Acknowledgements

Abbreviations

Introduction

Ⅰ. Regional Geopolitics and Integration

1. The Changing Geopolitics in Asia
A. The Emergence of China
B. Coping with the Rise of China
2. Regional Economic Integration
A. Overview of FTAs among Asian Economies
B. Economic Interdependence in the Region
C. Trade among Countries in the Region

Ⅱ. Overview of Vietnam-Korea Relations

1. Non-Economic Relations
A. Political and Diplomatic Relations
B. Cultural Cooperation
C. Labour Cooperation
D. Tourism Cooperation
E. Science and Technology Cooperation
F. Intellectual Property
G. Education and Training Cooperation
2. Economic Relations
A. Trade
B. Investment
C. Official Development Assistance

Ⅲ. Vietnam-Korea Free Trade Agreement

1. The Two Parties’ FTAs
A. Korea’s FTAs
B. Vietnam’s FTAs
2. Vietnam-Korea FTA
A. Trade in Goods, Market Access
B. Trade in Services
C. Commitments on Investment
3. Implementation of VKFTA
A. Opportunities
B. Institutional Readiness
C. Vietnamese Enterprises’ Readiness

Ⅳ. Trade and Investment Dependence

1. Trade Dependence
A. Overview of Trade Dependence
B. Main Features of Vietnam-Korea Trade
C. Trade Dependence: Some Conventional Indicators
D. Trade Dependence Index: a Single Index
E. Conclusion Remarks on Trade Dependence
2. Vietnam-Korea Investment Relations
A. Korea’s FDI Inflows to ASEAN
B. Vietnam’s Policies on FDI Attraction
C. Korea’s FDI Inflows to Vietnam
D. FDI from Korea by Province
E. Production Linkages

Ⅴ. Trade and Investment from Gravity Model

1. Spatial Gravity Model
A. The Model Specification
B. Dependence Matrix (W)
C. Estimate the Model
D. Trade Model Results
E. The Results for FDI Model
F. Spatial Multiplier Effects
2. Trade and Investment Forecast
A. Scenarios
B. Key Findings from the Forecast

Conclusions

1. Critical Findings
2. Some Policy Remarks
3. Shortcomings and Further Studies

References

Appendix

1. The Content of VKFTA
2. Weighting Matrix
3. Summary of the Forecast Scenarios

Executive Summary

국문요약 

  The world is changing. Remarkable changes have been witnessed in East Asia where China’s emergence and the increasing bilateral/multilateral free trade agreements are shaping the economic and geopolitics patterns in the region. The facts have made regional countries become more interdependent. The trade and investment relations between any two countries have been no longer independent but influenced by the relations with the third country. This research is designed to investigate the trade and investment dependence of Vietnam on Korea given the increasing intensity of economic integration and more unstable geopolitics in the region. This research is based on network approach to investigate the bilateral trade and investment of Vietnam and Korea. As such, the relations of Vietnam and Korea are analysed taking into account the trade and investment of 13 other countries/group of countries who are large trade and investment partners of both Vietnam and Korea, including the EU, China, Australia, India, Russia, the United State, Japan, Singapore, Thailand, Indonesia, Malaysia, Cambodia, and the Philippines. The trade dependence index of Vietnam is calculated not only based on the trade structure of Vietnam, but also that of Korea as well as the power of Korea in the international market. The comparison of trade dependence by countries and by time gives critical insights about the relations. In addition, the inclusion of geopolitics into spatial gravity model is one of the innovations of this research. It allows to elaborately investigate the influences of the regional geopolitics, particularly the role of China, on the trade and investment of Korea and Vietnam as well as other major partners in the region.
  Vietnam and Korea have more than 20 years of diplomatic relations and remarkable progress has been made in improving and upgrading their ties. The strategic partnership was signed in 2009 in addition to the free trade commitments under framework of ASEAN Korea agreement (AKFTA). As a result, the trade and investment between Vietnam and Korea has increased remarkably. Korea soon becomes the biggest investor in Vietnam and the bilateral trade growth is recorded around more than 25% per year. The Vietnam-Korea Free Trade Agreement (VKFTA) in 2015 puts a cornerstone in the bilateral relation and is expected to potentially and fruitfully bring about benefits to both countries.
  The reason for such expectation is the fact that the VKFTA is more open than the AKFTA which both countries are signatories. It may benefit Vietnamese firms, indeed, both in terms of exporting more agro-products to Korea and importing better quality inputs. It also facilitates restructuring the import market of Vietnam, avoiding heavily dependence on some other markets. From another side, the FTA also facilitates the FDI from Korea because of more open commitments in service and investment. However, for Vietnam, such benefits are conditional. Poor preparation and readiness of both its institution and its domestic enterprises will hinder Vietnam from enjoying its trade with Korea.
  Given a more intensive cooperation, Vietnam is more and more dependent on trade and investment with Korea. The dependence index shows that in overall, Vietnam’s export dependence on Korea is less than other countries but inclines to increase since 2009. The same observation with a higher pace is found for import dependence in particular for auxiliary of garment and textiles, sea transport vehicles, machinery and mechanical appliances. This tendency is believed to continue because the VKFTA has taken into effect since 2015 and the expansion of FDI from Korea flowing to Vietnam will trigger a booming of import by Korean companies in Vietnam particularly the import of spare parts.
  Another note is the trade dependence is intensified over time in line with the expansion of FDI flows from Korea to Vietnam, especially from large corporations because of the shift of investment from China. This led to the argument that FDI is one of factors that make trade dependence increase.
  The FDI from Korea inflow in Vietnam has been also on the rise, largely contributed by the entry of very large firms in electronics and phones. Korea has become the biggest FDI investor in Vietnam that in turn implying an upward tendency of more investment dependence.
  Assessing the trade dependence index with Korea does not mean the dependence is good or bad because the relations between Korea and Vietnam in both economic and political aspects are warm and supportive in recent years as well as there is no territorial issue interrupting such relations. The policy implication of this dependence is different from the dependence of Vietnam on China since there remain the conflicts of sovereignty between China and Vietnam, and trade dependence may be used as an instrument for politics and sovereignty negotiation. Increasing dependence on Korea in terms of both import and export indicates that the two countries have increasingly taken advantage of the signed FTAs. However, the dependence also demonstrates the tightened relations between the two and changes in political, economic and trade situations of Korea may notably affect Vietnam. This is the common trend of integration because of increasing inter-dependence among economies.
  Further investigating the dependence suggest that even for some hypothetically unforeseen cases in which Vietnam would like to reduce such dependence, that the capacity to control international price of Korea is small, hence, Vietnam can proactively optimize the dependence either by diversifying commodities structure exported to Korea as well as diversifying export markets. From this perspective, in the context that Vietnam and Korea are accelerating the negotiation and signing new FTAs with other partners, in the near future, the export dependence of Vietnam on Korea is not a very big concern.
  The findings on the trade pattern using the spatial gravity approach suggested very intuitive evidence on the interdependence among countries. Besides other factors, FTA and geopolitical changes both determined the trade and investment. In addition, trade and investment flows of other countries also affect the trade and investment between any pairs of countries like Korea and Vietnam. The dependence of Vietnam on Korea is no longer only determined by the two countries themselves, but also the involvement of other partners.
  As an example of the advantages of spatial approach, the analysis about trade and investment multipliers indicates that Korea growth affects the trade between Vietnam and Korea, but besides the direct effect, a large part is through the interaction with other trade partners, among that the influence from Japan, China and Singapore is substantial. Similarly, the institutional improvement and wage improvement of China may have critical impact on the trade and investment between Vietnam and Korea as well as other countries in the region. This comes to the forecast that the trade and investment dependence of Vietnam to Korea will be continued, but sensitive to regional geopolitical and macro-economic issues. It implies that the KVFTA does not result in higher export to the Korean market unless supported by some favourable environmental factors such as the stable geopolitics and sound macroeconomics of Vietnam or in the region.
  The warming relationship between Vietnam and Korea is a very good environment for the trade and investment ties between the two which in turn brings about fruitful benefits for both sides. The stable regional geopolitics also plays a role for that. It, therefore, implies that keeping a stable environment in the region is not a duty of a single country or a group of countries but also of any countries  who  have  trade  and  investment  relations  with.  Both the Vietnamese and Korean governments are aware of the issue of stability in the regional geopolitics.
  From the Korean side, the relations with Vietnam bridges the relations to ASEAN. With cheap labour, large consumption market, this area should not be ignored by Korean investors. However, the role of China in this area also should never been neglected. China’s influence in ASEAN is huge, given more and more interdependence among countries and the implementation of AEC, Korean investment in this region is likely to be still slower than that of Japan or China. This issue should receive a noticeable consideration.
  With the increasing dependence and inter-dependence, the Vietnamese government should take advantage of this factor for their re-structuring economy, particularly improving the manufacturing sector toward export oriented strategy. Korea may become a good source of importing materials for exporting to other destinations, particularly the EU markets. EVFTA and VKFTA have generated great opportunities for Vietnam to eliminate the dependence on some traditional markets. In the context that TPP may be re-negotiated or cancelled, the critical improvement of the readiness of both Vietnamese and Korean firms for VKFTA is very necessary and needs to be done as soon as possible.  

