Executive Summary

I. Introduction

II. State of Play in the Two “Tracks”
1. The Trans-Pacific Track: TPP
2. The East Asian Track – the RCEP
3. TPP, RCEP and the Architecture of the “Two-Track” Approach to the FTAAP

III. The TPP: Prospective Content and Issues for Regional Economic Integration
1. Market Access for Goods
2. Rules of Origin
3. Services
4. Investment (Investor-State Dispute Settlement)
5. Competition: State-Owned Enterprises
6. Intellectual Property
7. Pharmaceutical Evaluation, Pricing and Subsidy Programmes
8. E-Commerce: Data Flow
9. Customs
10. Sanitary and Phytosanitary (SPS) Measures
11. Environment and Labour
12. Development and Capacity-Building

IV. The RCEP: Prospective Content and Issues for Regional Economic Integration
1. Tariffs
2. Rules of Origin
3. Trade Facilitation
4. Services
5. Investment

V. Which Way to the FTAAP – TPP or RCEP?

VI. Concluding Remarks

References

In the early years of the twenty-first century proposals reflecting two distinct “visions” of Asia-Pacific integration were being advanced for consolidating the regional trade architecture through the establishment of region-wide trade agreements. The rise of East Asian regionalism was reflected in proposals for an East Asian Free Trade Area (EAFTA) and Comprehensive Economic Partnership for East Asia (CEPEA), envisaged as major elements in an agenda for building an economically integrated East Asian region. APEC’s “trans-Pacific vision”, of integrating economies on both sides of the Pacific through achievement of APEC’s Bogor goals of free trade and investment in the Asia-Pacific region, was refreshed in modified form with the proposal for a Free Trade Area of the Asia-Pacific (FTAAP), conceived in principle as a free trade agreement embracing all APEC members.

In 2006 APEC leaders sought to emphasise complementarity between the two “visions” by formally adopting a Regional Economic Integration agenda in which the FTAAP was recognized as a “long-term prospect”. At Yokohama in 2010 the leaders set out the way forward in more concrete terms, when they unambiguously endorsed the FTAAP as the end-point to be reached in the evolution of the Asia-Pacific regional trade architecture, while at the same time endorsing a “two-track” approach to its eventual achievement. The leaders stated that achievement of the FTAAP is to be based on progress made within both a “trans-Pacific track”, represented by the Trans Pacific Partnership (TPP), involving economies from both sides of the Pacific, and an “East Asian track”, now represented by the Regional Comprehensive Economic Partnership (RCEP), a successor initiative to the EAFTA and CEPEA, with participation at this stage limited to the sixteen “ASEAN Plus Six” economies on the western side of the Pacific. Six of the 21 APEC economies are currently participating in both “tracks”, while four are participating in neither track. Four of the RCEP participants are not members of APEC.

The leaders left open the question of how the two “tracks” might evolve and eventually converge into the FTAAP. In the meantime, attention is focused on the substance of the TPP and RCEP agreements being negotiated within each “track”, and their implications both for the size and distribution of the prospective economic benefits of each agreement, and for the prospects of each agreement for gaining acceptance from other economies in the Asia-Pacific region as the “model” for the eventual FTAAP.

Of the two agreements, the TPP at this stage appears to have the more ambitious and comprehensive agenda. After three years negotiations have advanced to the point where failure, while still possible, would be a major surprise, but there are many sensitive issues remaining to be resolved. In addition to the expected market access issues of particular sensitivity to individual participating economies, other highly sensitive issues involve rules of origin, intellectual property, pharmaceutical evaluation pricing and subsidy programmes, management of electronic data flows, labour and environment. These and other issues are discussed in detail in the paper. How these issues are eventually resolved will be important in determining both the extent to which the TPP lives up to its stated ambition of being a “high quality” agreement and also its prospects of being accepted as a “model” for an eventual FTAAP.

The RCEP negotiations are only just beginning. It is correspondingly more difficult to evaluate its likely content and its potential as a basis for the eventual FTAAP. It appears likely that the most substantive provisions will be those on trade in goods, trade in services, and investment, prospects for which are analysed in detail in the paper. In these areas the RCEP faces formidable challenges in consolidating existing arrangements among the participating economies to a level that would mark an impressive step towards the eventual FTAAP. On the other hand the RCEP may be better placed than the TPP to develop rules of origin that foster deep integration among the production systems of participating economies. Provisions on intellectual property and competition policy are included in the proposed content of the RCEP, but it would be a surprise if these provisions approach the depth of commitment being sought in the TPP.

Like the TPP before it, RCEP faces all the issues involved in establishing agenda priorities and modalities for negotiating an agreement among countries that in many cases are already linked by existing agreements, or in some cases by ongoing negotiations. The complexities and difficulties will be compounded by the likelihood that the participating economies will come to the negotiations with widely divergent levels of ambition. Especially under these conditions ASEAN’s determination that the RCEP should be an ASEAN-led process also means that RCEP negotiations could turn out to a defining test of ASEAN’s ability to maintain its leadership role in regional economic integration.

