This study examines the economic cooperation between China and the EU and analyzes major trade issues in both regions. In addition, we analyze the competition between Chinese products and Korean products in the EU market, and draw up implications for the Korean government's EU trade policies and companies.

  Chapter 2 outlines the issues of bilateral trade and investment, including EU-China high-level dialogue, as well as a brief overview of cooperation in a wide range of fields. China and the EU are becoming more closely linked not only in terms of trade and investment, but also their cooperation in the fields of climate change, transportation connectivity, and innovation. The EU is China's largest trading partner and China is the EU's second trading partner. The EU's trade with China has exploded since China joined the WTO in 2001 and the two entered into a strategic partnership in 2003. In particular, the increase in goods imports from China has exceeded the increase in exports, and the EU's trade deficit with China continues to grow. The EU's main export commodities to China are concentrated in high-skilled machinery and chemical products, while China's export items to the EU include a variety of products from low-skilled to high-skilled. However, since 2010, China's machinery and transportation equipment exports to the EU are showing rapid growth, and the proportion of high-skilled products is rapidly expanding. In addition, China's recent increase of direct investment in the EU not only aims at the entry of Chinese goods and services into the European market, but also to secure brand value, expertise and technology through M&As with European companies. As a result, the Chinese economy is rapidly transitioning into high-value-added industries, and China's export items to the EU are rapidly reorganizing into high value-added products.

  Chapter 3 researches the major issues and prospects of trade disputes between China and the EU from the perspective of trade remedies like anti-dumping and countervailing duties, China's market economy status and bilateral WTO disputes. The biggest pending issue in trade disputes between China and the EU is identified as the market economy status related to anti-dumping measures and their effectiveness. The trade conflicts between the two regions will persist for the time being. If trade disputes between the US and China continue to expand and deepen, and the trend of global protectionism remains unchecked, more cases of trade friction will likely ensue between China and the EU. However, unlike the US, the EU is more inclined toward a dispute settlement method based on the rules of the multilateral trading system rather than unilateral sanctions. Therefore, as seen in the US-China trade dispute, it is relatively unlikely that full-scale retaliation to trade tariffs will take place.

  Some changes in the nature or form of trade disputes between China and the EU can be detected, one of which is the possibility of expanding the countervailing duty dispute related to the “Made in China 2025” initiative. EU industries are raising concerns that the Chinese government's support for Made in China 2025 could lead to over-production and thus strained trade relations. In the process of promoting Made in China 2025 as a national industrial development strategy, Chinese local governments as well as the central government are likely to implement financial support and preferential treatment measures for each core industry sector, which could constitute unfair subsidies. This means countervailing duties could play a larger role in China-EU trade disputes, which have hitherto focused mainly on anti-dumping measures.

  In Chapter 4, we consider the competitiveness of Korea and China in the EU market through a quantitative analysis of trade competitiveness, intra-industry trade and export similarity index.

  In the EU market, we can confirm that the export similarity between Korea and China for the 15 industry groups we examined is definitely on the wane. According to HS 4-digit classification, the top 30 export items of Korea and China to the EU do not show a high level of similarity, particularly in the case of higher-ranking items, and a large number of items indicate that intra-industry trade is active. In addition, Korean or Chinese products have secured global trade competitiveness in almost all of these items, and many of the top 30 items for Korea represented areas in which both countries have secured a high level of competitiveness. This shows that intra-industry trade in both countries has had a positive effect on the trade competitiveness of both countries and is one of the major factors that alleviated competition between the two countries despite the increase in market share.

  Finally, Chapter 5 evaluates the main characteristics of the China‒EU trade relationship, forming the conclusion of this study, and goes on to draw implications for Korea. It should be kept in mind that trade disputes between China and the EU may have an impact on the expansion of trade disputes with Korea, depending on future developments. Korea is ranked third in terms of the number of anti-dumping and countervailing duty measures taken by the EU, and is also the third most targeted by China for its anti-dumping duties. In particular, Korea has been subjected to more anti-dumping measures from China than the EU. This shows how Korea can always become involved in trade disputes with China and the EU regarding trade remedies. Accordingly, it is necessary to prepare for the possibility that the expansion of trade disputes between the US and China, and the escalation of trade disputes between China and the EU, will lead to further strengthening of trade regulations against Korea. In other words, by analyzing the development process and changes in trade disputes between China and the EU, it will become possible to understand the characteristics of these disputes and accumulate experience on the logic used in these situations, thus enabling preliminary measures to prevent such trade disputes or at least minimize any potential damages.

