In early 2014, building on the Bali success, WTO Members began revisiting the rest of the DDA under its three main pillars of agriculture, non-agricultural market access (NAMA) and services. The implementation of the Bali package itself, however, turned out to be more difficult than expected. In July, India signaled that it was unwilling to join the consensus on a proposed protocol of amendment integrating the new trade facilitation agreement into the WTO rule book, unless it saw evidence of progress on the concerns it had raised in Bali, starting with a permanent solution on public stockholding. This new impasse, only six months after Bali, not only affected mutual trust among countries but also significantly delayed discussions on the post-Bali work programme mandated by Ministers. Fortunately, after several months of deadlock, an agreement reached in mid-November between India and the United States finally allowed Members to overcome the impasse, paving the way for the implementation of the Bali deal on trade facilitation, as well as progress on the broader negotiating agenda.
Members will now need to turn their attention to the arduous task of defining the contours and content of a possible post-Bali work programme. The first step in this process will consist of undertaking a reality check of the 2008 modalities. While the existing draft texts cannot be dismissed, Members also cannot ignore the fact that the 2008 draft modalities was not accepted as a basis of future negotiations by developed members, including the United States and the EU. Furthermore, during the process of negotiations on DDA work programmes, it is most likely that the draft texts will be significantly changed to reflect arguments of developed countries - the reduction of gap in the applied and bound tariffs, the reduction of farm subsidies of China and India, and the reduction of special and differential treatments for developing counties.
Given such circumstances, Korea, a member of the G-33, should establish feasible and effective negotiation strategies on the following key issues in which Korea has deep interest. First, Korea needs to support the positions of developed countries on reducing the difference in MFN applied tariffs and bound tariffs. The ratio of applied tariffs to bound tariffs in Korea is just 0.8, which is relatively high compared to average values for both developed countries (0.6) and developing countries (0.4). Therefore, it is reasonable to propose a new tariff reduction method which relates to water. For example, a larger cut is applied to products which have more water.
Second, in absolute terms, farm support in China is now nearing the level of EU farm subsidies although China’s farm support is heavily focused on payment for general services such as infrastructure. India’s agricultural domestic support has also grown dramatically in recent years with a particular emphasis on input and investment subsidies in developing countries. Since Korea’s farm support is still very timid, there will be almost no substantial impact on the operations of Korea’s agricultural policy.
Third, the reduction of S&D for developing countries could negatively affect Korea’s trade policies because it can produce results that Korea could not obtain: special products with no tariff cut. Hence, Korea needs to build its alliance with the G-33 firmly, which strongly support special products for developing countries. However, if the reduction of S&D for special products is unavoidable, Korea needs to put its emphasis on treatments rather numbers of special products because its agricultural production is centered on several products such as rice.
Finally this study shows that the political costs of an agreement to increase market access could be reduced substantially by using a proportional-cut approach (for example, overall X percent reduction with a minimum cut of Y percent on each tariff line, following the Uruguay Round model) rather than progressive tariff-cutting formulas which has been discussed till now.

