Preface

Contributors

Introduction and Overview

Part 1. Regional Integration in Northeast Asia: Status and Potential

A Northeast Asian Economic Community: A Korean Perspective
Chang Jae Lee

Introduction
Recent Trade Situations of China, Japan, and Korea
China-Japan-Korea FTA (CJK FTA)
Conclusion
References

A Northeast Asian Economic Community: A Chinese Perspective
Fu Jingyun

Evolution of China’s FTA and Regional Economic Integration Policies
Overview of China’s FTA Network
Characteristics of China’s FTA Policies
Prospects of China’s FTA Policies and Their Implications for the Region

A Northeast Asian Economic Community: A Japanese Perspective
Yasuo Tanabe

A Northeast Asian Economic Community
An Asian Energy Partnership
Japan-China Energy Conservation Forum
Conclusion

A Northeast Asian Economic Community: A Russian Perspective
Sergei Sevastianov

Introduction
Past and Present Russian Regional Policy in the Far East
Development of Energy and Transport Infrastructure in Eastern Siberia and the Russian Far East
Russian View and Possible Role in NEA Integration
Subnational Models of Economic Cooperation in NEA
Conclusions and Recommendations:

Toward a Northeast Asia Economic Community: Lessons from the European Union (EU), Good and Bad
Glyn Ford

EU lessons for Northeast Asia

Potential for Connectivity in Northeast Asia: Energy and Transport Infrastructure in Eastern Siberia and the Russian Far East
Dmitry Reutov

Energy Projects
Transportation Infrastructure
Conclusion

Part 2. Renewable Energy in Northeast Asia and Prospects for the Region

China Renewable Energy Development and Future Prospects for Cooperation
Shi Dinghuan

History and Mission of the China Renewable Energy Society
Renewable Energy in China
Prospects for Northeast Asia Cooperation

Status of Renewable Energy Development―Toward a Low Carbon Society
Yoshiki Iinuma

Hawaii’s Clean Energy Transformation
Mark Glick

Introduction
Renewable Energy and Energy Savings
Tackling Transportation
Reducing Energy Demand
Hawaii: A Clean Energy Test Bed

Part 3. Financial Cooperation in Northeast Asia

Financing the Asian Infrastructure Investment Bank (AIIB):
Issues for Further Discussion
S. Stanley Katz

Development Bank Objectives
AIIB Financial Arrangements and Parameters

Creating a Multilateral Development Fund for Financial Cooperation in Northeast Asia
Jai-Min Lee

Recent Developments Impacting the Northeast Asian Development Bank Proposal
Creation of NEA Fund
Role of the Greater Tumen Initiative (GTI)
Conclusion

Establishing a Northeast Asian New Financial Institution to Promote Regional Economic Cooperation and Development
Zou Lixing

Strategic Value of and Market Demand for a Northeast Asian New Financial Institution
The Relationship between a New Northeast Asian Financial Institution and
the Asian Infrastructure Investment Bank (AIIB)
Basis and Path to establish a New Northeast Asian Financial Institution

Financial Cooperation in Northeast Asia: Japan’s Perspective
Hideo Naito

The Potential of Northeast Asia
Recent Trends in Financial Cooperation in Northeast Asia
Partnership for Quality Infrastructure
Japan and NEA Potential
Public Private Partnership (PPP) Readiness in Asia-Pacific

The Belt and Road Initiative: Ambition and Reality of China’s “Go Global” Strategy
Liu Ming

Background of the Belt and Road Initiative
Belt and Road Initiative: Challenges
Conclusion

Appendix
 

The Northeast Asia Economic Forum (NEAEF) is a regional nongovernmental organization created in 1991 to sponsor and facilitate research, networking, and dialogue relevant to the economic and social development of Northeast Asia. The Forum is also committed to promoting understanding and relations among the peoples of Northeast Asia, North America, and Europe.
 The main objective is for NEAEF to conduct research and conference activities aimed at functional economic cooperation such as cross-border energy, transportation and logistics infrastructure development, and capital mobilization. The Forum holds annual conferences, workshops, and seminars for planning, facilitating, coordinating, and implementing international and interdisciplinary solutions to common policy problems. It is the only nongovernmental regional organization in which all the nations of Northeast Asia and the US are consistent and active participants.
 In collaboration with the Korea Institute for International Economic Policy (KIEP), in 2015 NEAEF carried out activities on building a Northeast Asian Economic Community based on lessons learned from NEAEF’s previous work on financing cross-border functional economic cooperation. For the first year of this collaborative project the focus was on regional cooperation and strategies in Northeast oriented toward North Korea―this work focused on functional economic cooperation in cross-border resources, energy supplies, infrastructure construction, capital mobilization, and institutional development.
 This volume is the first part in a series of proceedings titled Building a Northeast Asian Economic Community. It contains presentations and summaries from the NEAEF Beijing Special Meeting and the related activities that took place under this project. The aim of the project is to contribute to and encourage activities and efforts toward regional economic integration in Northeast Asia. 