  The WTO’s Tenth Ministerial Conference, held in Nairobi on December 2015, concluded with the adoption of the “Nairobi Package”, several ministerial decisions on agriculture, cotton and least-developed countries. The Nairobi Package includes a historic decision to eliminate agricultural export subsidies, the most important reform of international trade rules in agriculture since the WTO was founded. The biggest disagreement among WTO members, however, goes beyond specific substantive issues: it is about the future of the Doha agenda and the WTO’s negotiating function itself. While developing countries wished to continue with negotiations, industrialized nations, chief among them the United States, called for an end to the Doha Round. The Nairobi Ministerial Declaration also acknowledges that WTO members “have different views” on the future of the Doha Round negotiations but notes the “strong commitment of all members to advance negotiations on the remaining Doha issues”.
  In this situation, there have been significant changes in international trade since recent decades. First, trade growth has been anaemic since 2010. Already before the 2008 Global Crisis hit, the rate of growth of the ratio of global trade to GDP had slowed considerably. Most recent data show trade values declining. Second, plurilateral negotiations are rapidly widespread in the WTO. In particular, developed members have pushed for more sectoral deals like the ITA-II. Currently, a similar deal on tariff reductions for environmental goods is being negotiated. More sectoral tariff liberalization of this sort might be a good area to pursue. Along the same lines, the trade in services talks going on in Geneva could be brought formally into the WTO framework.
  Third, at the Paris climate conference (COP21) in December 2015, 195 countries adopted the first-ever universal, legally binding global climate deal, which is expected to affect a significant impact on global trade. At the heart of the Paris climate agreement are national-level plans, called Intended Nationally Determined Contributions (INDCs), to reduce greenhouse gas (GHG) emissions. Although these INDCs are voluntary, they are considered a critical first step for an agreement designed to progressively ratchet up national commitments to collectively limit a global temperature rise to 1.5 degrees Celsius above pre-industrial age levels. It is now time that we have to design a harmonization between trade and environments.
  Finally, increasing anger over globalization would rapidly spread. The unhappiness is evident in Britain's vote in June 2016 to leave the European Union and in the U.S. presidential campaign of Republican Donald Trump.
  Under the above situations, the study suggested the following as new directions of Korea’s multilateral trade policy. First, New multilateral trade policies should aim to spread benefits of trade liberalization out whole people, particularly focusing on small and medium enterprises (SMEs) and the middle class. Small businesses often find the playing field for trade is not level. While the market is generally open with no tariffs, small businesses face a strong thicket of domestic regulations and non-tariff barriers, which are hardly to be overcome by SMEs. In this respect it is important to effectuate the trade facilitation agreement at 2013 Bali Ministerial as soon as possible.
  Second, Korea should prepare for the proliferation of plurilateral negotiations led by developed countries. With the WTO now reaching 164 members, we will rarely agree on all aspects of even one issue. That means we will likely also have to be flexible on who participates. In some cases, we will have to work on trade deals between smaller groups of countries as well―so-called plurilateral agreements. At the same time, it is highly projected that various plurilateral negotiations appear in near future within the framework of the WTO, since developed countries, in particular, the U.S. pursued continuously several plurilateral negotiations such as EGA, TiSA, Fishery subsidies. Prior to joining the plurilateral negotiations, a detailed examination for the economic impacts of plurilateral negotiations should be completed.
  Third, it should fully consider free trade’s negative impact on climate. Climate change is the biggest sustainable development challenge that the international communityhas had to tackle to date. Korea joined 175 countries in signing the United Nations Paris climate agreement setting a path forward to reduce global greenhouse gas emissions. Thus, it is time that we should think how to harmonize trade policies and environmental protection policies. We have to think about environmental subsidies as green subsidies, which are allowed in the WTO system.
  Finally, Korea also should pursue the harmonization among bilateral, plurilateral, and multilateral trade policies. Particularly, long-run multilateral trade policies need to pursue the harmonization of preferential ROOs consistent with WTO rules.
  To break the current deadlock of WTO negotiations, both developed and developing countries must commit to working together to prevent the re-emergence of protectionism, and strengthening of the rules based trading system, in a way that is fair, development oriented and inclusive. This is the only basis to resolve the current crisis in the multilateral trading system and create a more secure and peaceful world. Losing the WTO as an effective forum for trade liberalization would be a setback for free trade. Despite its existing successes, there is much more the WTO could achieve, as trade liberalization is most beneficial when carried out multilaterally. It is therefore in the interests of all governments to make the WTO work by committing to trade liberalization in relation to their own protectionism. Trade is critical to development and growth. The world needs a WTO that can effectively develop global rules on the issues that matter to developed and developing countries alike. Whether Doha is dead or alive, the WTO needs to spur growth and support development. 

