This study examines various potential international risk factors for the Korean economy in a medium-term perspective. The report highlights the different characteristics of the risk factors between the 1990s and 2000s in particular. First of all, the effects of oil price shocks on the Korean macroeconomy are investigated. Since Korea is an oil-importing country, it is natural that an oil price hike increases imports. However, VAR analysis found that an oil price rise raises exports as well as imports, since Korea imports crude oil and exports petroleum products. An export increase after the oil price shock was not observed in 1990s, since the ratio of petroleum product exports to total exports was relatively low in the 1990s but it has been increased in 2000s. Due to the fact that an oil price rise increases the exports, we also found that an oil price rise increases Korean industrial production in the short-run. Considering the asymmetry of the oil price shocks, the analysis shows that an oil price fall also increases industrial production, and moreover the impact is greater than in the case of an oil price rise.
Second, we empirically investigate the effects of exchange rates on Korean trade. It is widely believed that exchange rate depreciation would promote exports and reduce imports. However, we cannot find the evidence that the depreciation of exchange rates does boost exports, while it is found that depreciation decreases imports. Moreover, it is found that the volatility of exchange rates deters exports after the Asian currency crisis. Therefore, the stabilization of the foreign-exchange market is important for Korea to promote exports.
Third, the effects of the Chinese economy on the Korean economy are investigated empirically, focusing on exports and price levels. An empirical analysis found that the appreciation of the Chinese Yuan promotes Korean exports to China, by enhancing the price competitiveness of Korean products. Chinese exchange rate appreciation raises all three kinds of Korean exports: final goods, intermediate goods, and capital goods; while the impact of the final goods is the biggest among overall. It has also found evidence that Chinese inflation can be transmitted to Korea through rises in Korean import prices. Empirical analysis reveals that Chinese inflation had no significant impact on Korea’s inflation rate in the 1990s, while it became one of the main external causes of Korea’s inflation along with oil prices in the 2000s.
Lastly, we analyse the potential regional risk factors which can be realized in the medium-term. We considered the deterioration of the Eurozone fiscal crisis, US double-dip, and Chinese hard-landing as the risk factors. If the Eurozone sovereign debt crisis results in the disorderly defaults of some member countries, the world’s economy may experience recession like the global financial crisis of 2008. In the worst scenario of the Eurozone crisis, the world’s GDP will fall to 0.7%p in 2012 and 2.0%p in 2013. With regard to the US economy, it is not very probable that it faces a double-dip in 2012, but the recovery process from the subprime mortgage crisis could be longer than expected. If a US double-dip is realized in 2012, the world’s GDP may fall to 0.9%p in 2012 and 0.5%p in 2013. Finally, China’s hard-handing scenario does not seem to be happening in the near future. However, it is needed to carefully monitor the China’s bubble problem of asset markets and banking sector stability. If China’s hard-landing scenario becomes realized in 2012, the world’s GDP may fall to 0.4%p in 2012 and 0.9%p in 2013.

