Korea’s Response to the China Challenge: Implications for Latin
America
October 2003
Won-Ho KimKorea Institute for International Economic
Policy
The rate of economic growth in major countries
1998 1999 2000 2001 2002 2003
January – March April - June
China 7.8 7.1 8.0 8.1 8.0 9.9 7.0
Korea -6.7 10.9 9.3 3.1 6.3 3.7 1.9
Taiwan 4.6 5.4 5.9 -2.2 3.5 3.2 1.6
U.S.A 4.3 4.1 3.8 0.3 2.4 1.4 2.0
Japan -1.1 0.1 2.8 0.4 0.1 0.1 0.0
(Adapted from ADB, IMF, The statistics Yearbook of China)
Korean economy’s recovery from the financial crisis
GDP Growth of Korea (percent)
6.85
-6.7
10.99.3
3.1
6.3
2.6
1996 1997 1998 1999 2000 2001 2002 2003
Source: Bank of Korea
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)
• 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)
Export products from Korea to China - 1
ITEMS
Each item / total exports to China (%)
Exports to China / Total exports
(%)
Rate of increase
(%)
1998 2003 (Jan – July) 19982003 (Jan –
July)2003 (Jan – July)
TOTAL 100 100 9.0 17.2 47.0
Computer 1.1 9.6 2.6 22.0 69.5
Wireless communication
tool1.2 9.3 5.5 17.4 136.1
Steel manufactures
6.4 7.2 15.4 41.2 89.2
Synthetic resin 11.7 6.0 34.6 31.2 17.0
Chemical products 8.3 5.3 22.7 23.1 50.8
Semiconductors 1.3 4.2 0.9 7.7 123.6
Electron tube 3.3 3.5 15.7 40.9 -0.2
Synthetic fiber raw material
1.5 3.3 40.7 90.3 33.2
Petrochemistry intermediate raw
material1.8 2.5 28.4 55.0 64.9
Automobile parts 0.7 2.2 4.8 18.0 481.0
Export products from Korea to China - 2
ITEMS
Each item / total exports to China
Exports to China / Total exports
Rate of increase
1998 2003 (Jan – July) 19982003 (Jan –
July)2003 (Jan – July)
TOTAL 100 100 9.0 17.2 47.0
Construction & mining machinery
0.6 2.0 6.8 33.7 116.0
Other textile products
3.4 1.8 20.4 25.3 6.1
Backing cloth 2.9 1.7 18.0 19.4 15.8
Leather 5.0 1.7 51.3 49.2 -17.9
Sound facilities
1.4 1.6 10.9 25.6 -3.5
Automobiles 0.7 1.6 0.8 2.9 175.8
Trend of Korea’s Trade with China
South Korean Exports, 1980-2003
0
5
10
15
20
25
30
35
40
45
1980
1980
1981
1982
1983
1983
1984
1985
1986
1986
1987
1988
1989
1989
1990
1991
1992
1992
1993
1994
1995
1995
1996
1997
1998
1998
1999
2000
2001
2001
2002
Year
Per
cen
t o
f to
tal e
xpo
rts
China
Japan
US
Three Month Moving AverageSource: Bank of Korea Statistics Database.
South Korean Imports, 1980-2003
0
5
10
15
20
25
30
35
4019
80
1980
1981
1982
1983
1984
1985
1985
1986
1987
1988
1989
1990
1990
1991
1992
1993
1994
1995
1995
1996
1997
1998
1999
2000
2000
2001
2002
Year
Per
cen
t o
f T
ota
l Im
po
rts
China
Japan
US
Three Month Moving AverageSource: Bank of Korea Statistics Database.
Changes in the shares as destinations for Korean exports
Regional Distribution of Korea's Exports
20253035404550556065
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000year
share (%)
Industrialized
Developing
Changes in the shares as sources for Korean imports
Regional Distribution of Korea's Imports
20
30
40
50
60
70
80
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000year
share (%)
Industrialized
Developing
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
• 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), $10.3 billion (invested)
Korean Investments in China (2)
• Korea is the 3rd largest investor in China after U.S. and Japan
• Concentrated on Shandong, Tianjin, Jiangsu, Liaoning, Shanghai – Constrasted with Guangdong, Long River Delta by ot
her FDIs• 90% in manufacturing projects
– Electronics and telecommunication equipment, textile and apparel, petrochemical, and machinery and equipment sectors
• 75% of Korean investments (35% in amount) concentrated on labor-intensive, SMEs, exporting to Korea or a third country
Trend of Korea’s Investments in China
US$
millio
n
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
Figure 7: FDI in South Korea, 1989-2002
0
10
20
30
40
50
60
70
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Pe
rce
nt
of
To
tal F
DI
U.S.A.