  As can be seen in the case of China-EU disputes, anti-dumping measures are initiated primarily at the request of interested parties or associations. Therefore, in order to minimize trade disputes with the EU and China, efforts should be made to strengthen cooperation with industry and foreign partners in other countries. This is a very important factor in resolving disputes after antidumping measures have been implemented.

  It is necessary to closely examine the development process of trade issues discussed in the “High-level Economic and Trade Dialogue (HED)” between China and the EU. In particular, we can expect for matters of utmost importance to both regions and Korea, including trade and investment cooperation, sustainable development, trade facilitation and IPR, to be discussed at the HED. Therefore, it is necessary to review the bilateral trade issues discussed during the China-EU HED and establish a proper stance on issues that can affect Korea's interests and prepare countermeasures.

  As the Korea-China export similarity analysis shows that intra-industry trade in both countries has had a positive impact on trade competitiveness on both sides, as well as easing competition relations despite the expansion of market share in the EU, trade disputes between China and the EU hold particular significance for Korea.

  Therefore, it appears inevitable that the Korean economy will be adversely affected by the intensification of such trade disputes, and we must work to minimize the negative effects by establishing comprehensive alternative measures such as the utilization of niche opportunities that appear during trade disputes, reorganization of GVCs, and diversification of export markets. 

  The sudden turn of events on the Korean Peninsula – the historic inter-Korean summit held on April 27th, second inter-Korean summit on May 26th, the Singapore summit between North Korea and the U.S. on June 12th, and the third inter-Korean summit held on September 18th and 19th – are raising expectations for North Korea’s denuclearization, easing of military tensions between the two Koreas, the official ending of the Korean War and a permanent peace settlement.
  The ongoing negotiations between North Korea and the United States, which has the most impact among all factors on the Korean Peninsula, ended in a stalemate because the U.S. demands a preemptive and complete denuclearization while North Korea is demanding an immediate lifting of sanctions. If positive results can be derived from the second summit between the North and the United States scheduled for early 2019, it is highly likely that an easing of economic sanctions will be initiated in accordance with progress toward denuclearization, rather than additional sanctions being imposed.
  This research aimed to study the lifting of international economic sanctions on North Korea in connection with the North’s denuclearization process and to deduce implications in response. In particular, the purpose of this research is to see how lifting economic sanctions against North Korea in the course of future nuclear negotiations between the United States and North Korea can contribute to the North’s denuclearization, and how this process could be mutually beneficial to both North Korea and the rest of the world. Towards this, we analyzed the UN Security Council’s multilateral sanctions on North Korea, bilateral sanctions against North Korea by the United States and Japan, related laws and issues arising during the process of lifting sanctions, and the economic effects to be gained by lifting the sanctions. Finally, we analyzed the process by which the United States and Vietnam re-established diplomatic relationships, going on to draw implications for North Korea.
  Going on to the content of the study, in the second chapter, we explore the UN Security Council’s sanctions against North Korea. These can be divided into two types, the first of which are those imposed on the North from 2006 to 2015 when the North conducted its first nuclear test, and those from 2016 to 2017. In order to measure the effect of the UN Security Council’s sanctions on North Korea, we calculated the Sanctions Effectiveness Index – a composite index that combines the Trade Effectiveness Index, Market Effectiveness Index, and Foreign Currency Achievement Index. Our results show that the effectiveness of sanctions against North Korea has significantly increased after March of 2017, thus indicating that sanctions imposed by the UN Security Council have remained firmly in place.
  Next, we present plans for multilateral cooperation measures that could be implemented before complete denuclearization, and a possible scenario of lifting sanctions in accordance with the North’s pre- and phased denuclearization. Ways to lifting or easing economic sanctions in proportion to the level of North Korea’s denuclearization are suggested, as the economic sanctions have had a severe impact on North Korea’s exports of minerals, marine products, clothing and textiles, dispatched workers, imports of crude and refined oil, and joint investment, in that order. Multilateral cooperation prior to complete denuclearization should be faithful to the purpose of completing the North’s denuclearization, and if the relevant sanctions are lifted, the international joint development and management of North Korea’s mines and special industrial zone development projects in North Korea are suggested as promising areas for further multilateral cooperations.
  In Chapter 3, we examine the lifting of sanctions against North Korea imposed by the U.S. The U.S. imposed sanctions on North Korea on the grounds of executive orders issued by its government, which is delegated the authority to impose sanctions in accordance with legal statutes, and laws enacted by the U.S. Congress. More specifically, the legal grounds for these sanctions on North Korea are as follows: the Trading with the Enemy Act (TWEA), Export-Import Bank Act (EIBA), Export Control Act (ECA) and the Trading Agreement Extension Act (TAEA), laws enacted in the name of national foreign policy, preventing the spread of socialist countries, non-market economies, WMD development, and proliferation threats. In addition to these comprehensive sanctions, there are laws that justify sanctions specifically on North Korea, such as the North Korean Human Rights Act (NKHRA), Iran, North Korea and Syria Non-Proliferation Act (INKSNA), North Korea Sanctions and Policy Enhancement Act (NKSPEA), and the Countering America’s Adversaries Through Sanctions Act (CAATSA). The other way that the U.S. has imposed sanctions on North Korea is by issuing executive orders by the president. The first executive order was issued on June 28th, 2005, followed by six more, including Executive Order 13466, which was issued after the U.S. government listed eight agencies as WMD proliferation agencies, of which three were North Korea’s organizations. The U.S. sanctions include restrictions on trade, aid, arms sales or transfers, and access to assets.