One of the most significant changes in North Korea is that it has emphasized economic enhancement through economic cooperation with other nations. Since the 2000’s, North Korea has acknowledged practical interest in economic relations with others and that increases in volumes of trade and foreign direct investment are strategies to fulfill its interests. In order to enlarge the scope of its economic cooperation, the North has set priorities in policy agenda as follows: stimulate trade, business cooperation through equity joint venture and joint venture, proactive exchange in knowledge and human resources in IT with advanced countries, and increases in financial transaction activities. Since the 2000s, the North has attempted several changes, such as revision of policies and laws regarding trade and foreign direct investment and reshuffling of the administration system. For example, the North modified laws and regulations in the mid-2000s, raised the status of Rajin to a “metropolitan city” in 2009, and announced special laws for development and management of the Rajin-Sunbong Special Economic Zone in 2010. The North established North Korea Development Bank in 2009 in order to attract more foreign direct investors, and it also set up the Committee for Equity Joint Investment in 2010. Despite the extensive efforts by North Korea to revitalize foreign economic cooperation, in trade and foreign direct investment in particular, North Korea has come to depend heavily on China economically. The said dependency is deepening due to the nuclear crisis, different types of international economic sanctions levied upon the North, and political problems in relations between the North and the US. In order to minimize negative economic impact from sanctions, the North should try to extend its scope in economic cooperation not only with China but also with different countries such as nations of the Middle East, Europe, and Southeast Asia. Since the 2000’s, there have been positive changes in the North regarding foreign economic cooperation, including increase in trade volumes, after stagnating through the 1990s. During the same period, the North gave most priority to increasing foreign direct investment. The North pursued modernization and technology improvement, normalization of industrial production, obtaining foreign exchange, and improvement of standards of living. Such changes reflect that the North changed its thinking on and direction of its economic policy. In the past, the North regarded foreign economic relations as a tool for enhancement of political alliances, but in the present days, the North straightforwardly recognized it as a means to economic development. Accordingly, economic cooperation with other nations was raised to a higher status from its former status as a secondary instrument to a primary one for building a self-reliant national economy. Efforts by the North to attract foreign investors have been more aggressive since 2000. Humanitarian aid toward North Korea in the international community has decreased due to certain issues such as nuclear crisis, violation of human rights, and transparency problems in distribution of aid. The international aid in the mid-1990s alleviated not only the food crisis in North Korea, but also worked out as a window for dialogue between the international community and the communist country. But in spite of continued assistance from the international community, famine and economic crisis in the North remain ongoing challenges. Furthermore, the international community has expressed its concerns about nuclear weapons development in North Korea. The community still argues for the legitimacy of aid toward the North amidst the nuclear crisis and its effectiveness for the resolution of North Korea’s economic crisis, and food crisis in particular. Again, one of the most significant changes in the 2000s is North Korea’s increasing dependency economically on China, while economic cooperation with others shrank. Due to its nuclear weapons testing, North Korea’s relations with the US and Japan is near-nonexistent and the scope of economic cooperation with EU and nations in Southeast Asia decreased significantly. In particular, relations with Japan, which was the North’s second-largest trade partner until the early 2000s, is at an all-time low due to unresolved issues such as kidnapping of Japanese nationals and nuclear tests. Even though North Korea’s foreign economic cooperation in the 2000s was more vigorous than in the past, the North still faces numerous challenges with respect to resolving the current economic crisis and normalizing its industrial system. One of the challenges is that the North cleaves to a planned economy and a rigid doctrine of self-reliance at the cost of decreased efficiency. Economic sanctions by the international community are another factor keeping North Korea from consistent economic development and extending the scope of foreign economic cooperation. Failure to build a partnership with most advanced countries due to the nuclear weapons issue is the most critical factor limiting North Korea’s economic development. In order to improve relations with the international community, in particular with advanced countries, and to maintain steady development economically; the North should put forward special efforts to defuse the lingering nuclear crisis, normalize relations with the US and Japan, persuade the international community for removing sanctions, adoption of an open market economy, and implement an open-door policy. Without effecting fundamental social changes, it will be difficult for the North to resolve economic crisis. The paper studies changes in foreign economic policies, laws and regulations of North Korea in the 2000s and finds actual conditions in its trade, foreign investment, and international assistance in the same period of time.