As the external economic environment has been worse since 2008, China laid emphasis on the domestic consumption as a new drive force for sustained economic growth. And luxury consumer market expands very fast as Chinese consumers’ purchasing power has increased. Before targeting the Chinese luxury consumer market aggressively on a national scale, some regional market like Shanghai is needed to testify the effectiveness of distribution and marketing and to understand consumers’ tendencies.
The purpose of this study is to provide implications to both the Korean enterprises and government which have tried to foster competitiveness in luxury consumer market in China by analyzing competitive strategies of various enterprises in Shanghai. We approach this study based on the case studies in the clothing and cosmetics industry in Shanghai.
Chapter 1 introduces background, objectives, and methodology of this research. Chapter 2 analyzes the business environment of Shanghai luxury consumer market, inter alia, clothing and cosmetics market. Chapter 3 illustrates our case studies and Chapter 4 discusses the competitive strategies of each case study. And Chapter 5, with implications for Korean government and enterprises, reveals the limitations of this study.
As for business, Korean enterprises should carefully choose entry points when they are advance into the Chinese luxury consumer market. Second, they should utilize various strategies including regional specialized marketing strategy to increase brand awareness. Third, they should carefully analyze the characteristics of the Chinese luxury consumer. Fourth, there is a need to develop a new luxury goods area that you can enjoy the first-mover advantage, while increasing brand awareness in the area of the existing market. Fifth, Korean enterprises should prepare for the infringement of intellectual property rights in China and use it as a way of noise marketing at the same time. Sixth, Korean enterprises need to pay more attention to looking for the partners in China. 
In order that Korean enterprises can succeed in the luxury consumer market in Shanghai as well as in China, indirect support of Korean government is also required. First, Korean government should support promotional activities for Chinese tourists so that they can have the luxurious image about Korean products. Second, Korean government is advised to support the Korean enterprises in China to improve Korean brand awareness. Third, Korean government needs to request the Chinese government the strict management to counterfeit goods and negotiate with Chinese government to lower the entry barriers into Chinese market.

 

The whole world has been keeping its eye on Mongolia’s economic growth. Although Mongolia has experienced considerable socio-economic instability during the process of the regime transition in the early 1990s, it has managed to establish the market economy in a relatively short period of time and reached an annual average growth of 9% in the mid 2000s. Despite the rapid fall in the growth rate due to a global financial crises, Mongolia has quickly recovered its trend to accomplish astonishing 17.4% in 2011.
For such reasons, the international assessment on Mongolia has undergone noticeable changes. Leading international organizations and assessment institutions are presenting optimistic prospects for Mongolia’s economic growth, while foreign investments into Mongolia continue to increase. With such changes in Mongolia’s investment environment, expanding opportunities for market entry has become an urgent issue for Korean businesses.
Given such background, this research provides a systematic analysis of Mongolia’s overall investment environment, and identifies management situation and difficulties of Korean firms in Mongolia, in order to elicit ideas for specific measures and policy implications in order to expand market entry by Korean businesses. In particular, this research tries to provide detailed information and analysis through a survey research on 59 Korean firms in Mongolia, along with in-depth interviews of local professionals and company representatives.
Chapter 1 forms an ‘introduction’ that includes the significance and objective of this research, literature review to emphasize the contribution of this research, research methodology and the overall structure of this research.
Chapter 2 describes ‘Mongolia’s economic situation and mid to long-term prospects,’ providing an overview of Mongolia’s current economic state, its main policy objectives, and mid to long-term prospects for growth. Mongolia’s major industries include mining, agriculture and stock-farming, manufacturing (cashmere and textile processing), wholesale and retail, and tourism among others, while mining is the engine of growth. Mining represents about 20% of the GDP, about 60% of the total industrial production, and about 80% of total exports. The share of agriculture and stock-farming is decreasing, but still holds the largest number of employees. The share of manufacturing is under 10%, but helped by aggressive industrial policy initiated by the Mongolian government, it is showing a growing trend. The wholesale and retail, and the real estate business sector is consistently increasing their respective shares due to economic growth (driven the mining industry), or the so-called spending effects.
Presently, the main economic policy objectives of Mongolia include the development and diversification of industries to fully implement the benefits of its resource-based economy, along with price stabilization, reduction in unemployment rate and poverty eradication, effective application of economic policies, industrial policy realization, and control of the macroeconomy, among others. The Mongolian government hopes to provide and meet the mid-term national development strategy and realization plans in accordance with abovementioned policy objectives. Successful implementation of these policy goals is likely to shed a light of optimism to Mongolian mid-term economic outlook.
The third chapter, ‘Mongolian investment environment,’ analyzes in detail the overall investment environment of Mongolia, along with its infrastructure, labor system, and legal and institutional structures. Despite its vast territory, Mongolia is a country with a small population and generally poor infrastructure. For such reasons, the Mongolian government is increasing its investment in infrastructure for railway and road expansion, expansion of airway services, securing energy supply, information and communication technology development according to its mid-term national development strategy.
Labor market of Mongolia is characterized by its small labor population in comparison to other Asian countries. Particularly apparent is the imbalance between the demand and supply in the labor market, with high levels of unemployment despite increasing job openings due to rapid economic development. It is explained by the lack of skilled workers and low wages causing movement of local labor to foreign markets.
For its part, the Mongolian government has been improving its legal and institutional structures to promote foreign investment. It has established several laws on foreign investment to assure that foreign and domestic investors have equal rights in production, sales, and investment. The government has also concluded the Stability Agreement for foreign investors, including provisons on free trade areas, approved the use of land, applied low levels of tariff along with other incentives.
Chapter four, ‘Foreign investments to Mongolia and their strategies’ discuss the current circumstances and trends in FDI to Mongolia. The chapter provides a comparative analysis of the investments and entry strategies of China, Russia, Japan, Canada, United States, and the EU countries. Currently, China is first in foreign direct investment to Mongolia, which can be explained by the increase in China’s demand for Mongolian mineral resources and the relatively good condition of railways and transportation routes between China and Mongolia. Chinese businesses concentrate on various types of mineral resource development, while avoiding overlapping investments with other businesses.
Russian investments in Mongolia generally involve mines, mineral processing factories, and infrastructure already built during the past Soviet era. Unlike their Chinese counterparts, Russian businesses prefer joint investment, which is the traditional method of cooperation between Mongolia and Russia. On the other hand, Japanese investment is relatively low primarily due to geographical reasons, but is increasing nonetheless. Japanese businesses have been cooperating with local Mongolian businesses and investing in manufacturing, foodservice, and information and communication industries, but recently turned its attention to mining as well. Canada is another leader in investment, with the 6th largest total investment volume among foreign investors. Because mining industries require large volumes of capital, investment by Canadian businesses occurs in various ways, including individual investment, joint investment with Mongolian businesses, and joint investment with a third-party. United States, which is 8th in terms of its total investment volume, has been also investing primarily on mineral resources, but recently expanded into other industries such as trade, foodservice, and banking.
Chapter five, ‘Investment to Mongolia by Korean businesses and their management evaluation,’ introduces the current state of Korea’s investment to Mongolia, analyzes the motives for investment motivation, obstacles in local management, and their achievements based on a survey research on 59 Korean businesses in Mongolia. The research also provides a basis for policy implications for future business entry included in this chapter. According to the survey results, Korean businesses focus primarily on mining, services, wholesale and retail, lodging and foodservice industries, while manufacturing has a very low share. The businesses are mostly small scale with less than 10 employees, but their sales volume vary accordingly, and a large number of them have entered the market in the end of 2000s when optimistic prospects on Mongolian economy were dominant.
It turns out that most Korean businesses in Mongolia had experienced a lot of difficulties due to complex administrative structures, investment approving institutions, and frequently changing behavior of their local partners. They were also forced to procure their resources and operating funds in Korea due to Mongolia’s underdeveloped manufacturing system and poor banking infrastructure. The goods and services of the local Korean businesses were mostly sold in local markets, with the quality of those goods and services being above the average, and garnering high brand awareness. Also, because of the poor distribution network in Mongolia, local sales were occurring either directly by Korean businesses or indirectly through local partners. The greatest obstacles included difficulties in collecting loans and payments due to poor banking infrastructure, and price competition with cheap goods from China. Greatest difficulties in wage and employee management were rapid increase in wages and the high employee turnover rate. Overall, the business environment in Mongolia is characterized by particularly poor infrastructure; and while there are some problems in procurement of raw materials and resources, employment, and management of the personnel; there were almost none in terms of labor management conflicts, surtax refund, or the local administration interference.
The net profits of local Korean businesses appear to have increased continuously over the last three years, which has led businesses to consider expansion or at least maintenance of status quo rather than withdrawal or volume reduction. Also, these businesses are aiming to strengthen their marketing strategies and expand their entry in local markets, while trying to bestow the impression of good quality on their anchor products. In observing the overall business obstacles experienced by these enterprises, there are readily noticeable problems in employment, wage, and taxes; while the problems are not as apparent in terms of banking, foreign-exchange, and investment barriers. Looking into concerns raised to Korean government and public agencies, the businesses were most in need of stronger consular functions, investment information services, and banking support. On the other hand, concerns raised to the Mongolian government include issues regarding visa services and long-term visas, freedom of economic activities for foreigners, and improvements in the distribution sector. 
Based on these findings, chapter six, ‘Measures to expand Korea’s investment to Mongolia’ reconfirms the need for investment expansion, introduces the promising sectors for entry expansion of Korean businesses, and provides policy suggestions for the Korean government in establishing an active support system.
In sum, Mongolia’s investment environment holds potential in mining, plant industries, infrastructure development, tourism, banking, and manufacturing sectors for Korean businesses. Korean government needs to provide structured investment information, come to an agreement on visa waivers, reinforce consular services, place greater efforts to improve the image of Korea, and reinforce the local human networks.
In conclusion, considering the overall prospects of Mongolia’s economic growth and market expansion, Mongolian government’s efforts to stabilize its laws and institutions concerning the economy and investment, the quantitative investment growth to Mongolia, the entry expansion and diversification of Korean businesses constitutes urgent policy priorities