  It is unlikely that the U.S. will lift the sanctions all at once. A more realistic scenario is that the government will first exempt or postpone enforcement of some of the sanctions, and then lift the sanctions as the situation progresses. Partial suspension or exemption of sanctions can have the same effect as lifting sanctions in the short term, and any agreement to lift sanctions will likely incorporate “snapback” clauses stating that sanctions will be imposed again if the North reneges on the terms. As such, it would also be reasonable for North Korea to utilize such clauses as it seeks partial suspension or exemption from sanctions.
  In Chapter 4, we analyze Japan’s lifting of its bilateral sanctions on North Korea. Our analysis takes into account the fact that Japan has a special relationship with the North due to unresolved issues regarding the abduction of its citizens. During the six-party talks to reach a solution to the North Korean nuclear program, Japan caused difficulties for the denuclearization process by raising the Japanese abductees issue through international channels.
  Meanwhile, Japan could also provide North Korea with the biggest economic benefits and compensation in the process of lifting economic sanctions. Japan was once the North’s largest trading partner, and it is estimated that the amount of compensation money North Korea will claim from Japan in reparations for the colonial period will be substantial when the sanctions are lifted and diplomatic ties between the two countries are resumed. In addition, considering the international share of North Korea’s nuclear dismantlement, Japan will be able to financially support economic recovery in the North after its denuclearization. If the compensation money is used to build manufacturing facilities in North Korea, its foreign trade structure can expect tremendous change in addition to a rapid increase in trade with Japan.
  Chapter 5 discusses the process by which the United States lifted its sanctions against Vietnam and the issues that arose during this process. Prior to the establishment of diplomatic ties between the two nations, the U.S. implemented restrictions on trade or international aid to Vietnam and isolated the country from international partners. There was no choice for Vietnam but to cooperate with the U.S. in order to gain access to the world market and initiate trade with the U.S. as the sanctions continued to pile on. The United States used this position as leverage and demanded a high degree of openness in the Vietnamese trade market, as well as the resolution of political issues between the two nations. In light of the current denuclearization talks between the U.S. and North Korea, the process by which the U.S. lifted sanctions against Vietnam can be seen as a combination of a “front-loading” approach and phased, yet simultaneous efforts. During the early stages of the normalization process, Vietnam withdrew its troops from Cambodia and actively cooperated with the U.S. to excavate and repatriate the remains of U.S. troops. In response, the U.S. presented a four-stage roadmap corresponding to Vietnam’s efforts to normalize relations. We determined that economic sanctions were lifted sequentially, beginning with those of small effect but easy to remove, and eventually proceeding on to sanctions of strong effect and more difficult to remove. 
  Vietnam has benefited considerably from the elimination of economic sanctions. Its nominal GDP, which was $27.84 billion in 1980, jumped about eightfold to $22.04 billion in 2017. The amount of FDI and ODA flows also show that normalizing relations with the U.S. had a significant impact on the Vietnamese economy. Eventually, the U.S. granted Vietnam a permanent normal trade relationship (PNTR) status, which allowed it to join the WTO and be recognized as a normal country from the international community, and to create the institutional grounds for its economic growth.
  Lastly, Chapter 6 presented policy directions for lifting sanctions against North Korea in the process of denuclearization and proposed policy tasks for the South Korean government. First, we must lift multilateral and bilateral sanctions by cooperating with the United States, which holds a dominant position in negotiating the degree of sanctions against North Korea. Neither should we undermine the cohesion of the member states of the United Nations. In particular, it will be important for the UN Security Council to work with the United States, partially mitigating sanctions in line with North Korea’s denuclearization progress while strengthening the solidarity of multilateral sanctions and ensuring that the UN member states maintain the framework of sanctions against North Korea. In addition, a snap-back clause should be inserted in the negotiating terms to ensure North Korea implements its denuclearization measures within the prearranged time frame. Next, lifting of sanctions should start with ones which are easy to remove and have a small effect, and hold a strong leverage until the very last stage of the critical denuclearization phase. Of course, it will also be necessary to encourage North Korea to take decisive steps toward denuclearization by providing comprehensive support packages and other concrete economic incentives.
  In the process of lifting sanctions, the Korean government should coordinate each country’s interests and promote international cooperation by playing the role of a mediator. It will be highly important to create an environment that will allow North Korea and the United States to build trust with each other. The government needs to properly inform opinion leaders in the U.S. who affect U.S. policy, by engaging in public diplomacy efforts to promote understanding of the situation on the Korean Peninsula.
  North Korea’s denuclearization process will eventually require the United States to lift its sanctions against North Korea, yet this could take some time to resolve domestic legal procedures. In the meanwhile, the South should seek cooperation from the U.S. government to pursue inter-Korean economic cooperation first while the U.S. government lifts international sanctions against the North. The South should also make efforts to seek exemptions from and lifting of sanctions imposed by the U.S. government from the early stages of the North’s denuclearization, thus ensuring that South Korean corporations can become active partners in economic cooperation with North Korea. If North Korea gains a normal trade relationship(NTR) status from the U.S., South Korean companies will enjoy much more favorable conditions for economic cooperation in North Korea. Finally, it will be necessary to reassure North Korea about the benefits it will gain after sanctions are eased by presenting multilateral cooperation programs in the process of denuclearization. 