Japan
China
Source: Ministry of Commerce, Industry and Energy. Approval Basis
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 textil
e and clothing exports• WTO ITA participation
– IT products• Foreign firms allowed to import, distribute and retail foreign
products – Consumer goods, including mobile phones, automovile
s, clothing…
Lowering of tariff on export products to China
Items Actual tariff Particulars
Manufacturing industry
15.3 (%) Reduction by 5 or 6% on the average
Electric appliances 30 – 35 (%) Probably reduction by 1/2
Information & communication appliances
13.3 (%)Duty free for Semiconductors, computers, communication appliances by 2005
Electrical & electronic industry
8 – 12 (%) Reduction within narrow limit
Automobile
Parts
80 – 100 (%)
35 – 50 (%)
25 %
10 %
Chemical industry & Chemistry
8 – 18 (%) 6 – 8%
Steel 8 – 9 (%) 5 – 6%
Textile & clothing 20 – 32 (%) 10 – 16 %
Plan for the opening of the Chinese market - 1
Industry Particulars
Agriculture
Reduction by 17% on the average until 2004 (All agricultural products)
Reduction by 14.5% for Several U.S products
Abolition of the import prohibition of U.S wheat, citrus fruits, flesh and meat
Abolition of export subsidies
Gradual abolition of export subsidies for corn and rice product by 2005
Establishment of scientific standards of SPS
Customs duties
Gradual reduction of customs duties by 2001 (from 15.3% to 9.4%)
Dutyfree for Information & Technology products by 2005
Automobiles Reduction to 25% (Actual rate: 80-100%)
Information & Communication
Mobile & Wired communication products: up to 49%
Value added communication products: Permission of joint venture (up to 50%) in two years
Plan for the opening of the Chinese market - 2
(Financing)• Insurance: Increase in foreign capital quota (51%)• Banking: Permits foreign capital banks to transact with Chinese currency• Securities: Permission of Joint venture company
(Distribution)• Opening of the transportation business, wholesale and retail within 3 years• Abolition of the domestic selling quota within 3 years after joining WTO
(Tourism)• Permission of 100% foreign investment in hotels within 3 years after joining WTO
S
E
R
V
I
C
E
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 indust
ries 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 ind
ustries compete with Korea • China’s market share in the U.S. increases while Korea’s d
ecreases– Danger in other world markets and Chinese market
1995 1996 1997 1998 1999 20000
1
2
3
4
5
6
7
8
9
Korea’s & China’s Market Share in U.S
3.32.9
2.72.6 2.4 2.3
KOREA
6.16.5
7.2
7.88.0 8.2
CHINA
China as a member of WTO & Korean economy
Joining WTO (CHINA)
Liberalization of trade
Liberalization of Foreign investment & improvement of investment environment
Increase in competitiveness
Increase in economic growth
rate
Increase in exports to China
Increase in investment in China
Increase in imports from China
Shrinkage of Foreign Direct Investment
Increasing competition in Chinese market
Decrease in exports to China & the 3rd countries
Opportunity for restructuring
(CHINA)
(KOREA)
China’s WTO Accession & its influence on Korean economy
Industry Particulars
Less competitiveAgriculture
Increase in import of agricultural products at a lower price
Textile & Clothing
Increase in import of natural fiber
Loss of possession in U.S market
Footwear
ToysLoss of price competitiveness
Loss of possession in U.S market
Equal competitiveness
Electric appliances
Loss of competitiveness of electric appliances with low price
Increase in export of luxury electric appliances
More competitive
Shipbuilding Less risky industry due to the different type of ship construction
In the long run highly risky industry due to the enlargement of investment
Automobile Increase in exports due to the lowering of tariff
Good opportunity for domestic automobile industry due to the increase in small size car demands
Chemical industry Increase in exports due to the lowering of tariff
and increase in demand
China’s WTO Accession & its influence on Korean economy (2)
More competitive SteelIncrease in steel demand in China
Chance of solving excessive supply problem in Korea
Information & Communication
Increase in communication tools export to China
SemiconductorsProbable increase in exports when China demands
more electric appliances
Financing / Distribution
Chance of enlargement
Less competitiveness
Rising China and Korean economy
Rising China
<Industry>
• Competes with Korea in most of the main industries
• Challenges the newest industries like I.T
<Market>
• Vast domestic market
• Keen competition between the top class products
<Policies>
• Advantageous business conditions
• Flexible labor market
• Active inducement of Foreign capital investment
<International economy>
• Offset actions by U.S.A & Japan
• Trade disputes
• Decrease in competition
• May provoke an industrial secession from Korea (Doughnut)
• May delay the industrial progress
• Too small size of domestic market compared to China
• Continuous invasion of Chinese products into the Korean market
• Ambiguous government policies
• Restriction of enterprise operation
• Shrinking foreign capital investment
• Frequent trade disputes
• Increasing competition with rival countries
• May reduce Korean competitiveness
• May lose the competitiveness unless coping with the situation
• Should switchover the crisis to an opportunity
Korean situation Korea’s response
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
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.
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
• 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• 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
Thank you!