The U.S. Constitution assigns to the Congress for the enactment of foreign trade policy. Therefore, congressional election results have a big impact on U.S. foreign trade policy. A number of studies have been conducted to analyze the determinants of foreign trade policy in the U. S. House of Representatives. It is believed that one of the most important determinants of the voting behavior of legislators is the interest groups particularly the contributions of the political action committees (PACs).
In this regard, previous studies have exhibited the limitations which led to the inability to overcome the endogeneity as the studies utilized cross-sectional data analysis. It is necessary to utilize various econometric models to overcome this endogeneity, one of which is the panel analysis model. In addition, this study further divided the PACs by industries to reflect their different attitude on FTAs. We also analyzed the perspectives by political party factions.
In this paper, panel data was created with seven FTA bills that passed the House of Representatives since 2000. To investigate the relationship in detail, we used the random effect panel logit model and the Hausman- Taylor 2SLS estimation. In addition, we conducted the quantile regression based on the contributions received by the PACs.
The empirical results are as follows. We find that the House of Representatives received larger contributions from the business PACs on the FTA bills, while contributions from the labor PACs were not usually supportive of FTAs. However, when business PACs are divided into industries such as agribusiness, telecommunications, defense, energy, finance, there were differences depending on the position of each industry. For example, the contributions received from business PACs varied by industry perspective, rather than being uniformly in favor of the FTA bill.
An analysis of each political party's stance with respect to FTA negotiation revealed that the Republican Party has a more FTA-friendly characteristic while the Democratic Party shows a varied voting pattern with visible voting deviations.
Another important influence on the voting behavior in the House of Representatives is political ideology. For example, the Democrats have generally opposed the FTA bill; however, there were differences of opinion among the Congressional Progressive Caucus, New Democratic Coalition, and Blue Dog Coalition. Also, while the Republicans are generally in favor of the FTA bill, differences of opinion were found for the FTA depending on the group, Tea Party for example.
On the basis of this study, we could come up with the following trade policy implications. First of all, the most distinctive determinant of the voting behavior in the House of Representatives is the contribution of each interest groups and political ideology. Thus, the distinguished feature of the U.S. trade policy process is that the opinions of congress and each interested groups are well reflected. Of course, the Korean government also attempts to reflect the views of associations and businesses at the trade policy-making stage. However, the role of Korean national assembly is considered to be limited in the trade policy making process. Therefore, Korea needs to institutionalize the trade policy making process so that the opinions of the congress, industry, consumers and the media are better reflected.
In addition, the political ideology of US lawmakers was found as another important factor in the U.S. trade policy-making process. Therefore, it is important to continue to make aware that Korea and the United States are close political allies. In doing so, we could utilize the Korea Caucus. Korea Caucus was launched in 2003 for the purpose of promoting the two nations ties and sharing of Korea-related information in Congress. Members of the caucus are pro-Korean legislators. Therefore, it is necessary to strengthen the ties with them, which will also help reduce trade disputes between the two nations.

Since 2000, Korean firms’ R&D investment have recorded an annual increase of 12.7% and accounted for 78% of total R&D investment in Korea, which surpasses that of U.S., Japan, and China. On the other hand, Korean firms’ exports and outward foreign direct investment (OFDI) have steadily increased to record 562 billion and 24 billion dollars in 2013, respectively, which accounts for more than 50% of total GDP. Given the fact that the Korean economy heavily relies on firms’ R&D investment, exports and OFDI, our report provides in-depth analysis on the effects of R&D investment on exports and OFDI by using a rich set of Korean firm-level data. In particular, by considering the results from prior trade literatures that analyzed the effects of R&D investment on firm productivity and that examine the effects of firm productivity on exports and OFDI, we analyze the effects of R&D investment on exports and OFDI by incorporating firm productivity as a mediator.
In examining the effects of R&D investment on firm productivity, we first measure R&D investment as firms’ total expenditure on R&D activities, while measuring firm productivity using total factor productivity, capital productivity, and labor productivity. Using these measures, we find that R&D investment significantly increases firm productivity. In particular, to analyze how firm R&D investment affects its productivity-level over time, we use lagged R&D variables to estimate their effects on current productivity-level. As a result, we find that current and previous R&D investment have positive and significant effects on current productivity-level and that its magnitude becomes larger over time. In other words, firm productivity is significantly and largely associated with prior R&D investment. Alternatively, estimating the effects of R&D investment on firm exports using lagged variables, we find that R&D investment have positive and significant effects on current exports and that its magnitude becomes larger as R&D investment is made in prior. Evaluating the effects of R&D on OFDI through lagged R&D variables, our results show that R&D investment made in prior years significantly increases the current amount of OFDI and also raises the probability of firms’ engagement in OFDI in the current period.
To provide in-depth analysis on the effects of R&D investment on firm’s exports and OFDI, we use path analysis methodology to estimate the effects of R&D on exports and OFDI with and without incorporating firm productivity as a mediator variable. Our estimation results show that firm R&D has positive and significant direct and indirect effects on exports and OFDI through the increase in total factor productivity. Estimating the magnitude of direct and indirect effects, we find that firm R&D investment is more effective in increasing exports and OFDI directly than indirectly through firm productivity increase.
Given the fact that R&D intensiveness is different across industries, we perform the same estimations at the industry-level. Our estimation results show that firm R&D investment has significant positive direct and indirect effects through firm productivity on exports and OFDI among capital-intensive industries, namely, electronic components, auto-vehicle, and machinery equipment industry sectors; while it has insignificant direct and indirect effects within labor-intensive industries, such as textile and paper. Among capital-intensive industries, in particular, we find that firm R&D investment is more effective in directly increasing exports than OFDI in most sectors, while it is more effective in increasing OFDI than exports through firm productivity improvement in the auto-vehicle and machinery equipment sectors.
Our analysis provides significant policy implications on firm R&D investment. First, our estimation results that firm R&D significantly increases the productivity, exports and OFDI imply that R&D promotion policies towards the private sector are effective in improving firm performance and that more favourable policies towards firm R&D investment should be considered. Second, our findings that the magnitude of firm R&D effects becomes larger over time indicate that firms and governments should evaluate its effect from a long-term point of view. Third, policies that are designed to promote firms to invest in R&D activities would be more effective for capital-intensive industries than labor-intensive industries. Our results that direct and indirect effects of R&D on exports and OFDI are significant in capital-intensive industries imply that while promoting firm R&D investment in capital-intensive industries is effective, alternative measures should be considered to increase exports and OFDI in labor-intensive industries.