  The fourth industrial revolution is the next generation industrial revolution driven by intelligence information technology. Specifically, the digital innovations related to artificial intelligence, big data analysis, cloud computing, and the internet of things have driven hyper-connection between all products and services through global networks, thereby advancing the data-driven economy.
  This study describes the trend of digital innovations in the wake of the fourth industrial revolution, discussing the changes in the economic paradigm and international trade patterns in the future. This study also compares industry-level digital innovation by country using the data on patents reported to the US Patent and Trademark Office (USPTO), as well as the dataset provided by the OECD and the International Federation of Robotics. We simulate the effect of digital innovation on trade according to various scenarios, setting up the theoretical model for counter-factual analysis using data from World Input-Output Table released in 2016. In order to quantify the trade effects from digital innovation, we add fundamental productivity into a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity.
  According to the results of the analysis, the significant improvement in the world’s digital innovation, led by the US and Japan, shows an increasing step curve during the years of 1998 and 2010. The quantitative and the qualitative level of Korea’s digital innovation is steadily rising, and the latest data rank it at a high level. However, Korea’s level of digital innovation is still relatively low compared to the US and Japan. When considering the recent drop in Korea’s H index with an increase in the level of digital innovation in China and India, Korea may experience a similar decline as the EU.
  Overall, industrial robots are showing an increase in the level of digital utilization. Around 72% of the world’s industrial robots are installed and operated in the US, Japan, Korea, China and Germany. Korea is the third largest robot installation station, and the fourth largest robot operator country which uses industrial robots actively. In particular, the number of robots that are operated per 10,000 workers in Korea is 631, the largest rate in 2016. As for the other indicators of digital utilization, despite the nation’s high usage rate of high-speed internet at enterprises (99.3%) and households (99.5%), the usage of ICT at enterprises is not that high in Korea, with the exception of the RFID utilization rate.
  For the simulations, this study considers ten different scenarios depending on productivity shocks from sector-level and country-level. At a bottom line, counterfactual analysis based on a variant of the Ricardian model shows that digital innovation is beneficial to international trade. In other words, if digital innovation boosts fundamental productivity, it triggers growth in international trade at both sector-level and country-level. If countries/sectors have higher productivity due to digital innovation, those become much more competitive in producing goods or services, affecting trade share, price, expenditure, and many others within the model.
  As fundamental productivity induced by digital innovation becomes higher and the number of countries that experience enhanced productivity grows larger, the model predicts that world trade volumes will become larger accordingly. However, the growth in trade volumes are uneven. Although digital innovation contributes to growth in world trade volumes, increases in world trade are concentrated in certain countries and/or sectors that lead digital innovations.
  The above-mentioned results of this study indicate that the Korean government must step up wide-ranging deregulation measures to facilitate digital innovations. In addition, trade rules such as Technical Barriers to Trade (TBT), Intellectual Property Rights (IPR), Telecommunication Agreements, and Electronic Commerce need to be urgently revised through the WTO negotiations. Policy governance also needs to be set up to systematically support digital innovation in private sectors.