The United States government has launched the NEI (National Export Initiative) as an effort to increase U.S. exports to overcome the world-wide economic slowdown. The NEI has five main components. First, the Administration plans to improve advocacy and trade promotion efforts for U.S. exporters. Second, the Administration plans to increase access to export financing. Third, the Administration will reinforce their efforts to remove the trade barriers. Fourth, the United States will enforce trade rules. Fifth, the Administration will pursue policies at the global level to promote U.S. economic growth. For the success of the Initiative, the Administration established an EPC (Export Promotion Cabinet) to improve advocacy and promotion to enhance export assistance to SMEs. The NEI activity in concern with U.S. SMEs can be summarized as follows. 
First, the Administration increased the Export-Import bank of the United States’ budget for FY 2010, which would allow the bank to make more credit available to SMEs. Second, the federal government increased the USDA FY 2011 budget to amplify export promotion activities. Third, the federal government increased the Department of Commerce’s ITA (International Trade Administration) FY 2011 budget to expand its trade expert staff, to put a special focus on increasing the number of exporting SMES by 50 percent over the next five years, increase U.S. SMEs’ export opportunities in major emerging markets such as China, India, Brazil, and to develop a comprehensive strategy to seek new opportunities overseas for small businesses in key export sectors such as environmental goods and services, biotechnology, health care, and clean energy.
The United States is also making efforts to overcome exporting barriers for increasing small business export activities. First, U.S. SMEs plan to combine forces with other firms in the same industry, either through trade associations or through less formal consortia. Second, U.S. SMEs plan to collaborate with a single larger firm or a distribution agent. Third, U.S. SMEs plan to take advantage of government programs that assist SME exporters such as the Department of Commerce’s U.S. and Foreign Commercial Service and the Department of Agriculture’s MAP. In support of these efforts, the federal government is taking further steps to better survey SMEs’ barriers to exporting and taking the results into account when implementing financial and non-financial export promotion programs.
Korean SMEs are also facing difficulties in exporting, especially when competing with developed countries’ advanced technology goods and services and developing countries’ cheaper goods and services. Key barriers to export for Korean firms are little experience in overseas markets, lack of overseas network, lack of information and analysis capability towards overseas markets and technologies. Thus, to improve Korean SMEs’ global competitiveness, sustainable and organized export assistance and customized information on foreign markets and up-to-date technologies are needed.

By comparing development cooperation of China, Japan and Korea vis-à-vis Cambodia, this study strives to draw some policy implications for Korea’s development cooperation vis-à-vis Cambodia as well as Korea’s overall ODA policy.
In terms of the size of ODA, China overtook Korea in 2004 and came closer in 2009 to the level of Japan, which was the top bilateral ODA donor to Cambodia. However, China’s ODA consisted mostly of concessional loans. The said concessional loans were much larger than grants in Korea’s ODA, while grants were much more important than concessional loans in Japan’s ODA.
The financing structure of ODA was also reflected in the distribution of ODAs by purpose. In general, bilateral ODAs were mainly used for social infrastructure and services. However, China’s ODA went mainly to economic infrastructure and services, and road construction in particular. A greater portion of Korea’s ODA was destined for economic infrastructure and services than social infrastructure and services, whereas Japan’s ODA was equally destined for economic and social infrastructure and services. 
Thus, although aid from China, Japan and Korea was helpful for road construction, which was a particularly weak area for Cambodia; the three countries’ support for education and health, which were also weak, were very limited. Among the three countries, Japan contributed much more to education and health than Korea, while China did not contribute at all.
In terms of correlation between ODA and economic ties, it seems that there exists some correlation between China’s ODA and her economic ties, while Korea’s case was still too early to tell given the modest scale of its ODA. As for Japan, there was no correlation between them.
The size of Korea’s ODA is smaller than those of Japan and China, and in terms of development cooperation experiences, Korea is in-between. Under these circumstances, one of the most important tasks of Korea’s ODA policy will be how to differentiate Korea’s ODA from theirs. In this regard, this study suggests the following policy implications: First, we have to differentiate our ODA from China’s by reducing substantially aid destined for road construction. Second, we have to change our focus from building of “hard” infrastructure to “soft” infrastructure and services such as human resource development and health-related areas, where Korea has some comparative advantage. Third, in order to change our focus from hard infrastructure to one dominated by soft infrastructure, we should increase grants relative to concessional loans.

