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!