Korea and the Dual Chinese Challenge

Korea and the Dual Chinese Challenge

The Korea Institute for International Economic Policy (KIEP) was founded in 1990 as a government-funded economic research institute. It is the world’s leading institute on the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues, and also serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research far foreign institutes and governments on all areas of the Korean and international econrmies. KIEP has the most knowledgeable economic research staff in Korea. Now numbering over 100, our staff includes research fellows with Ph.D.s in economics from international graduate programs, supported by more than 40 researchers. Our staff’s efforts are augmented by our affiliates, the Korea Economic Institute of America (KEI) in Washington, D.C. and the KIEP Beijing office, which provide crucial and timely information on the local economies. KIEP has been designated by the government as the Northeast Asia Research and Information Center, the National APEC Study Center and the secretariat far the Korea National Committee for the Pacific Economic Cooperation Council (KOPEC). KIEP also maintains a wide network of prominent local and international economists and business people who contribute their expertise on individual projects. KIEP continually strives to increase its coverage and grasp of world economic events. Expanding cooperative relations has been an important part of these efforts. In addition to many ongoing joint projects, KIEP is also aiming to be a part of a broad and close network of the world’s leading research institutes. Considering the rapidly changing economic landscape of Asia that is leading to a further integration of the world’s economies, we are confident KIEP’s win-win proposal of greater cooperation and sharing of resources and facilities will increasingly become standard practice in the field of economic research. Kyung Tae Lee, President 300-4 Yomgok-Dong, Seocho-Gu, Seoul 137-747, Korea Tel: 02)3460-1114 / Fax: 02)3460-1144, 1199 URL: http://www.kiep.go.kr Price USD 5 Korea and the Dual Chinese Challenge Françoise NICOLAS CNAEC Research Series 05-01 KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP) 300-4 Yomgok-Dong, Seocho-Gu, Seoul 137-747, Korea Tel: (822) 3460-1178 Fax: (822) 3460-1144 URL: http://www.kiep.go.kr Kyung Tae Lee, President CNAEC Research Series 05-01 Published April 30, 2005 in Korea by KIEP _ 2005 KIEP The economic rise of China and its integration into the globalization process is undoubtedly one of the most important developments of the past decades. The resulting change in the global balance of economic activities has far-reaching implications for the world as a whole and for neighboring emerging economies in particular, with Korea as a case in point. The objective of the paper is to examine the exact nature of the Chinese challenge for Korea, and assess what may be the most appropriate response to mitigate the risks and maximize the potential benefits associated with it. The paper starts by providing a comprehensive description of the major changes implied by the rise of China and argues that they give rise to a dual challenge for Korea. First, the paper assesses China’s new role in the regional supply chain and the resulting change in the competitive game being played in the region. Based on an analysis of the trade and FDI flows in the region over the past decade, it highlights the differentiated impact on Newly Industrialized Economies, such as South Korea, and on less advanced economies such as Malaysia, Indonesia or Thailand. The paper goes on arguing that the recent changes in China’s stance toward its neighbors and its apparent resolve to become a regional leader further compound the challenge raised by the new conditions prevailing on the Asian competitive scene. The next section takes a prospective stance and examines the steps that Korea can (and should) take to face the dual challenge posed by the rise of China. It examines first the measures that can be put in place at Executive Summary firms’ as well as at the Government level in order to enhance Korea’s competitiveness, stressing in particular the need for further structural reforms. The establishment of the Japan-Korea FTA, now in the final stage of negotiations, is shown to be a potentially powerful instrument to that end. The paper also suggests that this FTA has to be associated with other arrangements with China and ASEAN, if Korea wants to keep some leverage over the future of the East Asian integration process. JEL Classification: F13, F14, F15 Keywords: China, Korea, regional integration, FTA