Since the Asian financial crisis of 1997-98, the East Asian countries have made efforts to guard against the crisis not only by being self-insured through the accumulation of foreign reserves but also by establishing a bilateral or regional financial safety net through the pooling of reserves. Holding ample amount of foreign reserves has proven itself to be useful but it comes with a high price tag. Moreover, in spite of noticeable achievements in recent years, the regional financial arrangement, namely the CMIM framework, had not been activated during the global financial crisis in 2007-08. Ironically, the bilateral currency swaps with the US Federal Reserve Bank played a pivotal role at that time in addressing some Asian countries’ liquidity shortages.
The crisis in 2007-08 has provoked a recurring discussion about the necessity of transforming the international monetary system and enhancing the alternative or complementary insurance mechanism of regional financial arrangements to fend off shocks. In the paper, we propose two ways to strengthen a regional financial arrangement in East Asia to make a practical contribution to the global architecture reform agenda and to build a resilient economy: (i) establishing a currency arrangement under CMIM framework to increase the usage of local currencies; and (ii) creating a cooperative framework between the AMRO and the IMF in the area of surveillance.

Preface
Contributors
Introduction and Overview
Statements by Hosts and Country Representatives

Part I. Regional Economic Cooperation in Northeast Asia: Country Perspectives
- A Korean Perspective (Chang Jae Lee) 
- A Chinese Perspective (Zhang Jianping)
- A Japanese Perspective (Maeda Tadashi)
- A Russian Perspective (Pavel Minakir)

Part II: Energy Cooperation: Energy Infrastructure and Physical Connectivity
Japan’s Energy Challenges and Potential for Regional Cooperation (Tanabe Yasuo)
Energy Issues: Security, Alternative Systems, and Low-Carbon Futures (Terry Surles)
Prospects for a Cross-border Power System in Northeast Asia (Iinuma Yoshiki)
Energy Cooperation in Northeast Asia: A Russian Perspective (Sergey Sevastianov)

Part III: Regional Cooperation and Integration
Regional Cooperation and Integration in East and Northeast Asia (Kilaparti Ramakrishna)
Cultivating Multilateralism in East Asia (Iwatani Shigeo)
Regional Integration in Northeast Asia (Wang Weina)

Part IV: Financing Regional Economic Integration through Cross-border Infrastructure Construction: Review and
New Approaches to Regional Multilateral Financial Institutions

Keynote Statement—Fulfilling a Long-held Dream: Financial Policy for a Unified Korea (Shin Je Yoon)
A Strategy toward a Regional Multilateral Financial Institution (Lee Jai-Min and Kim Yu-Ree)
Establishing a New Development Financing Institution: Comments and Observations (S. Stanley Katz)
Northeast Asian Financial Cooperation in a New Era (Fan Xiaoyun)
Comments on Financial Cooperation in Northeast Asia (Zou Ping)

Part V: Cross-border Economic Cooperation: Tumen River Area Economic Integration for the Korean Peninsula

Political and Economic Imperatives behind North Korea’s Evolving Special Economic Zones (Glyn Ford)
Underdeveloped Sino-Russian Cross-border Cooperation (Natalia Ryzhova)
Creating a Northeast Asian Economy (Tony Michell)