 This paper studies changes in competitiveness of Korean product, measured by Trade Specification Index (TSI) in order to analyze the effect of Korea’s free trade agreements (FTAs) with Chile, Singapore, European Free Trade Area (EFTA), and ASEAN. Additionally, it analyses the trend in change of tariff under the FTAs to show how changes in competitiveness of products are related with those, and measures usage rate of FTAs’ benefit from the lowered tariff lines the agreements. This paper  empirically tests the effect of FTA to the competitiveness of product using a panel model, which is originated from export functions.  
According to the results, the FTA with Chile may not lead substantial changes in competitiveness to Korean products, but FTAs with Singapore, EFTA, and ASEAN did. In addition, due to the relatively small changes in tariff after FTAs, the effect from the lowered tariff would be negligible, and there is no evident relations between the usage rate and TSI. Last, according to empirical analyses, the effectuation of FTAs would be a significant factor to improve competitiveness of products, but surprisingly the lower Korean tariff lines would result in more competitiveness and it even turns out that more usage on lowered tariff worsen competitiveness of product.
From the above, the following policy implications are derived: First, it would be desirable for Korea to pursue more FTA in order to improve competitiveness of its products and second, more effort would be required to raise usage rate on FTAs’ benefit from the lowered tariff. Third, comprehensive approaches that consider enhancement of efficiency and welfare improvement of entire economy should be emphasized.

Over the past twenty years, functional economic integration has been progressing rather rapidly among the three major Northeast Asian countries. The share of intra-regional trade between China, Japan and Korea increased from 12.3 percent in 1990 to 22.5 percent in 2010. When Hong Kong, Macao and Taiwan are added, the share of intra-regional trade of Northeast Asia (CJK+HMT) amounted to 37.3 percent in 2010.
In addition, the efforts to institutionalize Northeast Asian economic cooperation have also been made by the three countries. At the ASEAN+3 Summit Meeting, which was held in Manila in November 1999, the leaders of China, Japan and Korea met for historic gathering, and the Trilateral Summit Meeting has taken place annually since. Then, in Fukuoka in December 2008, the first independent Trilateral Summit Meeting took place outside of the ASEAN+3 framework, and the independent Trilateral Summit Meeting has become an annual event.
Furthermore, although the three Northeast Asian countries signed on to the economic regionalism bandwagon belatedly, they have concluded many FTAs, respectively. Yet, there is still no FTA among them.
However, some progress recently has been made. On the basis of the recommendation proposed by the Trilateral Joint Research, which was set up following the agreement among three leaders at the Manila Summit in 1999, the leaders agreed to launch an Official Tripartite Joint Study for a China-Japan-Korea FTA at the Trilateral Summit Meeting in Beijing in October 2009. Seven meetings of the Joint Study Committee for a CJK FTA were held between May 2010 and December 2011, and the outcome of this Joint Study Committee is planned to be submitted to the leaders at the Trilateral Summit Meeting in 2012.
When it comes to institutional economic integration in the region, it began after the Asian financial crisis. Following the first ASEAN+3 Summit Meeting which was held in December 1997, the Summit Meetings as well as Ministerial and Senior Officials Meetings have taken place regularly, constituting a framework for regional economic cooperation among the ASEAN+3 countries. Additionally, the East Asia Summit Meeting was launched in 2005.
Functional economic integration has also been advancing smoothly in East Asia. Over the past twenty years, the share of intra-regional trade among ASEAN+3 countries rose from 28.6 percent to 39.7 percent. In 2010, the share of intra-regional trade among ASEAN+3+HMT, ASEAN+6, and ASEAN+6+HMT represented 51.9 percent, 45.1 percent and 56.2 percent, respectively, surpassing that of NAFTA (40.5 percent) and nearing the level of EU (56.3 percent).
Furthermore, many bilateral and plurilateral FTAs have been concluded among East Asian countries since the turn of the century. In particular, ASEAN concluded FTAs with China, Korea and Japan, respectively.
With the proliferation of FTAs among the East Asian countries, the interest in a region-wide FTA in East Asia has risen. In fact, the idea of an EAFTA (East Asia Free Trade Area) was first recommended by the East Asia Vision Group in October 2001 and it was also proposed as a mid and long term goal by the East Asia Study Group in November 2002. Then, EAFTA Study among the experts from ASEAN+3 countries and CEPEA (Comprehensive Economic Partnership in East Asia) among the experts from ASEAN+6 countries were conducted, and on the basis of their recommendations, the four government - level working groups were established to prepare a region-wide FTA in East Asia. 
East Asia has already become the world’s factory. In the wake of the global financial crisis and the European fiscal crisis, given that the economic prospects for the United States and EU are remaining rather gloomy, East Asia is expected to be the engine of world economic growth. Moreover, if the rapid growth of East Asian economies continues, we may yet witness the start of East Asia era in the twenty first century.
This study proposes two criteria for the Era of East Asia; one is that the size of its economy should recover the level in 1820 (adjusted by the change in population), i.e., before its historic decline, and the other is that its average per capita income should attain the world’s average, and suggests it as a vision to be pursued by East Asian countries. 
To realize the era of East Asia, East Asia has to maintain its economic growth, enlarge internal markets and create a stable international political and security environment. And in order to satisfy all these conditions, we need a region-wide FTA in East Asia.
Given many FTAs among East Asian countries, including ASEAN+1 FTAs, the remaining missing links are among the three Northeast Asian countries. So, the most fundamental task to realize a region-wide FTA in East Asia is the formation of an FTA or FTAs between China, Japan and Korea.
This study highlights the fact that in order to realize the era of East Asia, a region-wide FTA in East Asia is needed, and that to achieve a region-wide FTA in East Asia, a CJK FTA is necessary. On the other hand, vision of realizing the East Asia era could be used as an additional stimulus to push forward the formation of a region-wide FTA in East Asia and CJK FTA.
Therefore, in order to realize the era of East Asia, China, Japan and Korea must strive to form a region-wide FTA in the mid and long term, and in the short term, they should focus on the formation of a CJK FTA.
The Korean government should also give priority to a CJK FTA over a Korea-China FTA or Korea-Japan FTA, and take the opportunity of the 2012 Trilateral Summit Meeting to launch the CJK FTA negotiations.  By choosing the trilateral FTA over the bilateral ones, the Korean government can show its will to assume an active role in improving relations in Northeast Asia.
 