 

 

Foreword

Contributors

Ⅰ. Introduction and Summary / Pyeong Seob Yang
1. Background
2. Review of Previous Studies
3. Summary

Ⅱ. The Transformation of China’s Development Pattern and Its Impacts on the World Economy / Yin Xiangshuo
1. Introduction
2. China’s Economic Development Since 1978
3. Transformation of China’s Development Pattern
4. The Impact of the Transformation of China’s DevelopmentPattern on the World Economy
5. The Impact of Transformation on Sino-Korean Economic Relations
6. Concluding Remarks

Ⅲ.China’s Demographic Transition and Labor Market Changes: Implications to China and Rest of the World / Cai Fang and Wang Meiyan
1. Demographic Trend of China
2. Resultant Changes in the Labor Market
3. Impacts on Economic Growth
4. Implications to the World Economy
5. Suggestions to Korean Government and Investors

Ⅳ. China’s Policy Direction on Industrial Upgrading and Its Impacts on the World Economy / Feng Fei
1. China’s Industrial Upgrading Process since Its Reform andOpening-up
2. Current Situation and Development Strategy of China’s Emerging Industries
3. Impact of China’s Industrial Upgrades on the World Economy and Closer Cooperation between China and Korea

Ⅴ. China Energy Policy Trend and China-Korea EnergyCooperation / Han Wenke and Fan Lijuan
1. Status of China’s Energy Development
2.Key Issues and Challenges Faced with China Energy Development
3. The Projection for Energy Development Perspectives duringChina’s 12th Five Year and to 2020
4. The Development Priorities for China’s 12th Five Year Period and to 2020
5. The Impact on the World and Northeast Asia by China’s Energy Economy
6. Suggestions on Cooperation between China and Korea

Ⅵ. RMB Internationalization and Its Impacts / Zhang Bin
1. Introduction
2. Development and Current Status of RMB Internationalization
3. Development Direction of RMB Internationalization
4. Impact of RMB Internationalization on the Global Economy and Financial Orders
5. RMB Internationalization and China-South Korea Cooperation