Executive Summary

1. Introduction

2. Value Added Exports (VAX) in Services
2-1. Value Added in Exports of Service Sectors
2-2. Contribution of Service Sectors to Value Added in Exports of Manufacturing Sectors
2-3. Comparative Advantage of Service Sectors

3. Empirical Model and Data
3-1. Comparative Advantage in Services
3-2. Institution and Social Capital as Sources of Comparative Advantage

4. Estimation Results
4-1. Relative Labor Productivity and Comparative Advantage
4-2. Sources of Comparative Advantage
4-3. Robustness Check

5. Summary and Conclusion

References

Appendix
1. Country and Industry Classification
2. Derivation of Value Added in Exports (VAX) 

Previous studies that have identified the impacts of institutions or cultural traits on comparative advantage focused on goods trade, but not services trade. In contrast to the rapid increase in trade in services, empirical examina-tion on sources of comparative advantage in services trade remains limited. This paper attempts to fill this gap by investigating empirically the impacts of institution as well as social capital on comparative advantage in services trade. Services are exposed to relatively more pre-choice risks than goods, because it is difficult to obtain information on the quality of services before the con-sumer decides to purchase. In addition, trade in services involved in global value chains possibly takes on the risks of contract breach by other firms along the same value chains. As a result, the transaction risks for trade in ser-vices are higher than for trade in goods. Using the World Input Output Da-tabase, we estimate the importance of social capital for comparative ad-vantage in services. We find that countries with more social capital tend to specialize in the production of contract-intensive services. We also find that social capital rather than institution matters for comparative advantage in ser-vices.

Keywords: Services Trade, Comparative Advantage, Institution, Social Capital
JEL Classification: F11, F14 

Executive Summary

1. Introduction

2.  A Retrospective Analysis of the Processes of Regional Economic Integration in CA

3. Dynamics of Foreign Trade of CA Countries
3-1. General Foreign Trade
3-2. Mutual Trade

4. The Role of CA Countries in International Organizations

5. Conclusion

Appendix

References 

  At the current stage of globalization, Central Asia (CA) is becoming a focal point for the political and economic interests of global forces because of its rich natural resources and critical strategic position. From this point of view, the CA countries need to form a joint development strategy for solving regional problems and a strong mechanism for countering the main political and economic conflicts in the region. At the same time, the countries of the region need to choose the path of joint development in order to increase the efficiency of their internal capacities and resources, adapt the domestic social and economic infrastructure to modern requirements and improve the living standards of the population.
  This is directly related to the progress of regional economic integration in CA. Through this integration, the economies of the countries in the region could complement each other and ensure a high level of development in mutual trade and industrial development.
  However, there are some obstacles and problems hindering the development of economic integration in the region. Most particularly, the weak infrastructure in the region, its economic-geographical isolation from world markets, administrative barriers and political instability hinder trade between the countries of CA.
  From this point of view, this study focuses on the problems of general and cross-border trade in CA countries, and the opportunities for economic integration in the region.

Keywords:  Foreign Trade, Export, Import, Central Asia, Mutual Trade, Economic Integration

JEL Classification:  F50, F63, R11 

Executive Summary

1. Introduction

2. The Model
2-1. Consumer
2-2. Firm
2-3. Labor market and production
2-4. International trade

3. Equilibrium
3-1. On the equilibrium
3-2. Changes in equilibrium
3-3. Solution algorithm

4. Counterfactual Analysis Based on the Model
4-1. A revisit to Caliendo and Parro (2015)
4-2. The welfare effect of China’s tariff reductions

5. Conclusion

References

Appendix 

  Over the last decade, quantifying the welfare effects from tariff changes has become one of the main challenges among international trade economists. There are a number of quantitative trade models with micro-foundations which emphasize demand-side (Anderson and Van Wincoop 2003), supply-side (Eaton and Kortum 2002), Bertrand competition (Bernard et al. 2003), extensive and intensive margin (Chaney 2008), etc, and conclude that trade liberalization with tariff reductions leads an economy to reach a higher level of welfare compared to pre-liberalization (Costinot and Rodriguez-Clare 2014). While elegant, these models inducing gravity equations share the common assumption, a perfect labor market. Quantitative trade models with full-employment developed so far have not taken account of labor market frictions when evaluating the welfare effects from tariff changes. This paper aims to fill the gap in the trade literature by explicitly considering labor market frictions.
  I employ search-and-matching to a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity, in order to quantify the welfare effects from tariff changes. The paper shows that labor market frictions can be a source of comparative advantage in the sense that better labor market conditions contribute to lower cost in production. Labor market frictions play a critical role in determining the probability of exporting goods to trading partners, and interact with bilateral trade share, price, expenditures, etc. Unemployment and changes in unemployment rates due to tariff reductions contribute welfare changes across countries, implying that welfare effects based on quantitative trade models with full-employment are likely to be biased. I confirm the biased welfare effects by revisiting Caliendo and Parro (2015), who conduct an analysis of the welfare effects from the NAFTA from 1993 to 2005. I show that the welfare gap between theirs and mine has a positive correlation with changes in observed unemployment rates across countries. With the constructed model, I further conduct counterfactual exercises by asking what would happen if China’s tariffs remain unchanged from 2006 to 2015. It turns out that there are mild welfare effects to trading partners in the world trading system.