As China emphasizes the role of service sectors in achieving medium-to-high level of economic development, and as the bilateral free trade agreement (FTA) between Korea and China comes into effect in December 2015, the Korean government and companies expect increased opportunities to enter the domestic service market of China. This study deems that the market-opening strategy for China’s service sectors has been changing during the 12th Five-year Plan period (2011 to 2015). Based on the results from the case study of the Shanghai Pilot Free Trade Zone (PFTZ), the study evaluates the level of market openness of China’s service sectors and provides suggestions for furthering Korea-China cooperation in the service sectors.
 The primary findings of this study can be summarized as follows. In Chapter 2, we analyze the current state of the Chinese service industry and major related policies, and explain why a change in the strategy for opening the markets for China’s service sectors is necessary. The importance of Chinese service sectors rose substantially during the 12th Five-year Plan period. The share of the tertiary industry in China’s GDP surpassed that of the secondary industry for the first time in 2012, and steadily increased to reach 48.1% of GDP by 2014. Since 2011, the share of the tertiary industry in China’s total workforce was first among the three industries; the same has been true of FDI since 2010. During the course of the 12th Five-Year Plan, the Chinese government has also announced for the first time a development plan that focuses on the service sector. In 2014, the Chinese government emphasized the role of service sectors in the “Made in China, 2025(中？制造 2025)” development plan and announced a policy that specializes in nurturing the producer service industry. But the service sector still needs to be opened further in order for China to gain a competitive edge in the global market.
 In Chapter 3, we evaluate the level of market openness in China’s service sector and analyze the changes in the market opening strategy, focusing on six industries in the service sector: finance, health, law, education, tourism, and culture. China’s service industries have opened up substantially after joining the WTO in 2001, but no significant change was made in the DDA initial offer, revised in 2005. Similar trends can be seen in finance and cultural industries; some areas in health, law, education and tourism, however, show a higher level of openness than corresponding markets in Korea. A comparison of the Service Trade Restrictiveness Index (STRI) in 2015 revealed that China still shows a lower level of openness in all 18 sectors when compared to other countries, and an overall higher level of restrictiveness than Korea.
 The Chinese government’s market-opening strategy for its service sectors has taken a different turn since 2011. First, the basic framework for market-opening for service sectors changed from stimulating influx of capital and technology by attracting foreign investments to driving forward structural reforms in the domestic economy and easing the country’s adaptation to global changes. Second, the target beneficiary group for the opening policy has expanded from foreign companies to China’s privately-owned companies. Third, the government is attempting to apply the development strategy of so-called “Points-Lines-Surfaces (点-？-面)” to open up specific industries in the service sector within a specific geographical area. Fourth, the government’s attitude has shifted from perceiving the opening process as an obligation mandated by the WTO, to active pursuit of opening procedures to prepare for the age of multilateral cooperation, epitomized by the TPP or the RCEP. Fifth, the government has been pursuing changes in the market-opening method, such as discontinuing incentives to foreign companies, adopting a negative list, and encouraging overseas expansion of Chinese domestic companies.
 In Chapter 4, we conduct an analysis using Shanghai PFTZ as the representative case of the market-opening strategy introduced in Chapter 3, and analyze the specific market-opening policies of six service industries that was implemented in the Shanghai PFTZ. As a result, we found out unconventional measures were generally avoided in Shanghai PFTZ until presently. In addition, the marketopening policy of legal service industry has not been effective enough, because openings as a result of the new policy were not as palpable as the foreign law firms expected; case in point, allowing the establishment of Sino-foreign joint ventures and employment of Chinese lawyers. In the health services, the establishment of wholly-foreign-owned medical institutions was allowed in 2013, but the market-opening policy has been discontinued recently. Shanghai PFTZ also seems to be very cautious in the opening of the cultural service market, allowing only the sales of video game consoles (which has low market share in the game industry) and the establishment of wholly-foreign-invested entertainment artist agencies to provide services in Shanghai.
Other cultural sectors such as film, broadcasting, and online games were excluded from market-opening. In the education service sector, it is encouraging that establishing both educational training institutions for profit and wholly-foreign-owned vocational skills training institutions were allowed, but under the new policy no company has established a presence in the Shanghai PFTZ till now. Financial service sector is not an exception, and most of the market-opening policies are, as of yet, merely an expanded version for areas that have already been opened.
 In Chapter 5, we discuss the implications for the Korean government and companies to expand cooperation with China in the service sectors. While the essence of Shanghai PFTZ’s is institutional reform rather than market openness, and while there certainly are limitations for local governments to enforce the market opening policy aggressively; it is the conservative attitude of the Chinese government regarding market-opening for service sectors constituting the primary reason why the market openness of service sectors in Shanghai PFTZ is delayed. The PFTZ project and market-opening policy may be expanded throughout China in the future, but the Chinese government will likely continue to be cautious regarding their pace and scope.
 The Korean government should utilize the market-opening policies of Shanghai PFTZ as well as collect information on ‘bottleneck’ problems which the Korean companies have experienced entering the service sectors in China during the course of post-FTA negotiations with China. The monitoring system also needs to be established to provide Korean service companies with guidance related to PFTZ policies. The opening of finance, law, housekeeping, and pension service markets might take place prior to all other service sectors, and Korea can cooperate with China in those sectors especially. Moreover, the Korean government should establish a mentoring system enabling Korean service companies to exchange experiences in the Chinese service market.
 With regard to Korean companies, we suggest that they use the Shanghai PFTZ as a platform and source of funding, to ask for exclusive benefits by appealing that they can provide advanced management knowhow to the Shanghai PFTZ, and use the simple incorporation procedure in Shanghai PFTZ. In addition, they should strengthen cooperation with privately-owned Chinese companies and carve out new service markets, while considering local demand. 

Jong-yong Yim, chairman of the Financial Services Commission (FSC) in Korea, said on November 12, 2015 that one of the FSC future policies is to establish a financial hub in Korea. In particular, among Korean government proposals for elevating competitiveness of Korean financial sector, the creation and development of a financial hub recently receives attention. An established financial hub might be able to allow domestic financial companies to address to the foreign demand for financial services and induce the entry of foreign financial companies into Korean financial industry. Thereby, the creation and development of a financial hub would be new momentum for growth in Korean financial sector.
Our past experience tells that it would be a difficult task to create and develop a competitive financial hub in Korea, however. Korean government established the roadmap for the creation and development of Northeastern Asian financial hub in Korea as Presidential agenda in 2003, planned to implement a series of financial sector reforms, and announced that the future Korean financial hub would become one of three major financial hubs in Asia until 2020. However, the current consensus is that a financial hub in Korea has yet been successful and, as World Economic Forum (WEF) announced, the competitiveness in Korean financial industry has gotten worse from 27th rank in 2007 to currently 87th in the world.
Nevertheless, the following three recent changes in domestic and foreign economic environment should be notable as regards Korean government’s efforts for establishing a financial hub in Korea. First, since the last couple of year efforts by Chinese government for RMB (Chinese yuan) internalization, the IMF said on November 30, 2015 that it added RMB to its benchmark SDR basket. Chinese government also said that it continued to push for RMB internalization in the future. Second, RMB offshore financial hubs are important for RMB internalization as Chinese government takes a gradual approach to openness of its capital market and deregulation of its exchange rate manipulation. Therefore, for the time being Chinese government would support RMB offshore financial hubs. Lastly, since the visit of Xi Jinping, Chinese president, on July 3, 2014, China and Korea have agreed upon opening won-yuan direct market, assigning the Korean branch of Bank of Communications to become a RMB clearing house in Korea, and 80 billion RMBs of RQFII (RMB Qualified Foreign Institutional Investor) grant.
The above changes in domestic and foreign economic environment can be a new growth opportunity, if the creation and development of RMB offshore financial hub in Korea would become one of goals of Korean government’s financial hub strategies. A primary premise for the successful RMB offshore financial hub in Korea is that Korean government should be able to commit to policies for the creation and development of successful RMB offshore financial hub. As a result, the policies should not be subject to temporary shocks such as regime change in Korea and Chinese business cycle. Therefore, firms in Korea, which is involved in the business with China, will expand the use of RMB and international investors will purchase RMB financial products issued in Korean financial market. Based on descriptive analysis, this study proposes the following seven next steps that should be taken for the creation and development of successful RMB offshore hub in Korea.
First, RMB offshore hub in Korea should be developed in the way that the hub in Korea can have comparative advantage. In this sense, RMB offshore hub in Taiwan is the best preceding example for the future RMB hub in Korea. One of the major roles of the RMB offshore hub in Taiwan is to support Taiwanese firms which intend to move into Chinese market, because Taiwan is a country with the largest trade surplus against China and because Taiwan is closely related to China through trade in real sectors. Because financial market in Korea is less developed than Hong Kong, London, and Singapore, the derivative products issued by Korean financial firms would not compete against the products from those developed financial markets. On the contrary, there is a huge volume of trade flow between China and Korea like between China and Taiwan. In addition, Korea posts the second largest volume of trade surplus against China in the world. As a result, Korea could accumulate RMB if exporting firms in Korea are paid by RMB. To this end, policy makers in Korea should implement the mechanism through which those exporting firms in Korea will be paid by RMB in their transaction with Chinese companies.
Second, it is not desirable to use RMB secured through won-yuan swap arrangement between China and Korea for creating RMB financial products. Unlike London with developed financial market and huge amount of foreign liquidity, Korea does not have comparative advantage in issuing RMB financial products. RMB secured through won-yuan swap arrangement should be reserved for the purpose of stabilizing temporary shocks in the foreign exchange market.
Third, Korean government has been discussing about establishing a special administrative region in Sandong, where many Korean companies currently move into. The similar, previous case is Taiwanese special administrative region in Haixi, which actually helped Taiwanese companies to move into China. Because Korea had comparative advantage in labor intensive products in the past, the main factor to induce Korean firms to move into China was cheap labor. However, in the future the main factor is likely to be huge domestic demand in China. Therefore, it is necessary to implement policies to support Korean firms that intend to move into China due to domestic demand in China as well as establishing a special administrative region in China.
Forth, Korean branch of Bank of Communications is RMB clearing house in Korea. However, since October 2015, CIPS Level 1 has initiated as clearing mechanism in China. In particular, eight foreign banks including HSBC and SC, which have opened their branch in China, have chosen to participate in CIPS, since it is more advantageous than the other clearing mechanism. Therefore, as RMB clearing mechanism in Korea, it is necessary to choose among various alternatives including CIPS.
Fifth, it is necessary to accumulate RMB liquidity in Korea by fostering RMB bank deposit. Some of Korean domestic banks require RMB depositors in Korea to pay a commission instead of receiving interest. They argue that insuring won-yuan exchange rate risk is too costly. Since requirement of a commission to RMB depositors is criticized as one of obstacles that prevent the accumulation of RMB liquidity in Korea, policy makers should figure out the way to reduce the commission and expand domestic RMB deposit in Korea.
Sixth, RMB bond is important for successful RMB offshore hub, as seen in the other successful RMB offshore hub. However, it is not easy to expand issuance of RMB bond in Korea. As opposed to the other RMB offshore hub, we do not have good record keeping device and monitoring system about Chinese firms. Therefore, cooperation with Chinese financial institutions is necessary because they have comparative advantage in evaluating Chinese companies.
Seventh, it is necessary to foster financial institutions which can earn the sufficient amount of RQFII quarter, so that economy of scale arises in Korean financial industry. To this goal, in the long run, some financial institutions in Korea should be motivated to build specialty in Chinese industry and firms. Thereby, the financial institutions in Korea should be able to manage not only sales of financial products but also operation of financial products.  