Ⅶ. China’s Overseas Investment Strategy and Its Impacts on the World Economy / Wang Luo
1. The Evolution of China’s Overseas Investment
2. The Features of China’s Overseas Investment
3. The Evolution of China’s Policies on Overseas Investment
4. The Impact of China’s Overseas Investment on the World Economy and Domestic Economy
5. The Situation China’s Overseas Investment Faces in the New Era
6. Problems in China’s Overseas Investment
7. The Trends of Chinese Enterprises’ Overseas Investments
8. The Outlook of the Policies and Measures to Encourage Overseas Investment
9. The Trends of China’s Investment in South Korea and the Recommendations

Ⅷ. South Korean Multinational Companies in China / Wang Zhile
1. Introduction
2. Development of Foreign Enterprises in China
3. Development of South Korean Enterprises Invested in China
4. Investment of Famous Korean Multinational Corporations in China
5. Suggestions: Integration into China for Sustainable Development

Ⅸ. An Assessment of Korea-China Economic Cooperation / Pyeong Seob Yang
1. Korea-China Economic Cooperation: An Overview
2. Korea-China Trade Cooperation: Assessment and Tasks
3. Korea-China Investment Cooperation: Assessment and Tasks
4. Suggestion of Cooperation for Future-Oriented Trade and Investment

The recent Chinese Communist Party Congress elected a new leadership that will lead China over the next decade. Under the previous, “fourth-generation” Hu Jintao leadership, China’s economy grew at an astounding pace, with China becoming one of the world’s largest economies and also one of the most powerful countries. The process of this rapid economic growth, however, also revealed deep structural contradictions in China and the increasing susceptibility of the Chinese economy to worldwide recession set off by the financial crisis in the West.
Students of the Chinese economy argue that, in order for China to ensure sustained development, it must take care not to fall into two traps: that is, the middle-income trap and the system transition trap. Although China is still the world’s most populous country, the size of its workforce for manual labor is now in a steady decline. The traditional manufacturing sector is vulnerable to oversupplying, while other developing countries are industrializing at a pace that may soon threaten the industrial prospects of China. The growth rate of the Chinese economy has accordingly slowed down in recent years. In the meantime, disparities in wealth along regional and class lines continue to increase, while a pervasive culture of corruption adds to widespread social anxiety. As the elite increasingly pursue self-serving policies, popular resentment is growing against the policy of continued economic reform.
Under the new leadership, China will fundamentally alter its approach to economic development, seeking to discover and develop new sources of growth. The framework of “development through innovation” will replace the framework of “development through input expansion.” Nurturing domestic consumer industries and markets will take priority over encouraging exports and foreign investments. Development no longer should degrade the environment but will become more eco-friendly, while the overall energy-dependent economic structure will gradually give way to a new and energy-saving economic structure. Industrialization will no longer be led singlehandedly by the manufacturing sector but will depend more and more on the new strategic industries. At the macroeconomic level, China will strengthen its ties to neighboring countries in the region through the expansion of free trade agreements. It will also seek to globalize the Yuan so as to facilitate Chinese investors’ activities overseas. These mid- to long-term changes will exert significant influence not only on the prospects of the Chinese economy for growth, but also the Korea–China economic relations as well as the entire international economy.
The shifts in the approach to economic development will inevitably slow down the growth rate of the Chinese economy, ending the age of high-speed growth and ushering in a new era of middle-speed growth. The new approach to development and the accompanying slowdown of the Chinese economy will also affect the prospects of economic partnership between Korea and China. South Korea has been one of the biggest beneficiaries of China’s rapid economic growth over the last two decades. As China grew to become “the world’s factory” and a major export powerhouse, Korea profited handsomely by providing intermediate goods that the Chinese manufacturing sector needed for the processing trade. This has enabled Korea to maintain a stable surplus in its trade balance with China. Korean companies also invested heavily in China, seeking new impetus for growth there. Now that China’s society and economy are expected to undergo radical transformation, no one can say with certainty that this mutually beneficial arrangement will continue to be so between the two countries for the next two decades as well. As China will increasingly seek to promote its domestic industries and reduce its emphasis on export-oriented growth, Chinese demand for Korean exports will concomitantly decrease. Given the fact that Korea specializes in supplying intermediate goods to China for its processing trade, Korea will be left all the more vulnerable to the decreasing demand in China. The effect could be drastic so long as Korea does not increase its access to the Chinese domestic consumer market.
Thus it is now urgent to develop a new plan and strategy for an updated partnership between Korea and China to guide the two countries’ relations for the coming two decades. We have come to publish the following collection of essays in order to help the reader contemplate and plan a new model of economic partnership between Korea and China. These essays address four main themes. The first essay examines the relationship between China’s changing approach to development and its demographic issues. As China no longer enjoys the “population bonus” that has been a huge boon to its astonishing growth, its potential for economic development is on steadily waning. The effects of this demographic change on China’s future development strategies are analyzed in detail. The second essay reviews China’s mid- to long-term strategy for industrial transformation and how such a strategy will affect China’s relations to the world economy and Korea. Of particular concern are China’s pursuit of advanced and high-tech industries and the mid- to long-term changes anticipated in its energy policy. The third essay addresses the international implications of China’s changing economic policy. Since joining the World Trade Organization, China has grown at an unbelievable rate by opening its doors to the international market and capital. This phenomenon can be described as “the bonus of openness.” The benefits of this bonus, however, have begun to decline, and China now needs to come up with a solution to handle its international economic relationship better. China has accordingly decided to globalize, expanding the markets for its companies overseas, hoping to enhance the sustainability of its growth potential and strengthen its position in the international community. The third essay therefore discusses the Chinese strategy for the internalization of RMB and plans for foreign investments. The fourth essay looks into the Korea–China economic partnership. It assesses the history of trade between the two countries over the last two decades, details the performance of Korean multinational corporations with operations in China, and identifies the challenges involved in improving and sustaining the partnership.
For this project, we invited seven Chinese experts specializing in China’s economic and trade policies. These authoritative experts not only participate directly and indirectly in shaping China’s important policies, but also have deep understanding of Korea–China relations. The studies undertaken for this collection were also extensively supplemented and revised with the help of Korean specialists in Beijing as well as a number of Korean experts on China.
Our hope is to see this collection of essays provide important and useful information to help readers understand China’s long-term development strategy better and develop a new strategy for the Korea–China economic partnership accordingly. I would especially like to thank all the writers who have contributed their work to this collection.

