The entry pattern of Korean small- and medium-sized enterprises (SMEs) into Southeast Asia was influenced by the ASEAN FTA in 2007 and the global financial crisis in 2008. SMEs that have entered the market with the aim of utilizing the low-wage labor force have been placing the most importance on entering the local market since 2007. In addition, after the global financial crisis in 2008, large corporations reshaped their production network rapidly to Southeast Asia, but not to SMEs, which were vulnerable to risk. Fortunately, since 2014, SMEs’ investment in Southeast Asia has recovered to pre-2008 levels, mainly in Vietnam and Indonesia.
  As Golovko and Valentini (2011) pointed out, it is possible to measure the business performance of the enterprise to the extent that the small- and medium-sized enterprises enter the overseas market. While many Korean SMEs have moved into Southeast Asia, there are still very few studies that have conducted fundamental research into their management status. Instead, there have been abundant studies about how to enter Southeast Asia in order to meet the needs of Korean companies that want to go there. Considering the shortage of information on the management status of Korean SMEs participating in the regional production network (RPN) Korean large corporations have newly established in the Southeast Asian region, data on the Korean SMEs in Southeast Asia is required to prepare the future direction and the support policies for the SMEs. This study was conducted to meet this demand.
  The second chapter summarizes how the economy of Southeast Asia is affected by changes in the external environment, such as slowing growth in the Chinese economy, low prices of raw materials, collapse of mega-FTAs, and the recent strengthening of protectionism. Fortunately, Vietnam, which is the largest investment destination of Korea, still maintains a market-opening tendency even though the top leadership of the Communist Party in 2016 was composed of conservative figures. Despite the USA withdrawing from the TPP negotiations, the Vietnamese economy has not been adversely affected because the opacity of the Vietnamese economy has been largely eliminated in the process of joining the TPP, and the opening trend has been maintained, such as pushing for an FTA with the EU. However, as Vietnam opens its market, Korean SMEs that have entered Vietnam may face various exposure risks such as intense competition within the market. Indonesia is striving to foster its own industry through various trade policies. For example, a company that wishes to export ore stones should meet the requirements for construction of a smelter facility and payment of export tax in Indonesia. Beginning from January 2017, LTE mobile phones can only be sold locally if they use more than 30% of domestic parts.
  Changes in the international trade environment can affect policies in Southeast Asian countries. There was concern that policy changes in each country could affect the performance of Korean SMEs. However, we find that Korean SMEs in Southeast Asia were not directly affected by the policy changes in Vietnam, Myanmar, Indonesia and Cambodia. Instead, we find that the Korean SMEs have been influenced by domestic policy changes, such as rising labor costs and tax collection, rather than changes in the international trade environment. Most SMEs only supply the amount of the orders from large companies. On the other hand, 58.2% of Korea’s parent companies expect long-term changes in the international trade environment.
  Chapter 3 analyzes the investment strategy of Japanese SMEs in Southeast Asia. We examine the response of the Japanese government and SMEs to changes in domestic and international economic conditions in Southeast Asia. Based on the results of the survey, we introduce this case as a benchmarking example to Korean companies and the government. Japan’s investment in Southeast Asia is centered on manufacturing rather than non-manufacturing. Japan regularly conducts surveys to identify the status of Japanese SMEs located in Southeast Asia. Japanese small and medium-sized enterprises (SMEs) emphasized the use of low-cost labor force when they first invested in Southeast Asia, but they are more concerned with demand in Southeast Asia than cheap labor force over time. This means that Japanese SMEs have entered Southeast Asia and built a production network to participate in the local market. The Japanese government’s policy of supporting small and medium-sized enterprises to enter the overseas market sees overseas expansion as a new opportunity for job creation and export. In particular, it supports fundraising, risk avoidance, intellectual property rights, and business restructuring not only before and during the business preparation phase but also at the entry phase and beyond. As the international trade environment has changed recently, the proportion of reshoring from Southeast Asia to Japan is low. However, the Japanese government provides funds for overseas business restructuring in order to support the regional supply chain and business restructuring in accordance with the integration movements in Southeast Asia.
  Chapter 4 analyzes the management status and business performance of SMEs entering Southeast Asia through surveys. Based on the results of the analysis, it is possible to prepare a support plan for the enterprises that have entered into Southeast Asia, including the business restructuring of Korean SMEs. Korean SMEs have suffered from complex administrative systems, cultural differences, change of attitude by license agencies and investment partners, among others. Small- and medium-sized enterprises with large sales have less barriers to administrative procedures through their securing some degree of bargaining power with local governments and the central government. Meanwhile, most of Korean SMEs entering Southeast Asia relied on the Korean head office (parent company) for financing. Only 25% of respondents use local financial institutions. In particular, when SMEs enter Southeast Asia, the guarantee of a parent company was essential for local financing. Therefore, financial support for the parent company should be made available.
