There is more visible movement for economic integration between two or more countries in East Asia, which has been nudged out in the global trend of regionalism. Along with such a movement, active discussion is going on FTA(Free Trade Agreement) among...
There is more visible movement for economic integration between two or more countries in East Asia, which has been nudged out in the global trend of regionalism. Along with such a movement, active discussion is going on FTA(Free Trade Agreement) among Korea, China and Japan, which are in close economic relationship with and geographically in close vicinity to one another, and FTA of the three counties is growing more important.
In this background, this study purposed to analyze economic effects and the effects of FTA of Korea, China and Japan on their international division of labor when tariff restrictions are lifted among them by the conclusion of FTA. For this purpose, this study presented the characteristics of international division among the three countries by analyzing the three countries' international trade, direct investment and their trade structure and competitiveness of six major industries, and estimated economic effects of FTA of the three countries on their GDP, industrial production and trade. Based on the findings, additionally, it analyzed the change of international division among Korea, China and Japan expected after the conclusion of FTA.
The results of this study are summarized as follows.
Chapter Ⅱ reviewed relevant theoretical background and examined previous researches on FTA and international division. It also considered the economic effects of economic integration and analysis models in order to present the theoretical background of this study. Furthermore, this chapter reviewed domestic and foreign researches on FTA and international division related to Korea.
Chapter Ⅲ analyzed the current state of the three countries' international trade, foreign direct investment and their trade structure and competitiveness of six major industries and described the characteristics of international division among the three countries.
As for export by industry, Japan is leading the other two in five out of six major industries, namely, in the chemical, steel and metal, machine, electric and electronic and car industry, and China in the textile industry. As for import by industry, China takes the lead in four out of the six major industries, namely, in the chemical, steel and metal, machine and electric and electronic industry and Japan in the textile and car industry.
The index of intra-industry trade was high in four industries, which were the steel and metal, machine, electric and electronic and textile industry. This shows that specialization and supplementation in these industries are going on among the three countries.
As for the international competitiveness of the six major industries based on trade specification index, Japan appeared most competitive among the three countries in all but the textile industries, but Korea was not most competitive in any of the six major industries. Its competitiveness was only second to Japan in the machine, electric and electronic and car industries. China was the most competitive country in the textile industry.
Chapter IV estimated the economic effects of Korea-China-Japan FTA using GTAP(Global Trade Analysis Project)model and analyzed the change of international division among the three countries expected after the conclusion of FTA based on the characteristics of current international division among the three as analyzed in Chapter Ⅲ.
As for effects on GDP, the effect of FTA was expected to be greatest on Korea considering by reason that Korea has the highest regional trade dependence and would have the most intense industrial restructuring resulting from FTA.
As for effects on industrial product, it is estimated that Japan will have growth of production in the chemical, steel and metal, machine, electric and electronic and car industries, Korea in the chemical and textile industries and China in the textile and electric and electronic industries. In general, Korea and China will be more disadvantageous than Japan in the heavy chemical industry after FTA.
As for effects on trade, export from Korea and Japan to China and that from China to Japan will increase significantly but export from Korea to Japan will not increase much because of no progress in the machine, electric and electronic and car industries.
Since the conclusion of FTA of Korea, China and Japan, international division among the three countries will be changed as follows.
As for chemical engineering products, the increase of production in Japan reflects its international competitive advantage, and the decrease of production in China reflects its international competitive disadvantage. Korea, though inferior in international competitiveness, expects the increase of production thanks to expanding demand in China resulting from its explosive economic growth. In the aspect of trade structure, export from Korea and Japan to China and that from Japan to Korea will be largely expanded.
As for textile, based on the current structure of international competitiveness among the three countries in which China has the advantage over Korea and Japan in manufacturing and international competitiveness, the production in Korea is expected to grow after FTA but it will not influence much the structure because of the absolutely dominant position of China in price competition. With regard to trade structure China will play the role of a global supplier even after FTA, so its export to Korea and Japan will continuously increase.
As for the steel and metal industry, the current structure of international competitiveness in which Japan is advantageous over Korea and China in production and international competitiveness will result in the increase of production in Japan and decrease in Korea and China after FTA and Japan will maintain its leading position. With regard to trade structure, as China will continue its rapid growth after the conclusion of FTA, its demand will expand in basic industrial areas and consequently export from Korea and Japan to China will keep expanding.