  This study suggests a management plan of temporary separation in the area of labor and social welfare from a medium- to long-term viewpoint in order to minimize socioeconomic impact after reunification of Korea. This suggestion should be analyzed within the two frameworks of economic policy and social policy. In particular, research on the integration of institutionalized systems bears a direct relation to the establishment of future macro-level policies at the national level. Studies on reunification conducted up to recently have been limited mainly to the micro-debate about defectors from North Korea. Therefore, they are limited in analyzing the current system and suggesting future directions in the wider area of ??social policy. Concerning these limitations, this study compares the current situation of the labor market and social welfare system in North and South Korea, critically examines the contents of social policies carried out in the past by the unified Germany, and applies this to North and South Korea in the areas of poverty, unemployment, and populace migration, which have been identified as the main tasks to address during the process of unification.
  Following a collapse of the regime, the core of North and South Korean labor and social policies would lie in dealing with the issues of extreme poverty, unemployment, and rapid migration of the population from the North Korean region. In particular, the problems of poverty and unemployment during the process of unification can have a considerable impact on the scale and nature of future migration. Migration during the unification stage can be largely classified into the phases of “migration under normal circumstances” prior to reunification, “drastic increase in migration” during reunification and “conditional migration” after reunification. Of the three phases, this study focuses on “drastic increase in migration.” Especially, through an intensive examination of the possibility of temporary segregation, this study attempts to divide the population movement into that from the North Korean region and that from other areas, such as ethnic Koreans living in China (Chosun-jok), thus deviating from a single unified policy. Through this, the study will suggest measures to mitigate the impact of sudden migration through temporary separation of North and South Korea.
  Since the unification of Germany, the integration of labor and social security has been implemented through the method of applying the West German system on East Germany, and guaranteeing living standards in the former Eastern area has prevented the rapid migration of the East German people. However, during this process, there was a surge in fiscal expenditures, which led to financial burdens and unemployment for later generations. The trend of migration by the German population shows that the migration of East German residents to West Germany decreased, while the migration of residents of other countries such as Eastern Europe continued to increase. At the time, the migration policy was set on a “cost-intensive” course on the premise that Germany could afford the costs of unification. However, such an approach would have to be carefully deliberated before being applied to North and South Korea because of the huge cost burden and possibility of social confusion ensuing. In other words, Germany intended to improve the living standards of the people in East German area in a relatively short period of time after unification, and chose an integration plan where the financial resources relied solely on the economic power of West Germany. In the case of Korea, it is suggested that there would be considerable difficulty in adopting the German approach because of limitations in financing capabilities. Therefore, it will be necessary to consider various possibilities when concerning the direction of policy. 
  The most serious problem in North Korea after unification will be mass unemployment. Concerning income assurance policy, it is desirable to adopt unemployment allowance that includes an activation policy, with the principle of “wide coverage, moderate benefit level” rather than the immediate introduction of the employment insurance system of South Korea. At the beginning of the transition, the government's direct job creation policy needs to concentrate on the creation of massive employment in the field of public works and social services, taking lessons from Korea's experience. It will be necessary to introduce the principle of proportional wages, based on calculations of real purchasing power, in order to instill confidence that living in the North Korean region is possible. The minimum wage system should also be set as the average wage or at a certain proportion of the median wage, based on the principle of proportional wages.
  The basic direction of social policy after unification is to make poverty and unemployment a top priority of policy. It will be necessary to reduce the financial burden of unification as much as possible and to provide policy alternatives to minimize dissatisfaction among North Korean residents and alleviate large-scale migrations to South Korea. This goes along with the necessity of establishing a social security system as an additional and complementary measure to various economic policies. Allocating a low level of financial burden for the North Korean region would lead to large-scale migration, while an increase in the level of burden is likely to cause discontent among South Koreans. Therefore, it is necessary to precede the process of defining the object of temporary separation more clearly, such as strictly blocking migration from the North to the South through physical measures.
  In the end, in order to contain the migration from North Korea to South Korea, policy measures should be taken to create economic conditions advantageous for people when staying in North Korea. Acknowledging the regional disparities of the two Koreas that will appear after unification, measures to reduce the gap, such as large-scale investment, investment from domestic and foreign companies through tax exemptions and SOC business expansions, have to be taken to absorb the labor force and allow the population to become economically self-sufficient. Social confusion could be minimized by establishing the principle of “get hired, then move,”  rather than allowing job-seekers to relocate before being hired when it comes to migration from North Korea to South Korea
  The basic plan for social integration of North and South Korea consists of the following three phases: the “emergency transition period,” “institutional integration period,” and “institutional settlement period.” In the “emergency transition period” where transient emergency measures are taken, the aim is to guarantee the basic standard of living in the chaotic period directly following reunification. This phase concentrates on establishing basic security levels through current systems, in-kind benefits and maintenance of the existing benefit level. In the “institutional integration period” which will mainly aim at the integration of the two Koreas, integration of social security systems based on the market economy and implementation of transitional measures to reduce institutional confusion will take place. The “institutional settlement period” will finally establish this integrated system to operate a homogeneous and united social security system for the unified Korea.
  In the case of public pension, the temporary separation plan is not to adopt the South Korean system in the North Korean region but rather to apply it gradually step by step by applying transitional types of benefits and gradually phasing in certain condition levels. In the case of health insurance, the plan also suggests the introduction and operation of a temporary separation plan by establishing healthcare infrastructure in the North Korean region and temporarily exempting out-of-pocket payments with consideration of the national healthcare system in North Korea to mitigate the impact. 
  In terms of social integration, the integration of labor and social welfare needs to be approached not simply based on the logic of power but from the standpoint of achieving mutual harmony in growth and distribution. In particular, the migration policy should reach a proper balance between various economic incentives and social policies to prevent massive migration from North Korea and to temporarily block the inflow from outside of North Korea to the Korean peninsula. Finally, approaches to institutional integration need to be more concrete in regard to viable options. This means to apply the South Korean system in a manner that reproduces the introduction, settlement, expansion and maturity stages of the South Korean system. Through these detailed discussions, we hope to contribute to the designing of policies related to reunification based on flexibility and rationality. 

  The purpose of this research is to discover an effective solution to managing North Korea's state assets during a temporary separation of the South and North, post-unification of the Korean peninsula. This study will focus on how to manage and liquidate North Korea's real estate and corporate assets and also suggest measures that are necessary during the temporary separation. Unification of the Korean peninsula is indeed one of the greatest ambitions of our people.  However, it is also considered an impending dilemma for both the South and the North. Especially when considering North Korea's unusually distorted economic status, the economic integration of South and North Korea is expected to be a considerable stumbling block.
  As a means to minimize possible confusion caused by the unification of South and North Korea, this study assumes the temporarily separated North Korean region to be the premise for analysis. This study is based on the assumption that with the political integration of the South and North, North Korea is economically separated for a limited period of time. Such an assumption narrows focus on exploring measures to managing and liquidating North Korea's state assets.
  This study consists of three main parts. The first part explores and analyzes the current condition of North Korea's land, housing and corporations. In North Korea, land is established as a socialist possession as a result of post-liberation land reform and post-war agricultural collectivization. By neutralizing the ruling class's economic base and raising poor farmers into yeoman farmers, the land reform achieved the political objective of solidifying Kim Il-Sung's support base and also the economic objective of securing state assets via nationalizing the industry. While rebuilding the country post war, agricultural collectivization was the process of completing socialistic reform and establishing socialistic property relations.
  In North Korea, housing is allocated according to hierarchy and social status. All real estate is defined as state-owned and individual ownership or construction is prohibited. The state built houses and residents were granted rights to use the housing. A characteristic of North Korean housing is that they were constructed through standardization and planned policies rather than a capitalist system, which relies on market economy. As a result, urban areas built mainly apartments while rural areas built mainly townhouses.
  North Korean corporations can be classified into various categories depending on the extent of socialization of production means, management methods and scale. In other words, North Korean businesses are similar to those of South Korea in that they are independently managed enterprises in production, traffic, transportation, distribution, and other economic fields. However, North Korean corporations can be divided into various forms according to the method of classification. That is to say, depending on the extent of socialization of the individual industry, there are state-owned enterprises or cooperative group corporations. And depending on who the management belongs to, they are classified as centrally or locally managed corporations. Corporations may also be classified as a production company or distribution company depending on the level occupied in the rebuilding process. North Korean corporations are created in 'Kombinat' form, which combines interrelated enterprises within a certain district while taking into account the relative effects between industries, availability of mass energy supply and issues of national defense. In addition, they adhere to the principle of industrial site selection, which maximizes use of domestic resources rather than relying on external resources and also show signs of being strategically located in areas that are unrelated to economic efficiency but in consideration of national defense.
  The second part is a case study of the Unification of Germany. In order to minimalize trial and error undergone by Germany during its unification, there was a need for accumulating the capacity for  privatization before the unification took place.  During the early process of privatizing East German assets, Germany had experienced a great hindrance due to insufficient information and understanding of government-owned property and lack of expertise of those in charge at the time. Korea also needs to shape a preliminary investigation plan in order to achieve a systematic accumulation of information on not only North Korea's real estate, but also its state enterprises. To do so pilot projects, such as conducting economic research on specific regions that are relatively inaccessible, are required.
  In the third part, this study presents a road map to managing the state assets of the North Korean region during the temporary separation period. The basic policy recommendations of this study are as follows: first, to revitalize the North Korean economy; second, to enhance efficiency and equity suitable for market economy; and finally, to build a common base for South and North Korean prosperity.   Also, in order to successfully manage and liquidate state-owned assets during temporary separation, a concrete road map of how to manage and liquidate land, housing, and corporate assets will be presented. The following are proposed principles of operation: first, fair valuation of property; second, preferential treatment of North Korean residents; third, contribution to supply funds for unification; fourth, investment support and attraction of foreign investors; fifth, integrated management-based organization.
  This study divides the temporary separation period into three phases for analysis: 'preparation,' 'implementation,' and 'preliminary integration' reflecting the aforementioned policy recommendations and principles of operation. During the 'preparation phase,' relative infrastructure such as consolidated legislation, organizational systems and renationalization must be established for efficient management of assets. During the 'implementation phase' privatization and nationalization of assets will take place over the course of approximately ten years. At the same time, a state asset management program is carried out by exchanging and utilizing human resources from both South and North Korea, drawing on foreign and domestic investments, and operating management funds. During the 'preliminary integration phase,' all privatization processes must be completed, and long-term preparations must take place for the integration of South and North Korean state asset management system through post-management monitoring and liquidation of funds.
  Management of North Korean real estate and corporations has a direct impact not only on the North Korean economy, but also on the economic development of the unified Korea. Hence, this study contributes to the establishment of a government unification preparation policy that can revitalize the reconstruction of the North Korean economy through the following ways: deducing effective management plans for North Korean corporations and real estate to ease the large-scale migration of North Korean residents, minimizing the possible negative impact of inter-Korean economic integration, and establishing a strong foundation for South and North Korea's coexistent development. 