This study examines the trends and forms of China’s ever-growing outward foreign direct investment (OFDI), and provides a case study as well as a business performance analysis on OFDI of major Chinese companies.
China’s OFDI has increased rapidly in recent years, making China the World fifth largest investing country in 2010. The outbound M&A by Chinese companies constituted 42.4% of the total OFDI in the same year. Although the majority of China’s OFDI was still concentrated in the energy/natural resources sector of certain Asian and African countries, M&A-based investment in technology, brands, and distribution networks of the US, EU, Japan and other developed countries has showed an upward trend.
China’s investments in developed countries (except Canada where China’s investments are natural-resource-oriented) are motivated mainly by companies’ market-seeking and technology acquisition strategies. As for investments in developing countries, they are basically aimed at natural resources and market penetration. In particular, while most of China’s OFDI in Africa was in natural resources (except South Africa where market-seeking OFDI prevailed), OFDI in ASEAN countries was mainly oriented towards entering their markets. The level of Chinese investment in Korea is marginal in comparison to bilateral trade volume between the two countries. China’s investment here is concentrated in the manufacturing sector, followed by services, and characterized by its small scale.
A case-study on OFDIs of major Chinese companies has revealed that their business performance was below expectation. Chinese companies present in Africa have suffered from poor investment environment there; Outbound M&A aimed at technology acquisitions in developed countries have failed due to the lack of management expertise of Chinese acquirers, resulting in worsened business performance of both Chinese adquirers and acquired companies. Representative examples are: M&A of France’s Alcatel by TCL, and M&A of Korea’s Ssangyong Motors and Hydis by Shanghai Motors and Jingdongfang Hightech respectively. Although those Chinese companies are powerful in their respective sectors, they have been engaged in M&A transactions with no account of their own capacities in technology, size, and management expertise. Moreover, Shanghai Motors and Jingdongfang Hightech were more interested in technology acquirement rather than improvement of the acquired company’s performance, which consequently worsened.
On the other hand, the acquisition of Korea’s Actoz Soft by Shanda, a Chinese online game company, is a success story of a relatively small-scale M&A which focused not only on the acquisition of the local company’s technology (intellectual property), but also the latter’s expansion and growth in the Korean market. Shanda’s case shows that China’s outbound M&A transactions in which size and technology level of acquired companies are modest enough to be controlled by Chinese acquirers tend to be more successful, rather than excessive large-scale M&As with Chinese government support.