After the establishment of the People’s Republic of China in 1949, urban migration caused by the heavy-industrialization policy initiated China’s early urbanization. The Great Leap Forward and the Cultural Revolution which generated reverse migration, however, delayed the earnest onset of urbanization until the end of 1970s. Since the Reform and Opening, rural industrialization by TVEs and land reform expedited urbanization. In the 2000s, urbanization accelerated with deepening reform. Expansion of fixed assets investments led to development of urban areas and the increase in urban population.
Immediately following the start of the Reform and Opening, urbanization in China occurred among small cities and townships. From the 2000s, urbanization began to be perceived as one of the national strategies for economic development. The 11th five year plan had focused a city-cluster strategy which materialized in the 12th plan as ‘Two Crosses and Three Ordinates’ and the ‘Self Functioning Region.’ It is expected that China’s urbanization rate will increase steadily albeit at a lower rate. Various calculations made in different researches reveal that China’s urbanization rate would reach 60% in 2020 and 70% in 2030.
In Chapter 3, we analyzed the relationship between urbanization and economic growth in China using regional data. Specifically, the Williamson Hypothesis which states that conglomeration into large cities could accelerate economic growth in the low income states, but actually slow it above a certain level of income, is verified. Cross section, dynamic and spatial econometrics models are adopted as methodologies. The empirical analysis results in policy implications as follows. First, the largest city in the region negatively impacts economic growth. For economic development, Chinese government would be better off creating several big cities rather than focus on one mega city. Second, urbanization itself obviously propels economic growth. In the cross-section and spatial econometric models, urbanization as a whole contributes to growth. In the dynamic model, however, only urban areas with a population of more than 750,000 do so. In sum, if we do not consider the spatial spillover effects among cities, hub and spoke urbanization would be the most favorable scenario; if we do consider it, increasing urbanization as a whole could be applied for growth.
In Chapter 4, we examined the Chinese consumer market from the perspective of urbanization. The total size of the consumer market in 2011 had increased by 4.7 times since 2000. The consumption rate, however, had decreased steadily. During the same period, the urban share in the total consumption increased much, indicating that urban areas have led the growth in consumption as a whole in China. Observing changes in consumption according to income levels, we found that the upper 40% has contributed the most. We also found that as income increases, the share of basic consumption declines while service consumption grows. The share of service consumption is higher than that of Korea in 1990 when the income level was similar to China today.
Estimating urban consumption items in 2020, we found that basic consumption would be larger while new growth would mainly come from service. Based on comparison of consumer durables between China’s average and Shanghai, we found that fastest growth would occur in potential markets in air-conditioner and color TV among other home appliances; and in computers, mobile phones and passenger cars. On the other hand, it is pointed out that the main obstacles in developing the urban consumption market are declines in labor’s income share, deepening income gap, insufficient social security, and high housing and education costs.
In Chapter 5, we examined the construction market related to urbanization. Urban construction investment grew steeply every year, reaching 19 trillion yuan or 41% of GDP in 2011. Shares of the individual sectors are: real estate 43%, transportation infrastructure 21%, irrigation/environment/public infrastructure 16%, and electricity/ gas/water 10.7%. Share of foreign investment takes up 4.7% in average; 9% goes to real estate.
It is expected that urbanization rate would reach at 70% in 2030, and we estimate that more than 5 trillion yuan will be invested in urban real estate every year until 2020 if the current level of investment per capita is sustained. In terms of space, urban areas occupy 4.71 million km2, or about the half of total land area in China. In the 2000s, the administrative urban area basically remained unchanged, while actual urban districts increased steadily, accounting for 13.4% of the total urban area. Real estate investment per building site has also increased, reaching 1.2 trillion yuan/10 thousand km2 in 2010.
Penetration rate of tap water and gas are relatively high, 96.7% and 92%, and road density is not low relative to the international standard. However, sewage disposal rate is a rather low at 82.3% and much investment is expected in this sector. Refuse disposal rate is 90.7%; another area with room for improvement. Observing region by region, an inverse correlation is revealed because the regions with higher penetration rates are investing more. This is because maintenance and upgrading require as much investments as building new ones.
In Chapter 6, we investigated potential risks of urbanization in labor supply, land management, municipal finance and migrant workers. Until 2010, the productive population has increased rapidly, with abundant labor for the workforce. Surplus labor in rural areas moved to cities and supplied labor for workforces in manufacturing and services. Although labor shortage has appeared recently in some coastal areas, it will not become a general phenomenon for China as a whole in the short term, as there is still a labor surplus in the primary industry and the urban population will keep increasing for the time being. The labor shortage reported recently is actually the result of the imbalance of labor supply and demand between regions and businesses. It is expected that enterprises’ share in financing social welfare will increase and wages will also rise due to government policy, thus transferring the cost of urbanization to the enterprises. If that happens, the production environment would eventually worsen.
As for the supply of urban land for construction, the ‘requisition-selling’ system has been established as the predominant mode. But the current system cannot be sustained for long because the amount of land available is limited, thus putting land finance in jeopardy. As of 2010, about half of the funds for urban infrastructure building were produced by selling land and the share has been increasing since. This means shortage of land would likely result in shortages in municipal budgets. The current system allow farmers whose lands are requisitioned only marginal compensation while local governments and land developers enjoy excessive profits, leading to shortsighted maximization of income via land sales. By doing so, the increase in urban land under construction outpaces the increase of urban population. Recently, several changes have occurred such as introduction of the property tax, development of collectively-held farmland, auctioning of manufacturing sites, and legalization of unregistered property/houses. Hence, compensation for requisitioned farmers would rise, land auction for business would become widespread and the land cost would increase. However, the current land selling system will not be substituted easily and the local government would likely resist the central government plans to introduce property tax. In addition, self-development by farmers would become widespread, resulting in diversification of land management units.
Local governments’ account balance in building urban infrastructure has generally been profitable. However, high percentage of land sales and ambiguous loans by various financing platforms reveal very significant risks. It is expected that high rates of land sales in certain areas would eventually decline to the level of Beijing or Shanghai. Naturally, the amount of ambiguous finances in big cities will decrease in the future. At the same time, the rate of land sales in underdeveloped regions could still increase.
As of 2011, more than 20 provinces have announced consolidation of the rural-urban family register system. The perfectly equal treatment, however, has yet to emerge. Most advanced cities would not dare to begin the process of consolidation, as it would mean 250 million migrant workers will become official city residents, and cost the cities about 20 trillion yuan which represents up to one-half of China’s total GDP in 2010. However, the central government is not likely to retreat in the reform in migrant worker and will force the issue in efforts to suppress their total numbers.
Based on the analyses above, we deduce the policy implications as follows. Core consumption class in China’s consumption market in China is the upper 40% and they should be considered as the main targets in marketing. Until 2020, the basic consumption market would expand by 2.4 times whereas the service market will expand by 3.6 times, implying the importance of the service market. To access the ‘large consumption market’ in coastal regions for which competition is fierce, careful analysis on income/class composition and popular items is warranted. In this respect, ‘potential consumption markets’ in inland regions with large populations could also become a major target.
Central and local governments in China have shown interest in designing the cities utilizing advanced foreign concepts and technologies, and these represent important elements in accessing China’s urban development market. The Korean government can establish and diversify inter-government cooperation channels. The Korea-China FTA could be the stepping stone for access into China’s construction market. Korean-style urban models such as environment-friendly cities, smart grids, and administrative capitals could have some appeal. New investments in sewage among others are expected and would draw the attention of city planners. Different regions should be accessed differently with respect to their urban infrastructure market, as investments would likely be for maintenance in China’s east coast, for new construction in mid-west regions while western regions have yet to witness the initiation of full-scale building.
Urbanization and increase of income would lead to increases in production costs. But this does not necessarily mean the manufacturing sector would eschew China. Alternative production sites such as inland, mid-western regions or specialized industrial complexes could be sought. Considering that the productive population would decrease and the pace of urbanization will experience a slowdown around 2020, responses must be in advance.