  This study is an introduction to research on “Temporary Separate Operation of South and North Korean Economies after Unification,” which is the third-year theme of KIEP’s on-going Medium-Term and Long-term Unification Study. The temporary separation operation plan is a newly emerging approach for the economic integration of the two Koreas. In order to gradually promote economic integration after political unification, it will be necessary to separately operate some sectors of the economy of North and South Korea for a certain period of time.
  The policy focus is to prevent large-scale migration of the North Korean labor force to the South after unification. To provide economic incentives could be an effective policy alternative since physical interception to prevent the migration is not a desirable option. However, the economic incentive in this case cannot be an artificial increase in income as seen with the German unification process. Regarding this dilemma, the KIEP Medium-Term and Long-term Unification Study seeks to provide alternatives through concrete institutional design in three sectors: labor and social welfare; monetary, financial and fiscal policy; and state property management policy. This study provides theoretical support for the studies related to the specific design of the system by identifying the economic necessity and legal validity of the temporary separation operation.
  This study consists of two independent studies. First of all, Chapter 2 deals with the legal validity of the temporal separation operation. In this paper we examine the scope and limitations of the autonomous rights of a special administrative region (SAR) in North Korea, the constitutionality of segregation of the North and South Korean labor markets, and prospective ways to confirm the people’s sovereign opinion. First, in relation to the autonomous rights of an SAR, this paper specifies in detail the scope and limit of powers that can be granted to an SAR in North Korea in terms of executive power, legislative power, and jurisdiction, in accordance with the current Constitution, laws and ordinances.
  Secondly, regarding the constitutionality of separation of the North and South Korean labor markets, measures such as the limitation of North Korean residents relocating to South Korea, an employment permit system for North Korean workers, or the setting of discriminatory minimum wages for North and South Korea are likely to violate the essential principles of fundamental rights guaranteed by the Constitution. However, such measures could be accommodated if it is recognized that the separation of the labor market is aimed at preventing 'clear and existing risks' to the national economy, and if efforts are made to ensure basic rights, such as by limiting the separation period, and supported by a national consensus.
  Finally, it is suggested that the referendum system would be preferable when it comes to confirming the sovereign intent of the people, which is a procedure that must be followed in order for the temporary operation of the two Koreas’ economy after unification. Our recommendation is based on the fact that this involves an important policy matter that can have a profound effect on all areas of politics, economy, society, and culture, which can thus cause serious restrictions on the basic rights of residents in North Korea, and how it would take a considerable amount of time to form a unified National Assembly.
  In conclusion, it is true that this plan for the temporary separate operation of the two Koreas involves many issues which could bear relation to infringement of the basic rights of the people, and thus become subject to judgments by the Constitutional Court. However, it is pointed out that unification of the two Koreas is an unprecedented event involving political, ethical, cultural, social, economic, and constitutional issues that cannot be determined in advance, meaning that unification policies are likely to be carried out under the highest degree of political commitment.
  Next, Chapters 3 and 4 address the economic need for temporary separate operation. First, Chapter 3 deals with the economic necessity of temporary separate operation. This paper shows that the gradual integration method (the 'Special Zone Model') through the temporary separate operation could be a way to maximize the economic benefits of the unified Korea. More precisely, we estimated the appropriate cost of unification and mode of economic integration to maximize the net benefit of unification.
  These unification costs are defined as the sum of the potential growth rate reduction effect (direct cost) and the social disruption cost (indirect cost), which is followed by Korea's fiscal transfer expenditure and increase in the national debt.
  Considering the financial transfer expenditure and the potential growth rate decrease, the GDP of the unified Korea is calculated by subtracting indirect costs from the GDP of North and South Korea. The benefit of unification is obtained by subtracting the sum of GDP from the two Koreas from the GDP (GDP of the unified Korea) of when South and North Korean remain divided. According to the freedom of movement of production factors, the South and North Korean economic integration system has established five integration methods that range from a fully open system in the manner of Germany to a completely closed type. In addition, each of the integration modes are defined as the composition ratio of infrastructure construction cost (I) and social security cost (S) among financial transfer expenditures.
  As a result, the unification cost that maximizes the cumulative net benefit for 20 years after unification was calculated as 1,000 trillion won. This figure presumes that 2.5% of Korea's GDP (based on 2020 figures) is invested annually for 20 years. While Korea's national debt to GDP ratio will rise to 71% by 2039, this is regarded a level that Korea can afford to bear.
  In Chapter 4, we derive implications for estimating the appropriate cost of unification. First, the economic integration method maximizing the cumulative net profit is a special zone model. In addition, the effect of mitigating the income gap between the two Koreas is also greater when proceeding with a special zone model than with the German model. However, even in the best case, the income gap between North and South Korea is not expected to be reduced any further than the income in the North rising to 34% of South Korean levels by 2039.
  Meanwhile, this study shows that the point where the cumulative net benefit becomes positive will arrive faster as we spend less than the appropriate cost of unification, and that the level of decrease in short-term benefits for Korea also shrinks in this case, but that the net benefit for after this point decreases as well. On the other hand, as the actual amount of expenditures approaches closer to the appropriate reunification cost, this point arrives later and short-term benefits fall by a larger level, but the net benefit after this point of time increases. In order to wisely overcome the valley of transition where the net benefit temporarily falls into the negative after the economic integration of the two Koreas, measures such as the establishment of effective financing plans must be taken to bring about a national consensus. 