Keywords: Quantitative Trade Model, Unemployment, Welfare
JEL Classification: F10, F17, F60 

ⅠIntroductionⅠ

Political Changes on the Korean Peninsula and the Significance of Trilateral Cooperation between South Korea, North Korea, Russia
Lee Jae-Young
President, Korea Institute for International Economic Policy (KIEP)

❙Korean and Russian Perspectives on Trilateral Cooperation between South Korea, North Korea, Russia❙

Korean Perspectives ❚

01 New Opportunities for and Approaches to the Trilateral Cooperation between the ROK, DPRK and the Russian Federation

Kim Seok Hwan
Visiting Research Fellow, KIEP

Park Joungho
Director General, New Northern Policy Department, KIEP

02 Key Challenges of the Trilateral Cooperation and its Action Plan

Kim Seok Hwan
Visiting Research Fellow, KIEP

Park Joungho
Director General, New Northern Policy Department, KIEP

Russian Perspectives ❚

03 North Korea-Russia Relations and Overview of the Prospect of Trilateral Cooperation by Areas

Pavel A. Minakir
Director emeritus, Economic Research Institute, Far Eastern Branch of the Russian Academy of Sciences

04 Interrelation between the North Korea-Russia Cooperation and the Trilateral Cooperation

Vasily V. Mikheev
Vice President, Institute of World Economy and International Relations (IMEMO)

05 New Developments in the North Korean Nuclear Issue and the Trilateral Cooperation between the ROK, DPRK and the Russian Federation

Sergey A. Karaganov
Dean, Faculty of World Economics and International Relations, National
Research University-Higher School of Economics

Natalia Kim
Associate Professor, School of Asian Studies, National Research
University-Higher School of Economics

ⅠConclusionⅠ

Policy Recommendations to Promote TrilateralCooperation between the Two Koreas and Russia
Lee Jae-Young
President, Korea Institute for International Economic Policy (KIEP)

ⅠReferencesⅠ

ⅠAppendixⅠ 
Developments related to Trilateral Cooperation between the Two Koreas and Russia 