As for the machine industry, the current structure of international competitiveness in which Japan is advantageous over Korea and China in production and international competitiveness will result in the increase of production in Japan and decrease in Korea and China after FTA and, as a result, Japan will solidify its leading position. With regard to trade structure, export from Korea and Japan to China will increase significantly.
As for the electric and electronic industry, Korea is relatively advantageous in international competitiveness but production is expected to rise in China and Japan and fall in Korea since FTA, which will worsen the competitiveness of Korea in the electric and electronic industry, which has been the biggest export industry in Korea. With regard to trade structure, export from Korea and Japan to China will increase significantly and that from Korea to Japan will decrease but Japan will export more than before to Korea after FTA.
As for the car industry, Japan has been the highest competitiveness in the world in production and international competitiveness and Korea has also maintained high-level competitiveness, but production is expected to grow only in Japan, which will solidify Japan's dominance and cause a heavy loss to the car industry of Korea and China. With regard to trade structure, the size of regional trade will not be large compared to other industries.
Based on the results of this study the researcher make suggestions as follows concerning Korean economic policies.
First, in connection to Japan, prompt and decisive industrial restructuring and technology development are required to minimize damage in manufacturing industries, which are expected to suffer the heaviest loss from FTA of Korea, China and Japan, deficit in trade with Japan.
The gap in competitiveness between Korea and Japan cannot be reduced in a short period. Thus Korean companies must make all efforts to develop technologies and restructure industries, and take aggressive actions of increasing direct investment to Japanese companies and transferring core technologies. The government must also raise national strategic industries and promote industrial technologies and part industries. Furthermore, active measures need to be taken including merger and strategic cooperation with Japanese companies.
Second, in connection to China, the country is the largest competitor as well as the greatest emerging market for Korean exporters. Thus policies related to China should consider the two aspects.
As for export, the increase of export from China to Japan resulting from FTA is expected to be twice that from China to Korea. This means that the international competitiveness of Chinese major industries will be rapidly improved in the Japanese market since FTA. Thus, although Korea is currently in competitive advantage over China, it needs to take stronger measures to secure its advantage in areas such as electric and electronic and machine industries, in which fierce competition will take place after the markets are unified.
As for import, import of China from Korea and Japan is expected to grow significantly after FTA of Korea, China and Japan. Thus the effect of FTA on the growth of import appears great in China. FTA of Korea, China and Japan will provide a good opportunity for Korea to expand its export to China and be an institutional instrument in advancing to the Chinese market.
Third, the three countries need to strengthen their economic cooperation and pursue active trade policies in preparation for the conclusion of FTA of Korea, China and Japan.
The three countries are narrowing gaps in international competitiveness of major industries and growing more dependent on one another in trade and investment. This shows that the industrial structure of the countries is being reorganized to be complementary and the practical effect of FTA is growing bigger.
Korea and Japan held a separate summit talk in the APEC meeting in October 2003 and agreed to conclude FTA between Korea and Japan until the end of 2005, but China is still taking a passive attitude. In this situation, the three countries need to coordinate the direction and position of their trade policies in connection to the conclusion of FAT of Korea, China and Japan.
Korea-related research on FTA using CGE model estimates economic effects resulting from the conclusion of FTA by applying the corresponding statistics of each country to the model. In addition to such economic effects, however, this study analyzed the trade structure and international competitiveness of six major industries in Korea, China and Japan and, based on the results of the analysis and economic effects derived from CGE model, suggested the change of international division among the three countries as expected since the conclusion of FTA of Korea, China and Japan.
Thus this study is different from other researches and contributive in that it analyzed using CGE model the change of international division among the three countries after the conclusion of FTA of Korea, China and Japan and, for this, it compared the trade structure and international competitiveness of six major industries among Korea, China and Japan.
Nevertheless, this study has several limitations inevitable in performing the research. This study used industrial classification of HS 2-digit (major industries are 4-digit) and lacked objective evaluation of international competitiveness. In addition, GTAP model data were as of 1997, so somewhat inadequate for reflecting the latest economic condition. Moreover, microscopic approach centering on industries and enterprises was not made in analyzing the change of international division.
These limitations need to overcome in advanced research in the future.