Appendix I. Seoul Declaration and Agenda
Appendix II. Planning Meeting Summary and Agenda
Appendix III. Report of Field Visit to Rason Special Economic Zone, DPRK and Yanbian, China

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.
For the year 2014, NEAEF in collaboration with the Korea Institute for International Economic Policy (KIEP), cooperated in efforts toward achieving closer economic and financial cooperation in Northeast Asia, and continued its focus on research, the annual conference, and meetings aimed at financing regional economic integration and establishment of the Northeast Asian Bank for Cooperation and Development (NEABCD). This work aims to promote functional economic cooperation in terms of cross-border resources, energy supplies, infrastructure construction, capital mobilization, and institutional development.
NEAEF, as planned for the year 2014, facilitated conference and meeting activities in which experts presented their perspectives, views, ideas, concrete proposals, and strategies relevant to the issues of a regional institution for financial cooperation.
This volume, which is the final part of a series of proceedings titled Financing Regional Economic Integration and Functional Cooperation for Northeast Asia: Toward a Northeast Asia Economic Community, presents the results of a project implemented in 2014 that includes presentations and summaries from the 23rd annual NEAEF conference and meetings, as well as related activities.

This study investigates the background and causes of the major changes in the labor market environment in Southeast Asia, while also identifying the characteristics of the labor market. In particular, the increase in foreign direct investment (FDI) in Southeast Asian countries serves as a starting point for this analysis, because the flow of FDI, we believe, is the most important cause of changing conditions in the labor market. In addition, we have explored whether the investment decisions of Korean firms are affected by the changes in the labor markets in the area, through both empirical analysis and a corporate survey on their strategies to respond to the changes. We find that Korean firms, particularly, small and medium sized enterprises, mainly focus on localization at the management level. Furthermore, based on the findings, we have proposed better ways to support the Korean firms operating in Southeast Asian markets.
In chapter 2, we have listed the causes of labor market changes in Southeast Asia. First, as increases in income made workers in the region to devote greater attention to democracy and human rights, the government could not ignore the workers' demands for higher pay and better working conditions. Second, the governments in the region have recognized that high external dependence may hinder sustainable development after the global financial crisis. Since the governments are aware of the necessities of expansion of domestic markets to avoid the risk, they have become noticeably pro-worker in terms of their labor policies. In addition, populist political activities also led to pro-worker policies. Since the changes in the labor market environment can reflect the needs of both the governments and their workers, in sum, we conclude that changes in the labor market environments will continue to occur for some time.
In chapter 3, we analyze the characteristics of the labor market structure in Southeast Asia as to labor supply and demand aspects. The features of labor supply in the region can be summarized as follows. First, this area exhibits a relatively high population growth rate as well as a high proportion of youth among the entire population. Second, the quality of human resources is expected to improve. In Vietnam, Indonesia, and Cambodia, where Korean corporations have been relatively active expanding their business compared to other countries, we have observed a rapid increase in the enrollment rate in tertiary education. Third, if the ASEAN Economic Community succeeds in its plan, skilled workers can migrate more freely within the region. The characteristics of labor demand can be summarized in the following two sentences. First, the structure of labor demand is becoming diversified in Southeast Asia. Second, we find that economic growth creates a number of jobs in the area through the elasticity of employment. In addition, comparing the wages of white-collar and blue-collar workers, we find that the white collar workers receive more wages than blue-collar workers across all countries. However, we could not confirm whether these wage differences are attributable to individual capabilities, due to limitations in the data.
In chapter 4, two analyses were carried out. First, we empirically analyze the Korean enterprises' determinants of foreign direct investment in Southeast Asia. Moreover, we investigate how they respond to the current changes in labor market environments through a corporate survey. According to the results of our empirical analysis, Korean firms continue to choose these areas as bases for labor intensive production process, despite the increase of local production costs such as labor cost. This result accords with survey results that the firms already working in these areas will not move, either back to Korea or to other countries. Interestingly, 57.3% of the companies responding to the survey answered that they overcame the recent wage increase through increase in productivity. Furthermore, where the labor market conditions are worsening, 73.3% of firms chose a localization strategy, such as productivity increases, to surmount the difficulties, rather than moving to other countries. The reason for these interesting results can be shown in the following two sentences. Firstly, the increase in variable costs currently being experienced is less than the increase in the fixed cost of relocation of production facilities. Secondly, countries that are generally considered as alternative locations, such as Myanmar, have also experienced similar changes in labor market environments.
Based on the above discussion, we believe that Southeast Asia still has potential for the inflow of FDI from Korean firms. Ongoing changes in labor market conditions in Southeast Asia are likely to have an adverse impact on Korean firms operating there, though the extent of the impact will differ across industries and technology levels. In chapter 5, therefore, we suggest that business support policies in overseas markets should widen the scope of their application, because current support policies tend to focus on supporting only the initial advances. Hence, for firms already operating in Southeast Asia to successfully expand their markets, the Korean government should provide additional support measures for localization of these firms. Of course, since the companies located abroad do not use the domestic production process, the additional support of the firms located abroad may reduce the creation of domestic jobs. However, given the existence of previous research indicating that Korean firms' OFDI can positively affect domestic productivity and employment, the Korean government should identify the impact of additional support by industry.