China, as one of the world’s leading economic powers, has been heavily dependent on investment and exports for economic growth since its opening and reform, which allowed for a sustained average annual growth rate of 10% until 2011. But the Chinese government, realizing the limits of such investment-driven growth model, has been pushing for a paradigm shift to a consumption-driven growth since the beginning of the 12th Five Year Plan (2011~2015). The switch is a demonstration of the government’s firm determination to lower its dependence on investment for economic growth and expand consumption, even at the cost of decreased growth rates. But since 2012, a sluggish global economy has led to a slowdown of exports, investments and consumption, causing China’s economic growth to dwindle to around 7% and thus, signaling the country’s entrance into the “era of new normal.”
Considering such a background, this research aims to investigate why consumption was not stimulated to the extent the Chinese government wanted, using an empirical analysis; it also seeks to evaluate China’s efforts to boost consumption, and, from them, its consumption-driven growth strategy. Finally, this study analyzes the impact of China’s consumption-oriented growth model on the Korean economy, presenting several suggestions for establishing Korea’s new China strategy in this “era of new normal.”
This paper is divided into six chapters. After the Introduction, Chapter 2 looks into Chinese government policies to boost consumption, which began in earnest after the Global Financial Crisis. Three main policies are especially emphasized: China’s strategy to decrease household saving rate, its strategy to increase household disposable income and its strategy to change the consumption structure.
In Chapter 3, this paper investigates the trend of China’s household consumption, its consumption gap across various strata, its consumption structure and the trend of the consumption market according to industry sectors. According to an index that reveals China’s consumption expenditure, China’s household consumption increased more than five-fold from around 4.7 trillion yuan in 2000 to around 24.15 trillion yuan in 2014. But income disparity, an unwelcome side effect of China’s high-speed growth, is widening the consumption gap between urban and rural areas, between classes, and between regions. China’s retail sales growth, which had been rising steadily rise since 2000, has slowed after 2010. Reasons for the slowdown include retreating consumer confidence due to the recent economic recession, general preference for savings due to insufficient social security net, etc.
In Chapter 4, widening income disparity, demographic changes, an inadequate social security system, low urbanization rate, slumping development of consumer finance and high housing prices are presented as the factors responsible for constraining the growth of China’s domestic consumption, and efforts were made to analyze the present condition of each factor. After 2009, urban-rural income gap narrowed to a certain degree, but disparity across regions (Eastern coastal regions versus Western inland regions) and the social stratum, visible in the Gini coefficient, remain large.
In Chapter 5, this paper uses province-level data to conduct an empirical analysis to examine factors that determine China’s domestic consumption. The results show that factors including economic growth, level of economic development, household income, investment, elderly support ratio, development of the service sector, financial development, urbanization, education expenditure, and the rise in the minimum wage all have meaningful influence on China’s domestic consumption.
Economic growth and economic development were found to have a meaningful negative correlation with consumption. Household income and development of the service sector were found to have a meaningful positive correlation to consumption; while investment and elderly support ratio had a meaningful negative correlation; this indicates that low labor share, underdevelopment of the service industry, high investment rate and high elderly support ratio have limited the growth of China’s household consumption.
Among the China-specific factors, financial development and urbanization were found to have a meaningful positive influence on household consumption.
Regarding government policies, the expansion of fiscal spending for education after the financial crisis has contributed to the increase in household consumption.
On the other hand, expenditure on medical, social security and subsidized housing did not have any meaningful influence on household consumption. Minimum wage increases have been found to have a meaningful positive influence on increasing household consumption in the coastal regions; in the coastal areas, the government policy of raising the minimum wage has been successful to some degree.
Regarding investment, investment on manufacturing and the real estate sectors have mostly increased profits of companies, rather than that of households, restricting the growth of household consumption. Investment on farming and the service sectors, on the other hand, led to a growth of household income and consumption.
As China’s growth paradigm shift is expected to greatly impact the Korean economy, this research proposes Korea’s new China strategy based on the above findings.
First, against the backdrop of China’s declining growth as a consequence of entering the “era of new normal,” Korea faces an urgent need to develop new markets.
Second, more than 80% of Korea’s investment in China has been concentrated in manufacturing and those directed to the service sector has been meager, meaning Korea must speed up its entry into China’s service market.
Third, as China’s consumption market is expected to continue growing, Korea should search for a new export strategy to China, with less emphasis on processing trade and more on expanding the consumer goods market. At the same time, Korea should increase its share of investment to target China's domestic markets, accelerating the change in its investment structure.
Fourth, Korea should establish a step-by-step strategy to target the Chinese market: while targeting general consumer goods in the early stage, Korea should ultimately take advantage of the Chinese government’s so-called “new form of urbanization” plan. At the same time, Korean companies and the Korean government should seek to actively participate in large scale infrastructure projects related to the “One Belt One Road” strategy. 