  The digital transformation, which is often called as the Fourth Industrial Revolution, is attracting attention as a new driving force for economic growth. Digitalization is emerging as a measure to mid- and long-term trends, such as demographic change and transition to a low-carbon economy, while leading economic and industrial innovation. It is confirmed empirically that for high-income countries including the United States, digitization contributes to productivity improvement in other industries. However, these effects differ from country to country depending on the capabilities of digital innovation such as ICT infrastructure, R&D investment, ICT industry competitiveness, legal system, human resources, business use of ICT, and entrepreneurial activities. In Korea, ICT infrastructure is world-class, and ICT adoption and utilization are highly competitive. However, the competitiveness of ICT services, the effectiveness of R&D investment, contribution to innovation, legal system, human resources and entrepreneurial activities are far behind. By contrast, the United States has the highest level of competitiveness in ICT export, R&D investment and innovation, human resources and entrepreneurial activity. These factors are key concerns of the countries’ digital innovation policy, and each country is making a policy effort centering on it.
  The digital innovation policies of the United States, EU, Germany, Japan and China are similar due to the general characteristics of digital transformation, but they vary according to the capabilities and circumstances of each country. As in our analysis, the United States most clearly demonstrates the general purpose technology hypothesis that ICT capital contributes to increased productivity in the industry. In the United States, ICT has been a key driver of economic growth since the 1980s, and digital innovations led by Internet platform companies have become a source of mid- and long-term economic growth in the Obama administration. Recently, in the United States, innovation in the digital innovation is dominated by ICT or Internet service companies, and traditional manufacturing companies are also reviving through digitization. The US government is constantly investing in strategic research areas and advanced technologies required for digital innovation based on Strategy for American Innovation or NITRD, a government-level IT research and development program. In addition, the federal government operates a Chief Information Officer (CIO) and a Chief Technology Officer (CTO) to improve digital-based government management and to accelerate industrial innovation. The private sector is leading digital innovation while the government focuses on R&D investment in digital industry platforms and basic technologies such as big data and Internet of Things, solving public problems using ICT, and building consumer information protection systems.
  In contrast to the US, the EU has continually experienced a low ICT investment and a low ICT contribution to economic growth. The EU has identified the segmented digital market in the region as the cause of the problems and thus launched the Digital Single Market Strategy for Europe in 2015. Its main objective is to realize economies of scale by integrating the digital market with the elimination of digital barriers in the region and creating a common base of innovation. Following the digital single market strategy, the Digitizing European Industry, announced in 2016, is highlighting manufacturing as the center of European digital industry innovation. Unlike the United States, the EU's digital industry innovation tends to be government-led. In addition, EU focuses on joint private investment in strategic areas, digitization of SMEs, and promotion of technology commercialization.
  Germany is at the center of EU digital innovation. Germany has world-class competitiveness in advanced manufacturing and ICT services and has a solid medium-sized business base. Based on this, Germany is leading the digitalization of manufacturing. Building on long-term preparation with discussion among academia and industry, German government has led digital innovation policy. Germany is the first country to present its vision of the digitization of the manufacturing sector at the policy level. Based on a specific tradition in the process of policy implementation, the German government is engaged in mid- to long-term plans and tasks, and focuses on stakeholder policy platform construction, thereby inducing voluntary participation of companies. It also emphasizes the collaboration between large companies and SMEs so that SMEs can naturally participate in digitization.
  Japan has turned its attention to digital industry innovation as it has suffered from a long-term recession and a rapidly aging population. Japan has a solid competitiveness in ICT manufacturing and service industries, especially with global manufacturing base and robotic technology. In spite of the economic downturn, the Japanese industry has invested in basic R&D with a long-term perspective, securing global competitiveness in original technology. On the basis of this, Japan promotes digital innovation while focusing on process innovation in traditional manufacturing sector. In Japan, the government is playing a leading role in recognizing the digitalization of companies and societies. In particular, the government plays an important role in utilizing ICT technology to solve social problems such as natural disaster prevention, administrative efficiency and education. In addition, the government has established an integrated support system for research and development and various support policies based on the idea that major fields such as cloud service, Internet of Things, artificial intelligence, and big data are connected with each other in terms of industrial innovation.
  China has gained a worldwide market share in the internet platform sector based on the huge market and is recently emerging as a strong competitor of the United States. Since China has a variety of industries with different levels of technology, there is a complex task of promoting the transformation of traditional industries and fostering high-tech industries simultaneously. Therefore, at present, social innovation using ICT has policy implications and it is a key part to establish an innovative ecosystem and encourage start-ups centered on Internet platform companies. The Chinese government is actively promoting entrepreneurship as a substitute for a declining job in the manufacturing industry. In particular, it is characterized by the fact that big corporations take active partnership with the government in the management of platforms for start-up and innovation. In addition, the Chinese government is taking an open initiative in the fields of shared economy, internet banking, medical care, etc., and does not enact regulations that could hinder new types of businesses. do. In spite of various formal and informal regulations, global companies are actively seeking chances to enter the Chinese market. Chinese companies are actively introducing overseas advanced technologies in order to complement their lack of technology, and it is expected that the market will expand in areas where the demand for cooperation with foreign countries such as Internet of Things is increasing.
  Taking into account the general characteristics of digital innovation and the policies of the leading countries, the following lessons can be learned. First, there must be a strategic focus to promote industrial innovation through digital transformation. Digitization is practiced across industries and sectors, but it needs a starting point that matches the existing capabilities, conditions, and needs of the country. Second, the key to digital innovation is data. The Internet of Things, cloud computing, artificial intelligence and big data analysis are directly linked to the collection and analysis of vast amounts of data, which creates industrial competitiveness. Third, digital industry innovation requires openness. This means government agencies, government and business, researcher and business, researcher, openness, and even openness. Fourth, national mid - to long - term digital innovation strategy is needed. Since digitization is carried out across all industries and sectors, a policy implementation system that includes government departments and each stakeholder is needed. Also, in the short-term perspective, the pursuit-oriented industrial innovation policy does not seem to be suitable for the absolute digital transition period. Fifth, the government's role in promoting digital industry innovation needs to be focused on building institutional conditions, mediators between sectors and mediators of consensus, and investment in the public sector.
  The Creative Economy Strategy (2013) is Korea's new economic growth strategy in the era of the digital transformation. This strategy pursues economic and social innovation of the entire society including existing industrial innovation and promising industrial development. In addition, major strategies such as enhancement of science and technology and ICT innovation capacity, creation of entrepreneurial ecosystem, venture and SME development, and industrial innovation through digitization in order to ultimately pursue creation of innovation ecosystem across new economic society, As a growth strategy. However, it failed to fully realize the basic principle of departing from the chasing economic growth model. Moreover, although a considerable number of strategic policies and detailed policies were appropriate in light of the situation in the Korean economy, the strategy was not fully implemented yet.
  Taking into account the industrial competitiveness and the policies of the leading countries, Korea needs to recognized manufacturing as a strategic starting point to promote digital industry innovation. Manufacturing is Korea’s major industry and has a large economic impact such as employment. US and Chinese companies are leading the way in making virtual data as platforms while that of the real data such as operation data of factory facilities is in its early stage, there is a relatively high possibility for Korea to secure the sector. The scope and content of digital innovation policy is very comprehensive, as it can be seen from the EU's digital single market strategy. It is not realistic to achieve the results evenly in every sector and it is necessary to have a lead sector with remarkable performances. As the case of Germany, the government takes significant role in the digitization of the manufacturing sector, thus government should concentrate its capabilities on this agenda.
  Digital transformation is difficult to be defined and it is almost impossible to predict the rapidly changing trends. However, it should be emphasized that the key to digitalization is information and data. Many countries have introduced polices and strategies to emphasize big data, artificial intelligence and robotics, Internet of Things and cloud computing. The data is placed in the core of such policies. Also, collecting and utilizing data in strategic areas such as advanced manufacturing, high-end automobile, smart city, medical, energy and education are very important. Therefore, Korea needs to redesign its industrial strategy with particular emphasis on information and data. In other words, it is necessary to expand and sustain investments in general data technologies such as big data analysis, Internet of Things and cloud computing technology, application of enterprise and industry, and check the regulations to promote utilization of data in strategic industries. In order to spread common technologies such as the Internet, it is necessary to continuously improve institutional conditions such as personal information protection, cyber security, and intellectual property rights, and liberalization of cross-border data movement is the principle of foreign economic policy. And to find out how to do it.
  Digital innovation requires openness among all participants (Open Innovation). In order to effectively promote digital innovation, openness and cooperation among government ministries are required, which is a factor for the success or failure of digital industry innovation. Government should also focus on its role of mediators that form the network between technology developers, owners, and end users who apply them to the business, with a focus on end-users. Technological development is also required for digital-based industry innovation, but more importantly, technology end users are looking for and adapting to their business. This is because digital conversion is the result of an innovative business model that radically transforms the rules of existing games. In order to accelerate the digital transformation of the industry, it is necessary to strengthen the participation of the private and technical users from the R&D stage, to promote the international R&D network by increasing the openness of innovation. In addition, the Korean market should facilitate data-based innovation by leveraging free flow of cross-border data.
  Korea’s digital innovation policy implementation system needs improvements in managing and coordinating various policies promoted by different ministries and public agencies. Digital transformation leads to dramatic changes and innovations that are comparable to the revolution, which affects the entire economy and society. Therefore, strong and comprehensive leadership is needed to oversee data collection and utilization, apply ICT to entire economy and society and invest for advanced R&D. 