Until the mid to late 2000s, the process of trade liberalization has been driven forward through ongoing efforts of world economies at the WTO level. At the same time, regional processes such as Free Trade Agreements (FTAs) have made greater liberalization possible, lowering tariff barriers significantly. With the world currently in recession, the global financial crisis has intensified competition. These difficulties therefore require practical efforts of countries to maintain the present pace of trade liberalization. In this regard, there is much debate as to the role of trade remedies in the process of recovery from the global financial crisis. Some countries tend to utilize trade remedies to protect the country’s declining domestic industries or vulnerable domestic industries. Korea launches anti-dumping investigations against imports originating from foreign countries, but at the same time Korean exporters have also been subject to the largest number of anti-dumping investigations in the United States, China and India. Accordingly, it is necessary to examine the economic effects of trade remedies from both the perspective of being subject to import regulations and the perspective of imposing import regulations. The frequent use of trade remedies has come under criticism due to the fact that the positive effects of trade liberalization could be negated. This study aims to draw implications and propose countermeasures for the efficient operation of the Korean trade remedies system, by analyzing the impact of trade remedies on imports and exports, and by conducting comprehensive analysis of operational issues regarding trade remedies. The trade remedy system is often established to correct unfair trade practices such as dumping and subsidies, or to provide temporary remedies to importing countries for emergencies or for exceptional circumstances such as safeguards. In a broader sense, the trade remedy system often includes unfair trade practice investigation. This study limits the scope of the trade remedy system to anti-dumping investigations, as the cases of countervailing duties or a definitive safeguard measure imposed by Korea on imports (subject merchandise) are extremely rare. While most of the previous studies that analyzed the effect of anti-dumping measures were focused on cases involving the United States, this study contributes to the literature on anti-dumping investigation by collecting data on anti-dumping investigation in China and India, in addition to the United States. Comparisons of the anti-dumping investigations in Korea and the United States, China, India during 1995-2014 led to the following results: the United States had less number of cases terminated by impositions of measures as a percentage of all the cases initiated, while China and India were subject to a relatively long period of anti-dumping investigation. One thing the anti-dumping investigations in the United States, China, and India have in common is that the exporters of subject merchandise and the exporting country subject to investigation are quite diverse. Related practices in Korea are developing fast, and it is comparable to those of the United States practice, showing a higher-level anti-dumping system than China and India. The United States has the most specific provisions relating to the non-market economy (NME) and the use of cumulative assessment of injury; the United States makes active use of these provisions. As for China, it strictly enforces price undertaking agreements. However, there is room for improvement regarding administrative review systems in China along with India. This study empirically investigates the existence of a chilling effect on imports and exports, and the impact of anti-dumping measures on imports and exports, identifying separate effects for each. The impact of anti-dumping measures on imports and exports were felt differently depending on the country's institutional characteristics, practices, and the industry subject to investigation. The results show that the Korean anti-dumping measures caused a reduction in the import volume at the HS-6 digit category of subject merchandises, a phenomenon found to be common across industries. Mere initiation of an anti-dumping investigation against Korea by the United States caused a substantial decrease in the total export volume of HS-6 digit products. The duration of the chilling effect depended on industry characteristics. China's anti-dumping investigation against Korea was focused on the chemical industry. The chilling effect on exports occurred, but only appeared for a short period. Similarly, India’s anti-dumping investigation against Korea caused a chilling effect on exports, which again disappeared in a short period of time. A cross-country comparison of the anti-dumping investigation leads to a following conclusion: a confirmation of the existence of the chilling effect, induced simply by initiating anti-dumping investigation. The empirical results of this study suggests that the impacts of anti-dumping measures on imports and exports - whether an anti-dumping duty levied on the subject merchandise would cause a decrease in the import volume, and how long the effects would last - depend on numerous country- and industry- specific features. Therefore, it is necessary to propose implications against the United States, China, and India for the efficient operation of Korea’s anti-dumping system, by considering comprehensive analysis of operational issues. The criteria for selecting the vulnerable domestic industries is based upon the anti-dumping investigation frequency, the number of cases terminated by impositions of measures as a percentage of all the cases initiated, the shares of product volume imported (exported), and the growth rate of imports (exports) of products. The proposed country- and industry- specific implications are expected to contribute to developing Korea’s strategy against the use of anti-dumping measures by the United States, China, and India.