ASEAN is a key strategic market for Korean financial companies, as it represents a promising new source of sustained growth for an industry that is reaching the limits of growth in a saturated domestic market. For Korean companies to compete effectively with local financial compnies in ASEAN member states, it is crucial to have a deep understanding of ASEAN's financial industry, and furthermore to be aware of its current competitive landscape.
Recently ASEAN has begun earnestly to promote ASEAN financial integration with a view to enhancing the region's financial infrastructure and financial competitiveness. According to a commonly used concept of financial integration, a financial market is considered integrated if all market participants face a single set of rules, have equal access to the market, and are treated equally when engaged in it. More broadly, it indicates a state or a condition whereby connectivity among disparate financial markets increase beyond national borders. Thus, financial integration in ASEAN, literally, means integration of financial markets among the ASEAN member states, to stimulate economic growth and accelerate the process of forming an integrated community in the long run, through enhanced intra-regional investment (capital) and trade (goods and services).
Due to considerable differences in market size and the stage of financial development among the member states, establishing a single financial market in ASEAN might be an overly ambitious goal. However, the sustained economic growth of the region, and domestic financial companies’ vigorous efforts to expand overseas business and generate new sources of profits, makes ASEAN a highly strategic region. Thus we need to pay closer attention to the development of economies and financial markets in ASEAN.
The main objective of this study is to investigate current conditions and characteristics of ASEAN financial markets and the financial industry, particularly those of Singapore, Malaysia, Indonesia, and Thailand, and project future changes that may occur during the course of financial integration in ASEAN. These would help financial companies from Korea establish strategies to enter the Southeast Asian market. Since ASEAN is a strategic market for Korean financial companies with respect to continued growth and profit generation-especially when it is hard to find new opportunities within Korea-an understanding of financial markets of major ASEAN countries, including the current landscape of market competition, is critical for Korean companies to compete effectively in the region.
To this end, we must examine the historical and geographical characteristics of major ASEAN countries, as well as the current state of their economy, financial markets and financial industry. This article is structured as follows. Section II looks at ASEAN member states’ internal economic conditions (e.g. GDP, per capita GDP, economic growth, industrial structure) and external factors (e.g. trade volume and characteristics). Major macroeconomic indicators including exchange rates, policy rates, inflation, and unemployment rates are also examined. The analysis focuses on Singapore, Malaysia, Thailand, and Indonesia, and discrepancies among these countries are discussed. Additionally, the characteristics of the financial industry—specifically the banking sector and financial investment&# 8212;are examined. Also, given the significant importance of “Islamic finance” in the region, the topic is discussed separately in the Appendix.
Section III examines the current state of financial integration in ASEAN and draws implications for Korean companies. Different features of financial integration between ASEAN and the EU are highlighted, as well as impediments in ASEAN financial integration. Also discussed is the question of how the process of ASEAN financial integration affects regional financial markets and industries. Most ASEAN member states have bank-based financial markets, and have relatively less developed capital markets. Meanwhile, ASEAN-based banks are small in asset size compared to their European counterparts. In addition to this gap with advanced countries, there is a wide discrepancy across ASEAN as well. And there is diversity and divergence among policy measures adopted by individual ASEAN member states to strengthen their banking industry: Some emphasize overseas forays to pursue more M&A deals (e.g. Malaysia, Singapore, Thailand), while others focus on strengthening the domestic banking sector (e.g. Indonesia, the Philippines).
Meanwhile, the gap is even wider among capital markets than banks across the ASEAN region. Singapore has become a financial hub of Asia with a highly advanced financial sector, and Malaysia and Thailand have nurtured well-developed capital markets over the years. Capital markets in Indonesia and the Philippines are growing steadily, while those in the BCLMV (Brunei, Cambodia, Laos, Myanmar, and Vietnam) are still in an embryonic stage, with acute needs to build financial infrastructure and regulatory frameworks.
In this regard, a two-step approach has been made for ASEAN financial integration. The first is a “Two Speed” strategy to achieve partial integration first among the ASEAN 5 countries, and then gradually close the gap with the BCLMV, to eventually achieve full integration. The second is a “Two Track” strategy to allow QABs (Qualified ASEAN Bank) free entry into the ASEAN market, and later examine whether to grant the same privilege to non-QABs. At this point, ASEAN envisions a partial financial integration—unlike the EU—in the banking sector by the year 2020. As this endeavor moves forward, ASEAN member states will lower entry barriers in financial markets, and financial companies from many countries would continue to enter the market, thus strengthening their competitiveness and diversifying sources of profit.
From the current condition of the ASEAN financial industry, we can draw several implications for domestic financial institutions, especially as they are making great efforts to penetrate overseas markets, faced with deteriorating profitability within the country.
Section IV investigates how the progress of ASEAN financial integration and subsequent changes in the financial market environment have affected business strategies of financial companies in the region. Based on this analysis, we try to seek an effective strategy for domestic financial companies operating in the region. Specifically, we analyze the strengths of major ASEAN-based financial companies and their peculiar business practices in the ASEAN region. Then we look at business operations of Korean financial companies in ASEAN, including notable characteristics and obstacles.
By analyzing some of the leading Southeast Asian financial companies&# 8212;CIMB (Malaysia), Maybank (Malaysia), DBS (Singapore), OCBC (Singapore), and Mandiri (Indonesia)—we draw implications for penetration of overseas markets. It is observed that only a handful of financial companies from advanced ASEAN countries like Singapore and Malaysia have a wide presence in the region, and their presence is heavily biased in major ASEAN states including Malaysia, Indonesia, and Thailand, while level of penetration in the BCLMV markets remains weak.
Financial industry in ASEAN shows several salient features. First, ASEAN-based banks are more competent than non-ASEAN-based banks in the region, while global companies are more competent when it comes to securities and asset management. It is because development of capital markets has been slower than banking markets in ASEAN. As a result, financial market growth has been driven by commercial banks, and many of the financial companies with operating in ASEAN are commercial banks that focus on retail banking. Second, Singaporean and Malaysian banks, with their large asset sizes and competitive edge, are focusing on penetrating overseas markets to diversify profit sources, and in the meantime, global financial companies have been increasing their presence and competing in these countries. Third, financial companies in ASEAN are shifting their strategy, from specialization in a particular business to diversifying business areas.
Meanwhile, several characteristics have been observed regarding Korean financial industry’s forays into ASEAN markets. First, the number of overseas branches has been growing since the global financial crisis. Second, these overseas branches saw their current net income improve in recent years, as well as localization indicators. Third, cases of M&A deals with ASEAN banks or equity acquisition have been increasing. KEB Hana Bank acquired PT Bank Bintang Manunggal in 2007 to conduct retail banking in Indonesia, and Woori Bank acquired Bank Saudara— which specializes in retail banking—to expand the business network throughout Indonesia.
As for Korean financial companies’ efforts to achieve greater penetration of the ASEAN market, several observations were made. First, they have been biased toward the BCLMV states, with many companies concentrated in similar business areas, thereby intensifying competition. Second, Korean business activities in ASEAN are heavily dependent on Korean companies and Koreans in the region. Third, overseas branches are mostly small in size, and lastly, due to limited information on local financial markets, Korean financial companies in ASEAN are exposed to uncertainty surrounding economic and financial fundamentals of ASEAN member states.
In light of these findings, we would like to propose several strategies for forays made by Korean financial companies into the ASEAN market. First, a strategy of localization would be suitable for banks, while investment companies need to focus on establishing a “global link,” given that banks try to expand overseas business operations to attract new consumers and enhance profitability, while investment companies need to strengthen global networks to secure funding and manage assets more efficiently. Second, Singapore would be an ideal location to foster wholesale banking, while other member states are more suitable for retail banking. In retail banking, localization is key to increasing market share, and thus, acquiring good-sized local banks e would be essential. In comparison, in wholesale banking, the key is location where sufficient funds can be secured at low costs. Thus, overseas branches need to be established in financial hubs like Hong Kong and Singapore, or places where Korean companies are doing brisk business. Focusing on wholesale banking could be even more effective through partnership with investment companies.
The development of financial markets and financial industry in ASEAN member states shows that while stock and bond markets are developed to an extent in Malaysia and Indonesia, money markets and derivatives markets are at a nascent stage. In other countries, these markets are mostly absent. Under these circumstances, financial companies in Malaysia and Indonesia are capable of providing brokerage services and playing the role of market maker in traditional stock and bond markets, but their capacity for prop trading or hedge fund investment is quite limited. Also, market-making is difficult in corporate bonds market due to its negligible volume. However, the market for corporate financing and principal investment could be tapped into, as transfer of ownership claims is established for corporations and securities, and depository and lending institutions (e.g. banks) are relatively well-developed. Asset management may be done for stocks and bonds, and possibly for real estates as well, as transfer of property ownership is permitted. However, investment needs remain weak in Indonesia and the BCLMV due to high deposit rates and relatively high level of price instability, and thus, it will be difficult to sell funds or other financial instruments in these regions. The BCLMV countries have weak financial infrastructure, which makes conducting brokerage services, market making, or prop trading difficult challenges. However, as progress is made in ASEAN financial integration, financial infrastructure in the region would continue to improve; and with a basic legal framework put in place that governs corporate financing, and transfer of company or property ownership, there would be more room for expansion of corporate financing and asset management in the region.
Lastly, other suggestions to reap more benefits from deepening financial integration in ASEAN would be to operate an educational program to train local financial experts, train and recruit ASEAN students studying in Korea, provision of greater government support for domestic financial companies to strengthen their networks in ASEAN, establishment of an early warning system to detect risks in ASEAN, and provision of timely information regarding changes in laws and regulations of the ASEAN member states. 