  North Korea’s nuclear development plans and missile tests led to a state of acute tension in 2017, escalating the risk of war. The tense situation took a sharp turn following the 2018 Pyeongchang Winter Olympic Games, followed by two inter-Korean summit meetings and the first in history meeting between the leaders of North Korea and the United States. These developments have improved relations between the two Koreas and are leading to substantial talks toward the denuclearization of North Korea.
  On April 27, 2018, the leaders of the two Koreas met for the first summit talks in 11 years, culminating in the Panmunjom Declaration in which they agreed on the dramatic improvement and development of inter-Korean relations, elimination of military tension and mutual non-aggression, and complete denuclearization and establishment of a peace regime on the Korean Peninsula. In the second inter-Korean summit of the year held on May 27, 2018, the two leaders reached a consensus to work closely toward denuclearization of the Korean Peninsula and the establishment of a permanent peace regime. he South and North held inter-Korean high-level talks on June 1, in which it was agreed to establish a joint liaison office in Gaeseong, North Korea, and practical measures to implement the Panmumjom Declaration were discussed. South Korea becoming a full member of the Organization for Cooperation of Railways (OSJD) on June 7, 2018, was an important development as well. Despite seeking full membership to the Organization since 2015, the South had hitherto been blocked by North Korea’s veto votes.
  The virtuous cycle that began with these improvements in inter-Korean relations was continued with the first U.S.-North Korea summit in history. The leaders of North Korea and the U.S. met on June 12, 2018, in Singapore, releasing a joint statement agreeing to establish a new bilateral relationship, build a lasting and stable peace regime on the Korean Peninsula, and to make joint efforts toward the complete denuclearization of the Korean Peninsula. Chairman Kim Jong Un reconfirmed his commitment to the agreements made within the Panmunjom Declaration and pledged to work toward the complete denuclearization of the Korean Peninsula. The historic summit between the two leaders was followed by subsequent measures on the part of North Korea – such as the release of three U.S. citizens, repatriation of U.S. soldiers’ remains, and the closure of its Punggye-ri nuclear test site and dismantlement of the Sohae engine missile testing site in Tongchang-ri – in return for which it called on the U.S. to lift North Korean sanctions and formally end the Korean War. The U.S., on the other hand, is maintaining its position that North Korea must first begin substantial measures toward complete denuclearization, and that the lifting of sanctions can only be considered after major progress has been seen toward denuclearization. The U.S. is particularly keen on securing a list from North Korea outlining its nuclear arsenal, and is yet to make its position clear on the issue of an end-of-war declaration, instead focusing on both talks and pressure tactics toward North Korea.
  When considering the delicate situation currently unfolding between the three nations following the summit meetings, it is clear that the Moon Jae-in government in South Korea must play a crucial role. However, inter-Korean relations are mired in complications caused by North Korea’s nuclear program and U.S. sanctions against North Korea, making it difficult to realize any substantial progress in economic cooperation projects with the North. As of yet, the New Economic Map of the Korean Peninsula and the New Northern Policy, initiatives announced by the Moon administration, remain at the initial stage of planning. But as President Moon stressed in the August 15 Liberation Day speech, peace is vital to economic development on the Korean Peninsula, and the New Economic Map of the Korean Peninsula and New Northern Policy must be recognized as foundation-building efforts to resolve North Korea’s nuclear issue once and for all. In his Liberation Day speech President Moon emphasized that “establishing peace and forming an economic community on the Korean Peninsula is the actual realization of our liberation,” and that “developing relations between the two Koreas is the true driving force behind denuclearization of the Peninsula.” These sentiments carry the message that inter-Korean economic cooperation is an inevitable and essential means to reconstruct the virtuous cycle between the three parties through the third inter-Korean summit in September 2018, followed by nuclear talks between the U.S. and North Korea, and another North Korea–U.S. summit meeting scheduled to take place. During his speech President Moon also proposed an East Asian railway community, demonstrating how the New Economic Map of the Korean Peninsula will lead to economic cooperation with economies toward the north of Korea, strengthening connectivity with the Eurasian continent.
  As such, the New Economic Map for the peace and prosperity of the Korean Peninsula must be accompanied by a recognition for the geopolitical and geoeconomic value of the Russian Far East region. When North Korea begins its process of reform and opening up and economic cooperation projects between the two Koreas resume, the Russian Far East will rise as a key point for economic cooperation between Korea and its neighbors to the north. This would also open up more opportunities for bilateral and multilateral cooperation in hand with Russia’s development strategies in the Far East region, between the two Koreas and Russia. The Russian Far East region is strategically significant in that it connects with the Korean Peninsula, thus serving as a starting point for economic cooperation between Russia and the two Koreas and offering a bridgehead for the Korean economy to extend its growth. The Russian Far East region is also essential for the eastern axis of the New Economic Map for the Korean Peninsula, which involves forming inter-local cooperation in the East Sea region and developing the Northern Sea Route.
  There is no doubt that trilateral economic cooperation projects between the two Koreas and Russia will benefit South and North Korea and contribute to South Korea-Russia relations, while driving the denuclearization of the Korean Peninsula in an irreversible direction. Such cooperation projects would also make it possible to realize peace and mutual prosperity on the Korean Peninsula while strengthening connectivity with Eurasian nations. Ultimately, trilateral cooperation projects will add substantial momentum to Korea realizing its future vision of a “bridge country” that connects the ocean and continent, and to Russia gaining a strategic foothold to develop its Far East region and advance into the Asia-Pacific area.
  Russia is not a major presence in the ongoing talks between South and North Korea, the U.S. and China for the denuclearization of North Korea. However, when we recognize the limitations of producing a solution to the North Korean nuclear issue only within the framework of diplomatic security talks, it becomes clear that the Russian Far East represents great strategic value, and that trilateral cooperation projects between Russia and the two Koreas deserve much more recognition for their significance. On April 29, 2018, Russian President Putin stated the need for the progress realized through the inter-Korean summits to be continued through trilateral cooperation projects with Russia. President Putin also stressed how connecting Russia’s railways, gas pipes and power supply into Siberia through the Korean Peninsula would contribute to the stability and prosperity of the Peninsula. During his visit to Moscow in June 2018, President Moon reached a consensus with President Putin on how trilateral economic cooperation would create a virtuous cycle of furthering peace on the Korean Peninsula and promoting economic cooperation, and how this must be further developed into a multilateral security regime in Northeast Asia. If cooperation between the two Koreas and Russia could vitalize multilateral cooperation schemes with the U.S., China and Japan, this would add crucial momentum to the mutual prosperity and permanent peace of Northeast Asia.
  This volume contains the results of joint research conducted by Korean and Russian experts, focusing on the following objectives. First, we wish to illustrate the need for trilateral economic cooperation within the changing political situation on the Korean Peninsula and the Northeast Asian region, through which it will become possible to pursue mutual prosperity within the region and establish a foundation for permanent peace. Our second goal is to perform an in-depth study of the perceptions and situations on each side in regard to South Korea–North Korea–Russia cooperation, through which we can identify the basic directions, tasks and strategies to promote cooperation between the three parties. This approach is particularly timely and significant on an academic level when it comes to identifying strategic connections between Korea’s New Northern Policy and Russia’s New Eastern Policy, and to realize qualitative development in South Korea–Russia relations. Finally, we wish to offer important policy implications for the Korean government as it implements its New Northern Policy and the New Economic Map for the Korean Peninsula, and help produce measures to expand economic cooperation between Korea and Russia in the Russian Far East. 