Global imbalance has been widening on a large scale from the start of the 21st century and was received notice as a critical risk factor for the future of the world economy. Global imbalance was maintained by the inflow of the dollar from the surplus countries (China) to the deficit countries (U.S). Many economists worried that if profitability and stability of dollar assets became questionable because of decreasing credibility of the U.S economy, the risk of hard landing of the world economy would become a reality through volatile exchange rates and hikes in U.S interest rates. Fortunately, global imbalance was reduced considerably since the year 2007 and therefore the economists had less cause for worry about the possibility of hard landing due to global imbalance.
This study discusses the trend of global imbalance since the 1970’s, focusing on the U.S-Japan imbalance in the 1980’s and the U.S-China imbalance in the 2000’s. Then we analyze the adjustment process of global imbalance and its causes during the last few years. In doing this, we identified three possible causes– the U.S, China and the exchange rate. We find decreases in private consumption and increase in the savings rate in the U.S., increase in state-led investment and increase in consumption due to rising of income in China and also government policies in China. All of these causes result in narrowing of the savings-investment gap in both countries. Appreciation trend of the Yuan against the dollar also helped in reducing the imbalance.
We try to forecast whether the recent trend, the narrowing of global imbalance, will continue over the medium and long term horizon. To do this, we empirically investigate the determinants of the current account employing the national panel data. The results of the empirical study show that it is difficult to judge conclusively the continuity of adjustment of global imbalance, because there exists a mixture of positive and negative elements in the results. Reduction of government deficit of the U.S and more flexible exchange rate policy in China are the key factors that will determine whether the trend will continue.
We also try to draw implications of the adjustment of global imbalance for the structural fine tuning of the world economy. First, the U.S-China currency dispute which was called “the currency war” at the time of G20 of 2010 has been and will be further diminished. The adjustment this time will come not only from exchange rate adjustment but also from increases in U.S savings and China’s consumption, which can result in reduction of the saving-investment gap at the structural level. Second, the macroeconomic structural adjustment of the U.S and Chinese economies; and gradual progress made in the reduction of global imbalance. The U.S. efforts to increase exports, which will require strengthening of the competitiveness of the manufacturing sector, will take considerable period of time because the economy has been heavily dependent on the service industry including the financial sector over the last 30 years. Chinese efforts to rely more on domestic demand will accompany costs such as economic slowdown and workers’ adjustments to new industries. Third, it is necessary for the large surplus countries including Germany and regions like East Asia to participate in the global policy cooperation by increasing their domestic demand and imports, because the adjustment between the U.S and China is not sufficient to maintain and increase the global aggregate demand.