This study evaluates Korea’s competitiveness in manufacturing exports, focusing on the rivalry among Korea, China, and Japan. In doing so, it aims to predict changes in competitive dynamics for Korea in the global manufacturing market.
Chapter 2 compares the total factor productivity (TFP) and technical efficiency of 11 manufacturing sectors among the three countries. For Korea, firm-level TFP growth is decomposed by its determinants: within-firm and between-firm effects, entry and exit effects, technological progress and economies of scale. Chapter 3 sheds light on Korean export competition with China and Japan using various indicators calculated from export statistics. Then, it identifies the relationship between productivity and export performance in Korea. The standard gravity model and panel vector autoregressive model (VAR) are employed for estimations. Chapter 4 predicts changes in the competitive landscape for the Korean manufacturing industries based on long-term projections for productivity in the three countries.
The findings from the study are as follows: first, there has been a dramatic catch-up of China with Korea in terms of productivity, especially since 2000, while there still exists a relatively large gap between Japan and Korea. It is reminiscent of the sandwich theory, meaning Korea is literally sandwiched between a fast-growing China and technologically-advanced Japan. Second, since 2000, industry-level productivity has increased mostly with respect to the ratio of value-added in productive firms to total value-added in Korea. Meanwhile, it is actually technological progress that has been the major contributing factor to productivity growth rather than economies of scale. Third, Korea competes with China and Japan, respectively, in different product markets. It implies that the rivalry among the three countries even within the same industry may be divided in terms of the products. Fourth, productivity may be interconnected with exports in Korea. In particular, there seems to be a positive link between productivity growth created by technological progress and export performance. Fifth, current trends in productivity growth suggest that Korea will be overtaken by China in most manufacturing sectors except chemical and oil refining within 10∼15 years. For the long-term though, the productivity rankings will be reversed among Korea, China, and Japan; in virtually all industries but transportation equipment. 