In 2011, COP17, Parties agreed to launch a new process, called Ad Hoc Working Group on the Durban Platform (ADP), to negotiate a new climate agreement after 2020. The most distinguishable feature of the expecting new agreement is that it will be ‘applicable to all’ Parties. Though ‘applicable to all’ does not imply applicable to all in a symmetrical fashion, Parties’ positions on legal form will not be fall along developed and developing country lines any more. This critical change asks COP to develop new aspects of operating mechanisms under UNFCCC, accordingly. Especially to Korea which has been non-Annex I member so far, the change requires her to engage more actively in the climate negotiation process with suggesting constructive ideas to design the new regime, rather than simply to express her own position.
The purpose of this research is to lay out a basic theoretical and logical foundation which may help to design key mechanisms in new climate regime. To do this, in Chapter III, we first develop a model of a new climate agreement which satisfies key characteristics of Durban Platform. Then, we identify limitations of an old approach which can be summarized into (a) national reduction target and (b) international emission trading. The main result is that when a degree of heterogeneity in benefit from mitigation between countries is high enough, the old approach cannot achieve a social optimal mitigation level, though emission trading contributes to a broad participation. In this sense, relaxing the heterogeneity will be the key for the new regime. And that is the reason financial and/or technology transfer is necessary, besides mitigation efforts.
In this study, we focus on a specific issue among possible alternatives in designing the new regime, which is integrating market mechanism and financial mechanism. In Chapter IV, we survey the current and prospecting relevant mechanisms and investigate issues needed to be tackled for each mechanism. In Chapter V, we discuss interactions between two mechanism spheres in general and the importance of an integrating approach. A relationship between two mechanisms can be simplified as follows. The most fundamental element of market mechanisms is the demand for mitigation such as reduction targets and energy security. The demand induces flows of climate finance and they enable mitigation actions to be scaled up. Based on these observations, we qualitatively explore what expecting challenges to overcome will be. For the developing countries in general, lack of voluntary mitigation incentive is the basic problem. Supported NAMA type financial mechanisms, which requires corresponding mitigation actions, may be in a right direction to solve such incentive problems. The developed and the advanced developing countries may have voluntary mitigation incentives with seeking a new economy growth engine. For them, the key question is how to scale up the private resources in mitigation investments. A solution can be found with answering how to connect effectively the mitigation incentive into financial incentive, and vice versa. A necessary condition to construct those incentive schemes is to have transparent and objective MRV systems.
In Chapter VI, we present several possible tasks to develop both market and finance mechanisms in an integrated way. First, it needs to expertise best practice of the ‘inter-mechanism’ MRV system which is about coordination between a market mechanism and a financial mechanism. Various mechanisms in each market and finance sphere are expected to appear within and out of UNFCCC in near future. In the short run, more attentions will be paid to develop the ‘intra-mechanism’ MRV system which is about coordination among mechanisms within each sphere. However, having inter-mechanism MRV system will be very effective in the long run. Before a certain system without the integrating consideration becomes status quo, noting its importance and pursuing the best practice of them will be desirable. The other two are about how to provide more incentives toward environmentally more friendly private investments while the developed countries fulfill their financial contribution obligations. Depending on a type of private financial flows, its impacts on recipient country’s mitigation actions are different. Thus, a more environmentally favorable type of private financial flows needs to be more appreciated. To reflect this on incentive mechanisms, a more volatile financial flow can be discounted more in accounting financial contributions by developed countries, besides evaluation on environmental consequences of each investment. Also, we may consider to develop the technology spillover effect index which can differentiate private investments into the degree of mitigation technology spillover. Treating private investments with a higher index as the one with a more marginal contribution can help to create incentives.