Exchange rates have been changed unusually large these days. From 2011 to 2016, the Euro and the Japanese Yen have depreciated against the US Dollar by more than 25 percent. According to a theory, since competitively valued exchange rate helps to boost export growth, we should have observed a sub-stantial increase in export in the EU and Japan. However, the effectiveness of the exchange rates on exports appears to be weak across countries. This anomaly is one of the central puzzles in international macroeconomics: why large movements in the exchange rate have modest effects on the aggregate variables such as import prices, consumer prices, and quantity of exports. 

  In this paper, we examines the role of global production linkages on ex-change rate elasticities by using Korean firm-level data. At firm-level, foreign-owned firms or firms with foreign subsidiaries participated in the Global Value Chains (GVC) play an important role in weakening the effect of ex-change rate movements on firm exports. The empirical results show that the exchange rate elasticity of total export is about -0.64, which implies that 10% appreciation of Korean Won would make a drop in total export by 6.4%. However, the exchange rate elasticities of firms are not the homogeneous across firms. We find that the exchange rate elasticities of firm exports are significant and negative for domestic-owned firms and firms without foreign subsidiary whereas those are insignificant for foreign-owned firms and firms with foreign subsidiaries.

  After controlling exports to foreign affiliates, we still find that the estimated exchange rate elasticities of exports are statistically insignificant, but become negative and relatively larger for firms with global production linkages. More-over, firms with higher GVC integration measure or more imported inter-mediate inputs have the significantly lower exchange rate elasticities of firm exports. It suggests that developments of global production linkages via firm ownership, within-industry or within-firm in the last decade play an essential role in alleviating the effect of exchange rate movements on the firm exports.

Keywords: Exchange Rate Elasticity, Firm Export, Production Linkage, Global Value Chains

JEL Classification: F14, F15, F23, F31

About KIEP

Highlight 2017

Bright 2017

Research-Oriented Activities

General Projects

Appendix 

The year 2017 was a period of escalating external risks for the Korean economy, as advanced economies progressively normalized their monetary policies, the international trend of economic protectionism and nationalistic trade policies continued with the progress of Brexit and the Trump administration’s America First policies, and the North Korean nuclear issue deteriorated into a state of discord among the international parties involved.

To cope with these challenges, we at the Korea Institute for International Economic Policy (KIEP) identified eight major policy directions to focus on as we carry out our fundamental mission as a national research institute. The eight areas KIEP will focus its research capabilities on are: the proposal of coping measures in the face of trade protectionism; promoting strategic economic cooperation; the establishment of a Northeast Asia Plus Community of Responsibility; stronger development cooperation to maximize national interests; pursuing economic unification on the Korean Peninsula; the realization of income-led growth policies; the vision of Innovative Growth; and external risk management.

The global economy continues on the path of recovery from the past crisis, but as of yet we lack clear indications that this trend of growth will continue in the long term. The support of neighboring countries will be essential when it comes to the stable establishment of lasting peaceful relations between the two Koreas. As such, the geopolitical significance of Korea will continue to rise.

As our economy navigates these multiple challenges, KIEP will contribute to the establishment of sustainable cooperation strategies through research on the government’s New Southern Policy and New Northern Policy; we will guide the national execution of the New Economic Map of the Korean Peninsula, based on reconciliation and cooperation between the two Koreas; we will explore international economic and trade policies that can support the vision of inclusive growth; and we will identify promising new industries to concentrate our national resources in line with the Fourth Industrial Revolution unfolding around us. The research findings we provide will serve as a guide to formulate policy decisions that can drive national development.

On behalf of KIEP, I wish to extend my deep gratitude and appreciation for the interest and support you lend toward our progress. KIEP will continue its work in the areas of regional studies, trade investment, and international macrofinance, earning the trust of the people as we fulfill our mission as a responsible research institute and a national leader of sustainable growth and innovation through policy research.