Since the adoption of the WTO-led Aid for Trade (AfT) initiative in 2005, there has been a steady increase in trade related aid around the world. The share of AfT in total official development assistance (ODA) reached to 31% in 2012. Along with the increase in AfT, there has a slight controversy regarding the impact of AfT on reduction of trade costs and/or expert competitiveness of recipient countries.
The Korea’s volume of ODA has been increasing, with Korea becoming the 8th largest AfT donor country among DAC member countries; Korean ODA comprised 40% of the AfT itself. Interest regarding AfT, however, has mostly been concerned with the volume of AfT and there was relatively less attention toward its effectiveness. Our study, rather, is focused on the qualitative aspect of AfT; we would like to answer the questions on whether Korea’s AfT had positive impacts on recipient countries’ trade capacity - meaning our investigations would concern how the AfT contributed to their economic growth and what will be its impact on the trade between Korea and recipient countries.
We selected three Southeast Asian countries, Vietnam, Cambodia and Lao PDR, who are late-comers among ASEAN (Association of South East Asian Nations) members and also transition countries with a high economic growth. In order to investigate the relationship between AfT and trade capacity of the recipient country, we conducted an empirical estimation. Dividing the AfT by sub-categories and sorting recipient countries according to income level and geographical factors, the empirical results allow us to elicit in-depth and realistic policy implications.
We find that AfT, overall, has a positive impact on export performance of a recipient country. Among the sub-categories of AfT, AfT for economic infrastructure and production capacity were identified as having strong impact on export promotion. When recipient countries are sub-divided by income level, AfT has a positive impact on export promotion for low-middle and upper-middle income countries, whereas for low income countries, AfT turns out to have a negative impact. It is noteworthy that AfT for economic infrastructure and production capacity, which accounts for more than 90% of total AfT, did not have an appreciable impact on promotion of exports among low income countries.
On the other hand, AfT for trade policy and regulation has a significant and positive impact. When the recipient countries are divided geographically, AfT for economic infrastructure and production capacity show a positive impact on their export promotion for Asia and Europe in which countries have a relatively high income level, whereas we fail to find significant impact for the African country group.
From the study and empirical results, we can provide implications for Korea’s AfT policy. First of all, as we have noticed in our empirical estimation, AfT without considering country specific factors would not be an efficient way to enhance the trade capacity of recipient countries. Especially, AfT for economic infrastructure and production capacity did not have an impact regarding promotion of exports for low income countries.
It was rather AfT for trade policy and regulation which actually had a meaningful impact. Considering that about 96% of total AfT is allocated for economic infrastructure and productivity capacity, converting AfT support currently concentrated toward ‘hardware’ to ‘software’ based allocation would improve the effectiveness of AfT for these low income countries. It also implies that in order for AfT for economic infrastructure and production capacity to have significant impacts, it must be preceded by improvement of economic structure and regulation of recipient countries. Improving the effectiveness of aid would also entail taking into consideration the recipient country’s specific factors, including income level, trade structure and/or trade related regulations, followed by determination which supporting field of AfT would have priority.
Secondly, AfT should be treated as a cross-cutting issue in the process of establishment and implementation of Korea’s ODA policy. That is, AfT should be central in consideration for all types of Korean ODA projects. AfT will be a core topic in discussions around the world on how to increase ODA, how to promote its efficiency, and what type of policy project is needed to achieve the new development goal. To take a leading role in this process, Korea needs to take AfT as a core agenda in Korea’s international development model. For this purpose, we have to take an approach to AfT from a more integrated perspective; and development projects should be actively promoted and implemented to achieve comprehensive and sustainable economic development.
Thirdly, the results show that Korean ODA also suffers from excessive segmentalization. Overcoming this problem would require active bilateral and multilateral cooperation. In addition, creation of a permanent discussion channel between donor and recipient states will also enhance international cooperation. Inviting recipient countries into the permanent discussion channel accords with principles of harmonization of aid and aid ownership of recipient country, which was adopted in the Paris Declaration. If participation of the recipient country makes it possible to deliver assistant projects which coincide with its own visions for development, it will satisfy the accordance principle between development vision of recipient country and assistance of donor country. Also, such cooperation will strengthen the sense of mutual responsibility of donor and recipient countries, thus improving the efficiency of assistance.
Fourthly, the results show that assistance on economic infrastructure and productivity capacity failed to have significant impact on exports for low income countries, whereas aid on trade policy and regulation had positive and significant impacts. However, Korean AfT is highly concentrated on economic infrastructure and productivity capacity, in stark opposition to our empirical results. What we suggest for AfT for Vietnam, Cambodia and Lao PDR is that assistant projects to improve the trade system and trade-related regulation needs to come before improvement of economic infrastructure. Assistance in these fields can have significant impact on the improvement of trade capacity for these countries and based on that, assistance regarding economic infrastructure and/or production capacity can have meaningful results in the future. In this regard, reallocation among the field of AfT for these countries should be considered.
Lastly, to improve the efficiency of AfT assistance, a proper understanding about recipient country’s situation and intensive assistance should be achieved. As mentioned already, Korea’s AfT to Vietnam, Cambodia and Lao PDR shows excessive bias towards “hardware fields” of trade, such as economic infrastructure. On the other hand, what is needed and would prove more efficient for these countries is the “software fields” of trade capacity. Given that Korea has advanced software related to cross-border trade, Korea’s experience and technology could have immediate and practical help for these countries. For example, Korea’s UNI-PASS which is designed for automated electric customs procedure and/or consulting service regarding customs procedure and the related systems, can be an effective form of assistance. 

 In recent years, major Latin American countries, represented by Chile, Colombia and Peru, are actively implementing ‘new industrial policy’ in order to change their economic structures with high dependency on primary goods and then to promote their export competitiveness. One of the reasons that these policies are called new industrial policy is that it characterizes as following: First, they focus more on export promotion unlike the old industrial policy in 1950~1980 whose main focus was an import substitution. Second, the new industrial policies highlights the importance of the innovation. In the industrial policies of Chile, Brazil, Uruguay, and Colombia, the importance of innovation is particularly emphasized. Third, new industrial policies are nowadays backed by sound budget. Last but not least, new industrial policies are aiming at public-private alliances and being more horizontal whereas the old industrial policies are more of a vertical systems presided by the government.
 In this study, new industrial policies of Chile, Colombia and Peru have been analyzed in depth. Also suggestions to the government have been made to enhance cooperation between the two regions and also to the private enterprises to discover their opportunities in Latin America.
 This study has started from the questions of 1) what are the backgrounds for pursuing the new industrial policy of these three countries? 2) what are the differentiated characteristics of these new policies from the old ones? 3) will the sustainable development be possible through these new policies? 4) what are the obstacles for the promoting industrial cooperation between Korea and the Latin American region? 5) how can Korean government and the private enterprises utilize these new industrial policies in order to enhance the industrial cooperation?
 Based on these questions, this study comprises of five chapters. At the introduction, rationale for choosing three Latin American countries for the study, and the concept and the scope of industrial cooperation are described. Recent discussions on the definition and the scope of industrial policy are examined especially focusing on Latin American region.
 The second chapter explains the backgrounds for the three countries implementing the new industrial policies as of year 2000. This study presents the key drivers of implementing the new industrial policy dividing into three parts: necessity of export and economic structure diversification, productivity raising, and competitiveness enhancement.
 In chapter three, each of the three countries industrial policies are analyzed more specifically. For Chile, “Agenda of Productivity, Innovation, and Growth (Agenda de Productividad, Innovacion, y Crecimiento)” is analyzed, which the Bachelet government has been implementing since 2014. For Colombia’s case, “National Development Plan (Plan Nacional de Desarrllo 2014-2018)” and “Productive Transformation Program (Programa de Tranasformacion Productiva)” are studied which President Santos has chosen for his second term. Lastly, Peru’s industrial policy study is conducted based on “National Plan for Productive Diversification (Plan Nacional de Diversificacion Productiva)” which was introduced in 2014 by Humala government. Each country’s case comprises of backgrounds for the new industrial policy, main contents of the policies, and finally the evaluation.
 In the fourth chapter, promising industrial sectors are selected for each coun try and the possibility of cooperation with Korea is evaluated. The selection of promising industrial sectors was made based on policy demands of the country, Korean government’s interest, private companies’ interests, and the result of president Park’s tour to Latin American countries in April. For Chile, “Sart-up Chile Program” is selected as a useful tool for sharing each countries’ experience on SME’s start-up policy and cooperation in innovation sector. For Colombia, automobile/automobile parts, software and IT service, cosmetics/hygienic goods are suggested for the promising sectors as the Colombian government is trying to promote these industries. The selected industries of Peru’s are textile and costumes made of Alpaca, and processing of marine products.
 In chapter five, policy suggestions for enhancing industrial cooperation with these three Latin American countries are made. In order for this, current state of industrial cooperation between two regions is examined and their difficulties are addressed. Based on this survey, basic directions for the enhancement of industrial cooperation were suggested in six points: 1) more share of Korea’s experience of industrialization 2) reciprocal and balanced cooperation 3) triangular cooperation 4) the substantial cooperation through the cooperation choice and concentration strategy 5) customized cooperation strategy 6) proper counter action towards the drastic change of trade environment of these three countries. 
 For the last, four strategies for the industrial cooperation promotion with Chile, Colombia, and Peru were suggested as follows: 1) construction of trade infrastructure, 2) establishment of platform for the SME’s cooperation between the two regions, 3) support for the GVC participation of the three countries, 4) Korea-Latin America Innovation Summit. For more details of the support of GVC participation of the three countries, this study suggests 1) joint advancement to the third market (such as China) through a strategic alliance between Korea and Latin America, 2) encourage the advancement in the sectors of higher potential of GVC. 