  China is pursuing a regional development strategy for its northeast region with the realization that it is an area imperative to China’s future development and that it will function as a powerful engine in securing China’s regional competitiveness. For the successful development of northeast China, however, the issues related to the Korean peninsula must first be resolved. Therefore, it is important to understand how China views the Korean Peninsula, and which strategy it will employ in approaching this problem.
This study uses the ideal model method and global action patterns method to demonstrate that peaceful unification is the most ideal setting for China regarding the Korean Peninsula if China’s goal is to pursue its development strategy in the Northeast region. We conclude that China will choose a policy strategy that supports the unification of the Korean Peninsula in order to implement its own national strategy.
We consider four main scenarios related to the unification of the Korean Peninsula: status quo, military conflict between South and North Korea, North Korea’s pursuit of openness and reform, and peaceful unification. We conclude that China will strategically construct its policy underpinnings vis-à-vis the Korean Peninsula in support of a peaceful unification. Furthermore, China will eschew strategic competition with neighboring powers such as the US or Japan, and instead embrace cooperative co-existence in Northeast Asia. This would also mean that Northeast Asia will soon emerge on the global center stage as a peaceful and cooperative region.
Unification of the Korea Peninsula and economic benefits for China can be considered in three aspects: unification and economic benefits for China’s northeast region resulting from North Korea’s reform and opening up, the ripple effects of inter-Korean economic integration on China’s Eurasian strategy, and the application of the One Belt and One Road Strategy. If a Northeast Asian triangular trade network becomes a reality, China’s northeast region would be the greatest beneficiary in connection with unification of the Korean Peninsula. In particular, economic effects engendered from increased openness of the three provinces of northeast China due to Korean unification will be considerable. Increased openness of the three northeast Chinese provinces by itself is expected to generate economic benefits of about 283.6 billion RMB.
Additionally, when considering the inter-Korean economic integration using the CGE (Computable General Equilibrium) model, while it is true that trade diversion caused by inter-Korean economic integration may impact China negatively in the short term, North Korean economic growth will accelerate and increase import demand, which may increase China’s exports to North Korea and create a positive ripple effect.
Regarding the Eurasian Strategy and the application of the One Belt and One Road Strategy, if President Park’s Eurasia Initiative Strategy is implemented, China’s Northeastern region would experience increased openness and more areas would become open to development, henceforth strengthening its regional competitiveness. This would mean that the Northeast region could become a new engine of growth for the Chinese economy.
Since the beginning of the modern era, all international environmental factors that crucially impacted China’s national interests have stemmed from the Korean Peninsula. Thus, Korean unification and China’s security interests are closely connected.
In China’s perspective, Korean peninsula also represents an extremely important issue to the US and Japan in implementing their respective strategies. As a result, surrounding powers such as the US, China, Russia, and Japan is paying close attention to the constantly changes and standoff politics of inter-Korean relations; naturally, there would be strategic competition among the surrounding major powers who intend to prevent negative outcomes that could hurt them.
Reconciliation of the two Koreas or unification of the Korean Peninsula will induce the surrounding countries to acknowledge that they could lose out on potential economic benefits if they do not actively participate in Northeast Asian regional cooperation. If so, the mood in Northeast Asia will be extremely cooperative, which would provide favorable international conditions for Chinese regional strategy vis-à-vis East Asia.
Sino-Korean strategic cooperation is absolutely necessary in the process of unifying the Korean Peninsula. In the long-term view, South Korea needs to pursue a neutral policy towards the US and China. In the current situation, China also maintains a favorable attitude regarding the ongoing active role of the US forces stationed in Korea. However, the role of the US-Korea alliance must be limited within the Korean Peninsula. Moreover, while North Korea is undergoing top-down reform, a desirable policy for South Korea and China should be to encourage change in North Korean society and help North Korea to open up and initiate reform.s
Especially, if one wishes to see substantial changes in North Korea, one must actively conduct economic exchange with North Korea. Furthermore, regarding economic exchange with North Korea, South Korea and China should be attentive towards the creation of special zones in North Korea.
Finally, in order to realistically resolve the North Korean nuclear problem, the issue at hand must be divided into several steps. Internal politics within North Korea must first be stabilized by achieving economic exchange within set boundaries and at the same time, we must induce North Korea’s integration into the international society. Unified Korean Peninsula will play the role of a hub, located at the crossing point of interests of great territorial and maritime powers. Of course, the benefit will be shared by neighboring countries, as well as China and the Korean Peninsula. In this way, a peaceful unification of the Korean Peninsula will be a bonanza not only to the Korean Peninsula and China, but also to all neighboring countries.