In this paper, two issues are discussed. First, considering the interaction between economic openness and R&D investment, we investigate their effects on economic growth. Second, we analyze R&D policy directions under the new international trade environments such as deepening trade liberalization, Korea’s fast economic growth, and potential dispute under the WTO.
In the last two decades, the world has been experiencing fast trade and investment liberalization. In particular, since Uruguay round conclusion in 1993 and WTO establishment in 1995, the world trade has been growing by annual 9.1% and foreign direct investment has increased by annual 11.5%. During the similar period, total R&D investments by major countries has increased gradually and the growth rates of R&D investments by non-OECD countries exceeded those of OECD countries.
As the competition in the world market has been intensified because of trade liberalization, OECD countries have focused on technology and quality competitiveness rather than price competitiveness for exports. Also expansion of foreign direct investment induced increasing R&D activities by foreign companies in domestic markets.
We analyze the effects of economic openness on R&D investment using country-level data. According to the results, private R&D investments are affected by trade liberalization but not by investment liberalization. Government R&D investments increase as the volume trade increases, but decrease when foreign direct investments increase.
The effects of R&D investments on export performance are estimated by using Korean firm-level data. We fail to find significant effects of firms’ R&D investments on their total amount of exports, but decision on export, export shares, and the timing to start export turn out to be positively affected by firms’ R&D shares. Estimating the same regression models after dividing total R&D into product innovation R&D and process innovation R&D, we find only product innovation R&D has significant effects on export performance. This implies that technology and quality competitiveness is a more important factor for exporting.
Also we analyze the interactions among R&D, economic openness, and economic growth by using Panel VAR approach. The results show that foreign R&D increases domestic R&D, and domestic R&D brings value-added growth. Foreign R&D does not have direct effects on value-added in the short run, but increase it gradually in the long run.
To discuss effective R&D policies under new trade circumstances, we examine major countries’ R&D policies and the Agreement on Subsidies and Countervailing Measures‎under WTO. In addition, policy experiments are conducted by using computable general equilibrium model based on theoretical models of strategic trade policy. The results suggest international R&D cooperation and differentiated supports on industries considering their comparative advantages.

 

 

 It has been more than four years since the outbreak of global financial crisis. However, instead of moving along the road to full recovery, the world economy is continuously being challenged with new crisis such as European financial crisis and the fiscal cliff issue of the U.S. Although major advanced countries have mobilized yet the most aggressive macroeconomic and financial policies during the process of recovering from the global financial crisis, this rather resulted in causing another crisis due to the possible side effects of such economic policies. Based on this fact, it is likely that the world economy from now on will enter the phase of preparing countermeasures for those underlying side effects. Thus, the purpose of this research is to study the effectiveness and appropriateness of the economic policies carried out by the major advanced nations under the global financial crisis. And the paper also aims to project future world economy from an understanding on the consequences of policies.

Chapter 2 analyzes bailout plans that were implemented by major developed countries during financial crisis and attempts to assess them. It is true that the bailout programs carried out for financial institutions in the midst of financial crisis played a positive role in coping with the crisis by preventing its dispersal and intensification. On the other hand, however, side effect of such bailouts is predicted to become a burden on the economy of developed countries. This is because there is a concern that ‘too big to fail’ controversy will be led to a moral hazard, which may bring about the repetition of financial industry’s risk seeking behaviour. Another reason can be pointed to the possibility of prolonging the poor performance of financial system by regenerating the institutions that deserve restructuring according to the market principles. Therefore, in order to have instability among financial field under control, which may arise from the bailout plans, it is considered that advanced countries need to supplement financial regulations through reinforcing management and supervision over financial market and put in a great deal of effort for reforming financial system.
In Chapter 3, major economies’ monetary policy as a countermeasure for crisis is analyzed. The United States and the United Kingdom have been implementing the most aggressive monetary policy in history whereas Euro Area seems to be mobilizing the monetary policy that is more faithful to its target of stabilizing inflation. It can be criticized that such policies of European Central Bank bear some responsibility for prolonging the recession and intensifying a few member countries' financial crisis. U.S. non-traditional monetary policy, which lowered various interest rates, was very effective on moderating tight-money market in the beginning, but it can be said that its effect is gradually reducing over time. According to our Event Study, we found that the impact of first quantitative easing (QE1) was the largest, QE2’s effect was about one third of QE1, and impact of operation twist was even less than that of QE2. Hence, continuing quantitative easing after escaping from the serious stage of crisis may not have satisfying benefit. Moreover, financial market participants' disappointment with the impact of such policies that fall short of their expectation may cause crisis of a larger scale.
Chapter 4 compares pre- and post-global financial crisis fiscal multiplier of developed countries through empirical analysis. According to the result of Dynamic Panel VAR Estimation, major advanced countries' fiscal multiplier during the global financial crisis was higher than that of pre-crisis. This reflects the fact that major advanced nations’ policy to increase government spending was effective. If the fiscal multiplier is to be analyzed based on each country’s government debt, it is assumed that in case of a country with higher government debt, short-term multiplier is near zero and long-term multiplier is in negative range. Thus, it may be said that the aggressive expansionary fiscal policies of developed countries during global financial crisis had a notable impact, but it seems that in case of advanced nation whose government debt surged, it is hard to expect additional effect of expansionary fiscal policy and is thought that they need to accompany fiscal consolidation policy.
Based on the previously mentioned results of our analysis, this paper projects future world economy as follows: First, there is a high possibility for financial industry in advanced countries that are avoiding crisis through bailouts and quantitative easing to experience prolonged risk due to moral hazard and delay in liquidating insolvent institutions. Second, expanded global liquidity, a by-product of major advanced countries’ quantitative easing process, may cause instability of developing countries’ foreign exchange market and capital market. Third, the effect of major nations’ macroeconomic policy is expected to remain unobserved for several years from now on and hence when a new shock that causes economic downturn takes place, there is possibility for the economy of advanced countries to show larger fluctuation.