Despite the formal launch of ASEAN Economic Community (AEC) in December 2015, it is debatable whether the Community will work well. Instead, it is more appropriate to view the launch of the AEC as an opportunity to align the efforts in integrating the ASEAN and to identify its strengths and weaknesses. Therefore, the impact of the AEC on regional trade and investment is likely to be minimal or even not visible at all in the early stage immediately following the launch. However, the Nay Pyi Taw Declaration on the ASEAN Community's Post-2015 Vision in 2014 is a display of the ASEAN's willingness to advance the AEC as a long-term vision. When standardized institutions and policies are implemented in the member states, the AEC will be able to successfully integrate the ASEAN economy.
This study begins with an overview of the progress in ASEAN economic integration and responses from surrounding nations. At its establishment in 1967, the motivation for ASEAN was mainly political, not economic. It was only in the late 1970s when the ASEAN started to express interest in economic integration and cooperation. In 1992, economic integration within the ASEAN fully emerged as a topic due to the ratification of ASEAN Free Trade Agreement. Unprecedented growth of Chinese and Indian economy had pulled foreign investors away from ASEAN. Thus, a strong sense of economic integration and cooperation to foster investment conditions in the region had emerged. The ASEAN also pursued synergy by connecting their electronics and automotive industrial network with the East Asian production network.
In other words, the urge for AEC, that is, economic integration in the ASEAN, emerged voluntarily to maintain competitiveness in the global market and to secure regional order in the division of labor. The Community also implies the willingness to participate in the global value chain and to advance into the global economy while maintaining ASEAN Centrality. Thus, the Community is significant as an open economic community.
Major economies in the Pacific region, namely the United States, China and Japan have not expressed official response to the launch of the AEC. The abovementioned countries consider the matter merely as an extension of their current policy towards the ASEAN. Guided by their Asia pivot policy, the United States has expressed no objection. This is mainly because the U.S. seeks to restrain the rise of China with the new Economic Community. In addition, Japan has traditionally maintained strong relationship with countries in the Southeast Asia region, and many Japan-based multinational companies possess production facilities and sufficient supply chain in the region. Such activities suggest that Japan will become the largest beneficiary of the AEC. Finally, China seeks to connect the ASEAN region in their One Belt One Road initiative. China views the possibility in the ASEAN as their off-shore 'Silk Road' and will pursue mutual benefit.
 As for Korea, it will approach the launch of the AEC in a comprehensive way that encompasses political, social and cultural aspects. Considering the strong ties between Korea and ASEAN in terms of trade and investment, the launch of AEC has to be observed more from an economic perspective than other perspectives. In the second chapter, we conduct in-depth survey to review the awareness of Korean businesses regarding the establishment of the AEC and to see if the response to the launch of the AEC has been prepared. Survey questionnaires were distributed to both companies based in Korea as well as those based in the ASEAN region.
 The results showed low level of awareness regarding the launch of the AEC. Companies also struggled in obtaining information regarding the Community. Information disparity existed between large and medium-sized companies. Nonetheless, despite the low level of awareness, responses showed high expectation for the AEC in terms of improving business. Regardless, roughly 5% of the respondents had a prepared strategy or plan regarding the AEC, 41% answered that they are in the process of preparing for the AEC, and the remaining 55% of Korean companies did not recognize the need for a strategy at all.
 In sum, we conclude that the lack of strategies or plans is a result of an absence of understanding on the AEC. Disseminating information regarding the AEC and encouraging companies to prepare a plan is highly desirable; so that the companies are able to benefit from the launch of the AEC.
In the third chapter, the study categorizes the progress of the establishment of the AEC into three stages. The first stage begins in 1993 when the member states began to recognize the need for economic integration. The second stage is when initiatives took place between 2002 and 2007.
In the third stage, detailed efforts were made regarding the integration of the ASEAN economy. This study reviews the features of and transitions involved in that integration process. Despite some fluctuations, the share of regional trade displayed a constant increase since the 1990s. However, the figures of intra-ASEAN trade became stagnant in the third stage due to the significant rise in trade with major countries out of the region namely, the U.S., Japan, China and Korea since ASEAN+1 FTA. Foreign direct investment soared in the third stage (2007-2015) mainly due to the ‘ASEAN+1 FTA’ than regional integration. The study also finds that there were insignificant changes in the trade structure of intra-ASEAN trade. The trade pattern also showed heavy focus on certain type of goods. The change of export items within the ASEAN is due to the dispersion of production network within the region, which is significantly related to the influx of inward FDI. The FDI had increased except during the economic crisis in 1998 and global financial crisis in 2008. Direct investments from major economies have consistently increased during the second and third stage of economic integration, except for global financial crisis.
Japanese multinational companies pursue efficiency by establishing production networks between ASEAN member countries, through minimization of risk by considering country specific characteristics. With the AEC in consideration, a large number of Japanese firms have newly invested or expanded their investment to ASEAN during 2012 and 2013.
Therefore, it is probable that Japan will benefit the most when the ASEAN economy is integrated. China's investment to ASEAN was due, in fact, to both the changes of the government's industrial policy to lower the share of the labor intensive industry and the private firms' interest to avoiding high labor costs; and not to a response to the ASEAN economic integration.
The increase in direct investment from Korea, China and Japan is reinforcing the production network within the ASEAN region. Vertical trade which deals with raw materials and intermediary goods is relatively small in intra-ASEAN trade compared to trade with major investors such as Japan, the U.S. and Korea. With that fact considered, trade within the region will increase only when major foreign investors strengthen the regional production network. In other words, because ASEAN participation in a global value chain is more likely to occur with foreign direct investment, regional trade will only increase when the investors adjust their investment within the ASEAN region.
Through a comprehensive observation, the study confirms that there is very little shift in intra-ASEAN trade and investment structure without the flow of foreign direct investment. Under such circumstances, it is doubtful that there will be changes to the structure with the launch of an economic community. The following chapter (chapter 4) experiments with the change in regional trade, investment and industrial structure assuming the launch of AEC through dynamic CGE models. According to the findings, GDP change in each ASEAN country was nominal. Little change was observed in net export composition and intermediary material input by each industry. Considering the previous findings that there was little change in intra-ASEAN trade structure throughout the history of ASEAN integration, the results were predictable. Therefore, it is difficult to conclude that economic integration will lead to trade and investment adjustment within the ASEAN region.
Also, as the member countries’ autonomy remains intact within the AEC, extensive amount of time is required with the coordination of different rules and institutions. However, as economic integration progresses, the rules and institutions will sooner or later be adjusted in a coordinated manner within the Community since investment decisions of multinational firms are more likely to depend on the changes of industrial policy. That is, each ASEAN member country will transform industrial policy in order to induce foreign company investments. Chapter Five seeks to compare different industrial policy as well as economic development strategy of ASEAN members.
Considering the study results, the final chapter provides policy implications for Korea regarding the launch of AEC. First of all, the AEC must be observed and analyzed in the context of international politics and economy, for the U.S.-China-Japan triangular relations can affect the progress of the AEC integration. Therefore, the politics and economic relations among major countries including the U.S., China and Japan should be carefully observed and measures should be arranged accordingly. Second, there is a strong need to monitor the shifting industrial policy and institutions of individual ASEAN countries during the economic integration. In the process of regional consolidation, such change in policy and institutions is likely to impose both challenges and opportunities to Korean firms. Third, it is worth considering the development of a regional production network between local firms and Korean firms based in the region. Due to the high dependency of regional trade and investment structure on multinational firms' investment decisions, local firms were indeed neglected from the scene. If there is a way to consider a measure to strengthen the relationship between local companies and Korean companies in the region with special attention paid to creating shared value, it may assist Korean companies expanding their footing in the region.
Finally, the AEC response to Trans-Pacific Partnership and the One Belt One Road initiative should be observed very closely. Since the TPP is heavily influenced by the U.S., there exists a potential destruction of the ASEAN Economic Community when the TPP and OBOR clash with one another. In addition, we have to consider the fact that foreign investor will determine the formation of production network within the ASEAN region. If the investors determine that the establishment of new supply chains of electronic components should take place in TPP member countries such as Vietnam and Malaysia, it is highly likely that Cambodia and Laos would be isolated from this kind of industry.  