Over the last several years, the number of FTAs has significantly increased. Even if the basic aim of many FTAs is to cut tariffs, an increasing number of agreements deals with environment. While advanced countries, such as the United States, the European Union and New Zealand, have included the most ambitious environmental provisions or chapters in FTAs, some developing countries also have made an efforts to include environmental provisions in their trade agreements. This is an ongoing learning process and countries can benefits from the previous experiences. Against this backdrop, this study examines environmental provisions in FTA texts of major countries including both advanced and developing countries, and addresses some key factors related to the environmental aspects of FTAs. Based upon these analyses, this study also reviews some policy implications for Korea's future FTA negotiations.

 

I. Introduction 

II. Regional Economic Integration and FTAAP 
1. Regional Economic Integration in the APEC Region 
2. Conditions for a Desirable FTAAP 

III. Feasible Scenarios for the Best Practiced FTAAP 
1. Comprehensive Application of Tariff Elimination in Goods Trade 
2. Liberalization of Trade in Services 
3. Enhancing Trade Facilitation 
4. Feasible Scenarios for the FTAAP 

IV. Measuring the Impact of FTAAP 
1. CGE Model 
2. Data 
3. Simulation Results 

V. Concluding Remarks 

References 

In order to argue that the proposed FTAAP is the second-best policy option for APEC member economies and the world economy com-pared to the stalled first-best multilateral liberalization effort like the DDA (Doha Development Agenda), we examine existing arguments for and against the proposed FTAAP. From our examinations, we find that the FTAAP is a sustainable RTA (Regional Trade Agreement) and will work as a stepping stone towards global free trade. In addition, the FTAAP will be a more desirable RTA if it is cooperated with the APEC’s principle of open regionalism or/and evolves to a customs union of the region. However, unlike traditional FTAs, the FTAAP has some APEC-specific impediments to its establishment of a regional trade bloc at present. Some policy recommendations would be proposed to overcome the obstacles.

I. Introduction 

II. Direct Measurement of Arbitrage Costs 

III. Arbitrage Costs and Relative Prices 

IV. Empirical Analysis 
1. Threshold Autoregressive (TAR) Model 
2. Results 

V. Implications for the PPP Puzzle 

VI. Conclusions 

References 

This paper estimates the arbitrage costs from international relative prices, and studies the economic determinants of implied arbitrage costs. We find that the magnitude of arbitrage costs depends on the characteristics of both the type of good and set of locations under examination. More specifically, higher share of non-traded input and lower tradability of good lead to larger arbitrage cost, as does a lower proximity of geographic distance between locations. The role of location-specific characteristic in accounting for the arbitrage cost is more significant as we move beyond an economic geography, while good-specific characteristics matter relatively more if we move to the interior of this geography. We also show that arbitrage cost plays an important role in explaining the puzzling behavior of real exchange rate. We view our evidence as complementary to those that emphasize the role of nominal price rigidities.