic order. 2) Regionally an “inward globalization” strategy to make Korea the regional center for trade, finance and MNC’s. (regional hub of three pillars) 3) Logistics becomes a strategic sector as high value-added export sector (supply chain management). 4) Container shipments on Korea-China route and Korea-Japan route -- air passengers and air cargo are on the rapid rise.


Slide31: Vision for Korea as a Business Hub in Northeast Asia (2) 5) Incheon International Airport and surrounding areas are to be developed as a transport hub and value-adding logistic hub for finished and semi-finished products. 6) As an intermediate step, “special economic zones” are to be designated with a set of incentives. 7) Korea’s role as an effective intermediary between two regional hegemonic powers, Japan and China. 8) Korea’s hub idea should contribute to the “Northeast Asian Economic Community,” and then North Korea will have no choice but to join the regional growth bandwagon. 9) In the medium term, Korea needs to turn the entire nation in a special economic zone.


Implications for Latin America: Implications for Latin America Share of FDI from developed countries to China’s manufacturing industry rises China’s imports of capital-intensive, technology-intensive, and land-intensive products increases Main beneficiaries are developed countries China’s exports of labor-intensive products increases Developing countries face more competition


Recommendations: Recommendations Unilateral dimension Efforts to follow international standards Restructuring to strengthen competitiveness Secure human resource capacity by education and flexibility of labor market Global dimension Active participation in multilateral trade system Regional dimension Deepen integration in the Americas Bilateral dimension Promote exports to China Seek strategic industrial alliance with China Trade and investment facilitation efforts with China


Slide34: Thank you!