  Recently, our trades have been declining for the second year in a row, due to the maturity of the global value chain and the delay in the recovery of the world economy. In particular, imports decline more than exports, but trade surplus is rather expanding. Policy makers and experts expressed concern about the decline in exports, but did not show interest in decreased imports. Behind these responses, there is dichotomy that the increase in exports is positive but the increase in imports is negative. More importantly, there is still a lack of clear understanding of Korea’s import structure.
  In this paper, we analyze determinants of Korea’s imports in the context of the interaction between exports and foreign investments, and investigate the effects of imports on firms’ exit and productivity in order to understand Korea’s import structure and distributional influences of imports.
  Since 1988, Korea’s overall imports have increased substantially, except for the currency crisis and the period of the global financial crisis, but it has recorded a continuous declining trend due to recent sharp drop in imports of raw materials.
  Major importing countries have changed from developed countries in the past to resource-abundant countries and developing countries. By type, intermediate goods account for about 50% of imports, raw materials and capital goods account for 20% respectively, and consumption goods account for around 10%.
  In order to analyze determinants of imports by type, we constructed theoretical model and found two propositions. First, regardless of types, imports will increase as the economic sizes of importing countries become larger, and will decrease as the transaction cost with the importing partner increases. Second, while imports of consumption goods increase as the income level and market size of importing countries increases, imports of intermediate goods and raw materials used as production inputs increases as the outputs and exports of industries increase.
  The results of the empirical analysis based on the theoretical model are summarized as follows. First, as the export becomes more active, imports of intermediate goods and raw materials used as production input factors will increase, while imports of consumer goods will decrease. Second, imports of intermediate goods and raw materials are positively related with inward foreign direct investment (FDI), but imports of consumption goods are negatively affected by inward FDI. Third, the more industries spend R&D investments, the more the industries import intermediate goods and raw materials. Fourth, the effects of import liberalization are different for each type of import. The influence of the tariff rate was limited for raw materials and capital goods imports.
  According to the analysis of Korea’s import structure, imports of consumption goods declined by 0.137%, and imports of intermediate materials and raw materials were analyzed to increase by 0.235% and 0.193%, respectively when exports increased by 1%. When inward FDI increased by 1%, imports of consumption goods and capital goods decreased by 0.02% and 0.017% respectively, but imports of raw materials were expected to increase by 0.071%.
  The main results of analyzing the effects of imports on probability of firms’ exit are as follows. First, the increase in total imports increase the probability of a firm’s exit but the firm size, capital stocks, productivity decrease the probability. Second, imports of raw materials and intermediate goods decrease the probability.
  Third, whether firms are exporting or not does not significantly affect the relationship between import penetration and firms’ exit. Fourth, the magnitude of the effects of imports on firms’ exit varied from industry to industry.
  The results of effects of imports on productivity structure are summarized as follows. First, the total import penetration rates have an inverse U-shaped relationship with total factor productivity. Second, these nonlinear relationships between import penetration rate and total factor productivity are very different for each type of imports by industry. In order to investigate the effects of imports on the distribution of productivity within the industry, we decompose changes in the productivity into within firm effects, between firm effects, and exit and entry effects. Second, when imports increase, within firms effects are significant in food, iron, transportation industries and between firms effects are significant in oil and iron industries. Only in the transportation industry, exit and entry effects turn out significant. Third, the total import penetration rates have a positive impact on the growth rate of productivity by economies of scale, whereas the penetration rates of intermediate goods imports increase productivity through technological progress.
  Based on this, three policy proposals were derived. The first is the introduction of a new statistical system for imports linked with export and investment. Also, the new system should contain statistics for e-commerce imports in order to analyze the current situation of import of consumption goods. The second is improvement of the trade adjustment assistant (TAA) program. An increase in imports will increase the competitiveness of the domestic market and induce the exit of companies with low productivity, but these impacts were analyzed to be somewhat different depending on type and industry. In addition, a nonlinear relationship between imports and productivity was also considered. Third one is customized policies taking into account effects of imports by type. As the FTA tariff elimination schedule goes forward, the effects of imports are expected to continue to expand. To introduce customized policy for imports by type, it is necessary to raise the understanding of Korea’s import structure. 