Korea has steadily expanded its FTA network since the Korea-Chile FTA in 2004. Currently, Korea has FTAs with 45 trading partners including the world’s top three economic blocs, the U.S., EU, and ASEAN plus India. It is expected that nearly half of Korea’s total trade volume will be carried out with its FTA partners, taking into account of the Korea-China FTA, under current negotiation.
This study sheds light on the economic impact of FTAs in Korea, focusing on the agreements with Chile, Singapore, ASEAN, and EFTA. In particular, the study aims to identify how the FTAs affect exports and imports, outward and inward FDIs, and productivity and employment as the channels through which they ultimately lead to economic growth in Korea.
The findings from this study are as follows: first, the FTAs have promoted trade between Korea and its FTA partners by fostering closer bilateral economic relations as well as reducing bilateral tariff rates. Korea has diverted its suppliers of raw materials and capital goods to its various partner countries such as Chile, ASEAN, and EFTA through the FTAs.
Second, the number of firms, particularly SMEs, that newly enter the export market has rapidly increased since the FTAs, and the new entrants and SMEs experienced a higher export growth rate than the existing large exporters during the post-FTA periods. Hence it is revealed that the FTAs have played a significant role in the extensive margin of exports.
Third, there has been an upsurge in overseas investments made by Korean companies through the FTAs. The FTAs have encouraged vertical investments in the developing countries as cheap manufacturing bases and horizontal investments in the services sectors of the developed countries. Meanwhile, this study shows that the FTAs have stimulated the inflow of FDIs to Korea, mainly from the high income partners.
Fourth, it is estimated that the FTAs have contributed to the increases in productivity and employment of firms that export to the FTA partners. In particular, the impact on productivity of the FTAs tended to be magnified over time while their impact on employment was mostly delivered in less than 3 years after the inception of the FTAs.

This paper analyzes how large-scale disasters (such as large-scale natural disasters and terrorist acts) influence the macroeconomy and financial markets. According to the findings, the large-scale disasters does affect the economy of nations where the outbreak of disaster took place, resulting in a 2% drop in economic growth (in the case of the Great East Japan Earthquake) and 6% decrease in exports (ex. Great East Japan Earthquake and the 9ㆍ11) compared to the global average of each category. And the result also shows that the cumulative abnormal stock return can fall by 10% (The Great East Japan Earthquake). However, the degree of negative impacts from external shock can vary depending on the nature of the disaster, how it is dealt with, and the country’s economic condition.
First, although immediate harm from both 2008 Sichuan Earthquake and the 9ㆍ11 came mostly in the form of human lives lost, these two cases had different economic impacts. The Great Sichuan Earthquake took many lives but its impact on the Chinese economy appears to be insignificant. It is sometimes considered that the Sichuan Earthquake was actually helpful to the development of the local economy, in that it spurred reconstruction of the disaster-stricken region. On the other hand, the 9ㆍ11 attack hit hard not only US but also global financial markets since most of the lives lost or affected during this tragedy were of professionals in finance-related fields. In fact, the decline of stock prices in the global markets was larger than that of the US stock market.
Second, an instance of poor response to disaster-aggravated economic situation can be clearly seen in the case of Hurricane Katrina. Hurricane Katrina only caused a 1% drop in exports in the quarter it occurred, but the government's inadequate response and increase in fiscal deficits brought about an average of 0.5% fall in economic growth.
Third, the pace of recovery can vary according to economic conditions prior to the outbreak of a disaster. Before the 9ㆍ11 terrorist attack and the Great East Japan Earthquake, the US and Japan found themselves in a slump in terms of economic growth trends. Such large-scale disasters became the main causes that worsened economic conditions; and Japan’s economy, in particular, has yet to show signs of recovery. Moreover, it seems that disasters can have a major impact on neighboring countries. The Great East Japan Earthquake, especially, impacted negatively neighboring states and countries that Japan held extensive trading relationships with for as long as one year.
Furthermore, according to the results from the theoretical model and simulation analysis, if the potential for disaster rises--for instance, when possibility for the outbreak of war in Korea goes up or climate change causes higher frequency of natural disasters--damage and side effects are to impact capital markets first and then eventually have a negative influence on the overall economy.
However, the significance of economic impacts of such disasters should be carefully interpreted. The effects of disasters identified in this paper were determined based on our empirical and theoretical models which may not account for all fundamental factors related to disasters. Analyzing stock price indexes by industry allowed us to see the industries that experienced significant impact after external shock were primary industries hit by the outbreak of disaster (e.g. electric power-related public enterprise sector during the Great East Japan Earthquake), disaster-related industry that suffered harm due to their failure to properly predict the disaster (e.g. insurance sector during Hurricane Katrina), industry exporting to countries where disaster occurred (e.g. South Korea’s health care sector during the Great East Japan Earthquake), and so on. In overall industry, a temporary decline following the shock were valid only for about a day or two. Hence, policy makers and practitioners should keep in mind that analysis based on the relevance to the real economy is necessary in order to reduce market uncertainty arising from massive disasters. Policy enforcement as a precaution should be realized via constructing various safety nets and disaster prevention systems in order to minimize the negative economic impacts once large-scale external shock takes place.