The Fed's exit from the unconventional monetary policy it has implemented since 2008, is imminent. To combat the Great Recession, the Fed lowered its policy rate to 0~0.25% range and through Large Scale Asset Purchase(LSAP), acquired substantial amount of long-term government bonds and Mortgage Backed Securities(MBS). As U.S. economy is showing signs of recovery from the deepest recession since the Great Depression, these unprecedented policy measures are expected to be normalized soon. The normalization process will begin with raising the federal funds rate that has been kept near the zero lower bound for more than 5 years. Equally important component of the exit process is the normalization of the balance sheet.
Not only the scale of the asset purchase was huge but also asset classes that the Fed bought through LSAP were not conventional. Traditionally the Fed, through the Open Market Operations, has been buying and selling short-term government bonds but LSAP bought mostly long-term government bonds and MBS. The normalization process will involve rate-raising and scaling down the balance sheet as well as returning SOMA portfolio back to the pre-crisis statue.
This paper explores the exit strategy that the Fed is planning in order to normalize the monetary policy and possible problems that it would face in implementing these strategies. It also estimates the effects of raising the federal funds rate and normalizing the balance sheet(by selling assets), using econometric tools. Without understanding of these tools and procedures in details any further analysis on the effects of U.S. monetary policy normalization on Korean economy would be superficial. In Chapter 2, we go back in time and investigate the monetary policy conducted during the Great Depression. By examining the monetary policy in the past one can draw lessons from history. From 1932 to 1936 the Fed conducted the monetary policy similar to the Quantitative Easing. But the Fed prematurely ended this as worries about inflation resurfaced. This premature withdrawal resulted in the Recession of 1937-1938. Many blame this as the main contributing factor that prolonged the Great Depression.
This is why the current authority is so hesitant and cautious about normalizing the unconventional monetary policy even as the economy is showing clear signs of recovery. In Chapter 3, we analyzed the exit tools for normalizing the monetary policy and their possible impacts. First in regards to raising the rate, interest paid on excess reserves(IOER) is likely to be used. The Fed has been paying IOER since 2008 and this tool helped keep the excess reserves that banks possess within the reserve system. With the low interest rate and the economy still in fragile state, banks did not have better and safer outside investment opportunities than keeping their cash in the Fed's vault and receiving interest income. As a result, the excess reserve increased exponentially to a level that has never been before. As the Fed is planning the exit, it is working as a big inflationary pressure. This is because as the Fed raises its policy rate, the economy's overall interest rates would increase as well and that means better outside investment opportunities for banks. If the spread between IOER and the federal funds rate widens it would be possible that substantial amount of the excess reserves are withdrawn from the reserve system and create an inflationary pressure. A solution to prevent this scenario is to raise IOER in line with the federal funds rate so that the spread between them is maintained. This, actually is what the Fed's Forward Guidance is suggesting to do.
Meanwhile, the normalization of the Fed's balance sheet is another aspect of the exit. The size of the balance sheet increased more than five-folds due to LSAP and the composition of the asset changed as well. The balance sheet normalization has two components; first reducing the size, and second, eliminating the assets - long-term government bonds and MBS - that the Fed unconventionally possesses. The Fed suggests that this process will take place very gradually. One possibility is to wait until they mature and let them roll-off from the balance sheet. Another possibility is to sell them before they mature. If the Fed chooses to wait then the balance sheet normalization process will be very slow that the size and the composition of the balance sheet won't be normalized until 2020.
The fact that unconventional monetary policy is almost unprecedented puts us in a situation where there is not enough data or theory to infer the impacts of the unwinding. But we can at least narrow our analysis down to a few seemingly important variables and focus on them. We think that some of these variables are long-term interest rate and the yield curve because the main purpose of the QE was to influence them and it is reasonable to focus our interests on these variables when unwinding of the QE takes place.
First when the Fed begins to raise the federal funds rate, it is possible that something similar to 2013 Taper Tantrum can happen where U.S. long-term rates rose substantially and created a huge instability in the global financial market. This actually is the part where most worries arise regarding the rate-increase. Meanwhile, the increase in the long-term rate can also negatively affect the domestic economy. It might depress the aggregate demand, curbing the ongoing recovery of U.S. economy.
On the other hand, something exactly opposite can happen. The long-term rate would not react to the policy rate increase and the spread between long and short rate narrows. In the extreme case the yield curve can be inverted. This is exactly what happened in 2005 when the Fed increased its policy rate. This can also create problems because it will intensify investors' risk-taking and reaching for yield behavior.
In Chapter 4, we estimated the VAR model to forecast the impacts of the rate-rise and the balance sheet normalization(asset sales). In response to the 0.5 percent point increase in the short-term interest rate, the amount of excess reserves declined. This result suggests that without the IOER, substantial amount of the excess reserves would be withdrawn from the reserve system, posing a possible threat to inflation. It also seems that, as expected, capital inflows from the rest of the world to the U.S. is inevitable. Somewhat surprisingly, the response of the long-term interest rate is minimal. According to this picture, we would have to worry about the possible effects arising from the reduced spread between long and short-term rate, namely, reaching for yield behavior and the instability in financial market cause by this. The increase in the Dow Jones Index can be interpreted to be caused by the capital inflow and the reaching for yield behavior.
The results when we applied the asset-sales shock(selling 5% of the long-term bond that the Fed currently possesses), suggest that the balance sheet normalization by asset sales would intensify the effects from the rate-rise.
The rest of the world, especially the emerging countries, is keen on knowing the impacts of the normalization. Their interests focus mainly on how much they would be affected by the capital outflow. Korea is not an exception. Taper Tantrum incidence tells us that at least within a short time span there would be substantial capital outflow from Korea. But Korea currently has significant amount of foreign reserves and well-designed macro-prudential policies. This suggests that the negative impacts that Korea would have from the normalization of U.S. monetary policy would be limited.