  The international community’s sanctions are getting tighter due to North Korea’s continued nuclear missile tests in January and September 2016. This report aims to examine the impact of sanctions against North Korea on its neighboring countries' trade. First, in the 2nd chapter we analyzed the history, main contents, and issues of multilateral and bilateral sanctions against North Korea. In the 3rd chapter we categorized North Korea’s trade into termination, substitution, detour, creation, and provided empirical analysis using trade dataIt is necessary to clarify the concept of detour trade among the concepts of termination, substitution, detour, and creation in trade as a result of sanctions. In general, detour trade(sanction target country-3rd country-sanction sender country) is a trade that makes a detour via a 3rd country in order to avoid sanctions by the sanction sender country, which is based on illegality. However, detour trade concept used in this research is similar to the usual usage of the term in that it maintains the trade route using a detour, but is different in that it does not necessarily need to be illegal. In this research detour trade encompasses both legal and illegal trade. Legal detour trade is trade that abides by the customary rules of origin. For example, if an item that is traded on a detour from North Korea to a 3rd country via China is 60% produced by China and 40% by North Korea, then its origin is legally China. Therefore in this case even if the item had been in part manufactured in North Korea, it will not be subject to sanctions.
. In the 4th chapter we surveyed the history of cross-border business in the North Korea-China border region and how the how the main actors and locations(Dandong and Yanbian) of the cross-border business changed after the sanctions, and how export items changed through trade statistics analysis. Finally in the 5th chapter we analyzed the future scenario, issues and implications of sanctions against North Korea.
  Specifically, in chapter 2, we examined the history, and the main contents of sanctions against North Korea. Sanctions against North Korea are divided into multilateral sanctions led by the United Nations and bilateral sanctions imposed by the US, EU, Japan, South Korea and others. Up until now, there have been a total of six sanctions, and all were adopted due to the test-launch of North Korea's nuclear and long-range missiles. The United Nations resolutions have been strengthened gradually and continually to include additional points while reaffirming the previous sanctioning resolutions. The United Nations multilateral sanctions focus on WMD, nuclear tests and constraints on relevant trade, finance and travel, and in line with the Geneva agreement in 1949, there is no direct effect on the lives of residents of North Korea. In other words, sanctions were enforced so that it does not restrict ??civilian life, and only restrict non-civilian activities.
  Meanwhile, bilateral sanctions were imposed at a level that discontinued economic and diplomatic relations with North Korea gradually notwithstanding consideration for civilian activities. Unlike sanctions against North Korea by South Korea and Japan, the United States has stated four reasons based on domestic law, such as security problems, communism, terrorism aid country, WMD diffusion, etc. The sanctions were imposed by the U.S. since the 1950s, which includes ban on aid and financial support, freezing of assets related to North Korea, embargo of weapons, and prohibition of entry by stake holders. Japan's sanctions against North Korea had been initiated on the grounds of North Korea‘s abduction of Japanese citizens, and features a ban on imports against North Korea, the banning of related aircraft and ships, entry prohibition of stake holders in 2006, and banning exports to North Korea in 2009. South Korea's sanctions against North Korea includes the discontinuation of Mt. Geumgang tourism triggered by the attack on a South Korean civilian in 2008, the complete discontinuation of trade relations except the Kaesong Industrial Complex triggered by the 2010 Cheonan ship attacks, and in 2016 discontinuation of the Kaesong Industrial Complex.
  In Chapter 3, we analyzed the changes in trade between North Korea and neighboring countries due to sanctions. Sanctions against North Korea triggered changes in North Korea’s trade, which can be divided into trade termination, trade substitution, detour trade, and trade creation. Trade termination was due to the sanctions against North Korea by Japan in 2006 and amounts to about $ 180 million(annual average trade value between 2004 and 2006), and from the South Korea’s sanctions against North Korea in 2010, which amounts up to $300 million in trade termination(annual average trade amount between 2007 and 2009). As for trade substitution, inter-Korean trade increased by 113.1% in 2006, North Korea and China trade increased by 95.2% to Japan’s sanctions against North Korea, and North Korea-China trade increased by 195% due to South Korea’s sanctions in 2010. Detour trade North Korea-China-Japan amounts to about 2.1% of total North Korea-China trade(annual average of 2007 to 2009). After the 2010 South Korean sanctions, North Korea-China-South Korea detour trade amounted to about 5.6%(annual average between 2010 and 2012), North Korea-China-Japan detour trade amounted to about 2.6% (annual average between 2010-2012) of North Korea-China trade. Trade substitution to China and increase in detour trade via China due to Japan and South Korean sanctions increased China-North Korea trade to a considerable extent.
  In chapter 4, we analyzed how sanctions against North Korea impacts the businessmen and location of North Korea-China border region, and changes in major trade items as well as dispatch of North Korean workers to China. In the 1990s cross-border business was usually managed by the Chaoxianzu, or the ethnic Koreans in Northeast China, and centered on the Yanbian region. In the 2000s, cross-border business with North Korea was led by the South Koreans in the form of South Korean management and Chaoxianzu local brokers, mainly staged in Dandong. After the 5ㆍ24 measures, the major trading entity has changed its form from South Korean management - Chaoxianzu local broker to Han Chinese management ? Chaoxianzu and ethnically Chinese North Korean broker. The center of cross-border transaction shifted from Yanbian, Jilin Province to Dandong, Liaoning Province. In terms of trade items, North Korea’s traditional trade items such as anthracite and iron ore decreased after the sanctions against North Korea, while the growth of trade in textiles and marine products trade is remarkable. Finally, the number of North Korean workers sent to China has increased. After the sanctions against North Korea, the subjects, regions and products of the cross-border business with North Korea project have changed, but while North Korea's trade has not been greatly affected by sanctions, human interaction has rather increased.
  In chapter 5, we forecasted scenarios, issues and ripple effects on changes in sanctions against North Korea. An important factor in strengthening sanctions against North Korea is whether North Korea will conduct additional nuclear tests and long-range missile tests. Contents of the U.S. strengthening its sanctions against North Korea based on active participation by China include secondary sanctions in the financial sector, restrictions of the main export goods of North Korea which are coal and iron ore, restrictions on trading processed goods such as clothes and marine products which are rapidly increasing sectors for North Korea, as well as restrictions of dispatch of overseas workers. If the problem of weapons of mass destruction is resolved, sanctions against North Korea can be relieved at the level of sanctions enforced in 2006. Relaxation of South Korea’s and Japan’s sanctions against North Korea can be done relatively smoothly. However, the US sanctions against North Korea can be extremely complicated as it is necessary to dispose of relevant laws, amendments, and exemptions for North Korea. More importantly, the important variables that determine whether sanctions against North Korea should be strengthened or mitigated can be three-fold, such as changes in North Korea's behavior, changes in South Korea, the US and Japan's policies, and changes in China's policies.
  The ripple effect of the change in sanctions against North Korea was analyzed by distinguishing between the effect of strengthening and the effect of relaxation. In the case of strengthening the sanctions, North Korea's trade will be totally suspended and only emergency supplies based on humanitarian purposes will be sustained. The effect of alleviation of sanctions will result in rapid increase in trade between North Korea and Japan, and inter-Korean trade, whereas trade and detour trade between China and North Korea will rapidly decrease. 

  Following the global financial crisis, Korea recorded an average export growth rate of -1.8% for 2012-2015, and has not yet recovered its growth rate of 19.1% in 2003-2007 before the crisis. Considering the important role played by export growth throughout Korea's economic growth, a significant part of the recent decline in economic growth can be attributed to this slowdown in export growth. This study focuses on the relationship between financial constraints and exports in order to elicit policy implications for boosting export growth.
  In an analysis using firm-level data, we found that the financial constraint on the supply side of funds contributed to the decrease of exports. The financial shock to the banking sector, which supplied more than 70% of the external funds in 2015, has been found to affect exports of Korean firms. This main result is robust to another index representing the health of banks and different empirical model specifications including firm fixed effect, alternative variable transformation, and an empirical model considering the endogeneity problem. Small and medium-sized enterprises (SMEs) are more sensitive to the health of banks than large firms, and, among the top four manufacturing industries with a high proportion of exports, metal processing products are particularly vulnerable to financial constraints.
  Another empirical analysis using industry-level data again showed that the financial constraints are closely related to decline in export. Debt dependency ratio and tangible asset ratio were used as variables that indicate industry-level financial constraints. Having a higher debt dependency ratio and tangible asset ratio signifies a lower level of restrictions from borrowing in the financial market. An industry with a high financial constraint is more likely to show a large decline in exports as the cost of funds increases. By firm size, SMEs are more sensitive to financial constraints than large firms, as they both face the same financial costs. A classification of exports by item characteristics (e.g. capital goods, raw materials, consumer goods) shows that the financial constraints have a greater impact on exports of capital goods and raw materials. In the case of consumer goods, the effect of financial constraints on exports was not significant. However, further analysis of detailed consumer goods showed that consumer discretionary goods turned out to be sensitive to such financial constraints.
  The policy implications suggested in this report include an improvement in the health of banks, recognizing the different effect of financial constraints on exports by firm and industry characteristics, and the need for micro-financial policies. In relation to improving the health of banks, we propose improving loan examinations. This would involve an enhancement of the expertise employed to identify companies (or industries) that are expected to bring high profitability in the future. We also emphasize that the perception of policy authorities on the different effects of financial constraints on exports by firm and industry characteristics is a very important factor for the effective implementation of policies. By enterprise size, SMEs are more vulnerable to financial constraints than large firms. Therefore, policies to mitigate financial constraints on SMEs would be more effective. Since the relationship between financial constraints and exports is very different from one industry to another, we also emphasize the need for micro-financial policies. In Korea, financial constraints are more relevant to mid- to long-term economic growth rather than short-term economic fluctuations, indicating that policies related to financial constraints need to focus on the mid- to long-term. As the meaning of debt ratio is interpreted differently in empirical results for firm- and industry-level data, the policy maker should take this into account when establishing policies for individual firms and industries.
  The implementation of micro-finance policies that reflect the different effects of financial constraints on exports by firm and industry characteristics will serve as an effective policy option for policy authorities, as an additional policy instrument complementing existing monetary and fiscal policies. If the firms (or industries) with a large decrease in exports due to financial constraints are selected and focused on as a policy target, this would maximize the effect of policies while minimizing unintended side effects.
  The most salient feature of this report setting it apart from previous literature is that it applies proven methodology from previous research to Korean data, showing the part of decrement in exports caused by financial constraints. In addition, we found that these effects are different by firm and industry characteristics. Based on this report, future work using upgraded data will improve the estimation of the coefficient implying an accurate relationship between the diverse effects of financial constraints on exports by firm and industry characteristics, micro-finance policies and financial constraints under the control of various variables. Through this we ultimately hope to raise the effect of policies to improve the export growth rate. 

Introduction

Ⅰ. The Global Digital Economy: Trends, Impact and Prospects

1. The Digital Economy and Features of Digital Trade
2. Measuring Digital Trade
3. The Role of ICT in Northeast Asia
4.  Digital Services
5. Online Consumers
6. New Challenges Posed by the Digital Economy
7. Conclusions

Ⅱ. Existing Digital Trade Rules at the Domestic Level in Northeast Asia

1. Broad E?Commerce Regulatory Frameworks
2. Customs and Trade Facilitation Laws
3. Data Protection
4. Data Localization and Cross?Border Data Flows
5. Domain Names
6. IP Rights
7. Consumer Protection
8. Over?the?Top (OTT) Internet Services
9. Concluding Remarks

Ⅲ. International and Regional Trade Rules

1. The World Trade Organization (WTO)
2. World Customs Organization (WCO)
3. World Intellectual Property Organization (WIPO)
4. Asia Pacific Economic Cooperation (APEC)
5. Free Trade Agreement E?Commerce Provisions

Ⅳ. Negotiating Digital Trade Rules for the Future in Asia

1. Gaps, Challenges and Opportunities:  The Global Level
Recommendations:
2. The Domestic Level
Recommendations:
3. Addressing the Gaps:  Using Regional Trade Agreements
4. Concluding Remarks

Executive Summary 

  Economic policymaking is often a delicate dance between government officials and regulators and the marketplace.  Governments want to ensure, for example, that consumers are safe, that public goods are properly provided, and that government services are adequately supplied.  Companies want to find new markets and new consumers and reap maximum profits.  In mature markets or slowly evolving industries, finding the right equilibrium that balances the needs of government, citizens and companies is easier. 
  In digital trade and e-commerce, however, new technological advances are being developed so rapidly that governments are struggling to keep up.  Officials have responded by either allowing industries to exist in entirely unregulated spaces or have tried to adapt off-line rules and legislation to match growing on-line trade.  The result has satisfied no one.  Governments are uneasy with patchwork regulations and legislation in place to monitor the digital economy at the domestic, regional and global levels.  Companies face growing risks and uncertainty in their business models, since poorly structured and fragmented responses by governments can upend once profitable ventures overnight.  Consumers are also not getting the best outcomes since many products and services that they might want are not available, have uncertain quality, cost more, and may compromise their own privacy.
  This paper tracks the rapidly evolving landscape for digital trade and e-commerce across five Northeast Asian economies?China, Japan, Hong Kong, South Korea, and Taiwan.  These five countries are at the cutting edge of the digital revolution with increasingly wired citizens and innovative companies offering a staggering range of products and services.  The paper examines several business and consumer important trends of note, including the rapid explosion of e-commerce generally, the shift to online and mobile purchases, the proliferation of data and challenges of managing data flows across borders, and new disruptive technologies like fintech, 3D printing and the Internet of Things (IoT).  Each of these trends highlights the growing challenges to regulators in continuing to apply existing rules and legislation created for off-line applications to a digital world.
  It is one thing to note exciting new changing on the horizon.  It is another to grapple with how governments can actually address these rapidly evolving challenges.  The paper therefore breaks down digital trade and e-commerce into eight discrete segments of relevance for the digital economy.  The eight areas under examination are not the only areas that matter for digital trade, but give a better sense of the scale and scope of issues facing regulators at the domestic level. 
  The paper then tracks actual legislative and regulatory policies that govern (or do not yet address) policy for the following issue areas: overall e-commerce regulatory frameworks; customs and trade facilitation rules that apply to e-commerce goods; data protection frameworks; data localization and cross-border data flow rules; domain names; intellectual property rights rules; consumer protection in an online world; and over-the-top internet services.  A review of how the five Northeast Asian countries are grappling with policy in these eight discrete issue areas reveals wide differences in rules between the countries at the domestic level and often significant variation from what might be considered “best practice” ideas for each topic.
  Overall, the review of policy at the domestic level shows that governments have not yet figured out the best approach for creating supportive and enabling frameworks for digital trade and e-commerce.  To date, much of the official response has been fragmented between ministries and agencies, with little coordination.  Digital trade is unlike many other sectors?it cuts across an increasingly wide swath of the economy and regulatory policies in one area often has knock-on or unintended consequences in other areas. 
  It is also rapidly evolving, which is making it difficult for government officials to address.  If governments are too far out in front, too prescriptive or too forward leaning, they risk cutting off new sources of innovation and growth.  They may unintentionally box in specific technologies or platforms.  Yet it can be very difficult to think about regulating for outcomes, since it requires bureaucrats to have a visionary sense of the future that few individuals are likely to have.
  Creating digital economy policies at the domestic level, in any case, is probably not the best or most effective way to create sensible regulations.  The digital economy does not recognize national boundaries.  It does not logically stop at a customs border.  Hence, the more efficient and effective way to manage digital policies is at the regional or international level.  The paper therefore considers ongoing efforts in Asia the regional level, through the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) trade negotiations.  Both trade talks have digital components that could create sensible broader frameworks.
  Both the TPP and RCEP could also usefully contribute to broader global trade rules, crafted in the World Trade Organization (WTO), in the World Intellectual Property Organization (WIPO) and the World Customs Organization (WCO).  The paper also makes recommendations in the final chapter for provisions that should be considered in each of these fora to advance supportive, enabling digital trade and e-commerce rules that would allow governments and companies to reduce risk and uncertainty while ensuring that consumers are properly supported. 
  In the end, digital trade and e-commerce are likely to be the dominant means of creating and delivering goods and services to consumers and companies around the globe in the future.  Northeast Asian economies are at the cutting edge of these trends. The struggles that government officials, legislators and regulators are facing in creating the right frameworks to support this growth shows how vitally important it will be to get the appropriate scaffolding into place at the domestic, regional and global levels.