  Korean SMEs in Southeast Asia purchase raw materials at 31.8% from local sources, 46.3% from Korea, and 21.9% from third countries. Therefore, it is concluded that Korean companies make a great contribution to Korea’s export to Southeast Asia. In addition, production facilities, including used equipment and new facilities, accounted for 54% of all facilities run by Korean SMEs in Southeast Asia. Therefore, it is reasonable that Korean SMEs that have entered Southeast Asia contribute to Korea's export growth rather than lowering Korea’s exports. In terms of total sales of Korean SMEs by region, domestic sales account for 47.2%, exports to third countries account for 37.2%, and that to Korea accounts for only 15.6%. On the other hand, there was no empirical evidence that decisions to invest in Southeast Asia had a negative effect on the management index, sales, production scale, number of employees, R&D workforce of the Korean parent company. In the case of plastic/non-metal companies, sales, production volume, number of employees, and R&D workforce have all declined. However, this sector has mostly moved to Southeast Asia from Korea due to environmental issues.
  Localization is being emphasized to improve the sustainability of SMEs located in Southeast Asia. Most of the decisions directly related to production, such as delivery, employment, and selling prices, are made locally, but investment decisions are made by Korean parent companies such as new market development, new product development, expansion of production facilities, and financing procurement. In terms of profitability, SMEs that perform various functions such as production, sales, and research and development are more profitable than SMEs that perform only production functions. Satisfaction with profitability is not as good as expected in cases where Southeast Asia is simply used as a production base. Therefore, it is necessary to carry out activities across the value chain such as production, R&D, and sales through localization. Consulting support is needed to set the appropriate range of decisions related to the value chain. On the other hand, there was no relationship between business function and growth of SMEs. It is possible that the Korean parent company considered the local branch in Southeast Asia as a tool to generate short-term profit without establishing a long-term development plan for the local branch. This is because SMEs have been located in Southeast Asia due to the needs of buyers or large corporations. On the other hand, SMEs are able to cope with changes in the situation flexibly because their capital size is relatively small compared to large corporations. In terms of corporate sustainability, it is necessary to establish a long-term growth plan. The long-term development plans of Korean SMEs include plans to grow together with local SMEs in Southeast Asia, and Southeast Asia and Korean SMEs can grow together if they are deeply rooted in the host country. Also, considering the demographic structure of Korea, there is a limit to continuous export of commodities, so it is necessary to share the fruits of growth through equity investment or M & A in local companies.
  The SMEs’ recognition of the change in international trade environment did not affect their profitability and growth. While Korean SMEs were expected to have a long-term impact on changes in the international trade environment, they did not recognize the need for immediate action. This is because the SMEs responding to the survey supply most of the products to large multinational corporations rather than directly exporting them. Finally, in Appendix 2, we analyzed the evaluation of management performance between Korean parent SMEs and their branch subsidiaries in Southeast Asian to date. Empirical results show that there is no difference in profitability between the parent SMEs and their local subsidiaries. However, the profitability and growth potential of local branch subsidiaries were higher than the profitability and growth potential of Korean parent SMEs, despite the recent changes in trade and investment policies, the development of high value-added industries, and the launch of AEC. In the long term, the Korean parent SMEs think that the performance of the local branch subsidiaries is better than theirs. This result confirms that Korean SMEs would transfer their production facilities to Southeast Asia, so it is necessary to differentiate the location of their value chain between the Korean parent company and its local subsidiaries in Southeast Asia in the long run. On the other hand, the Korean parent SMEs, which lack accurate information about the local situation in Southeast Asia, would be more optimistic about the given situation. That could be a risk for their management. In particular, special attention should be paid before parent SMEs decides to enter into new markets.
  Based on the above results, the direction and implications of SME support policy for the Korean SMEs working in Southeast Asia are presented as follows. As the global production network expanded, Southeast Asia became the outpost of Korean production. In the survey of Chapter 4, many raw materials and capital goods were procured from Korea (see Figure 4-22). It was also confirmed that 54% of capital goods were imported from Korea. Therefore, it is necessary to consider expanding support for SMEs entering Southeast Asia as an export expansion plan. In Chapter 3, Japan recognizes the importance of supporting Japanese SMEs in Southeast Asia and various measures are implemented to support overseas SMEs. It is time to reevaluate the value of SMEs entering the market. Meanwhile, local subsidiaries in Southeast Asia have more information on Southeast Asia than Korean parent companies (see Appendix 2, Figure 16). If a domestic firm that wants to enter Southeast Asia or a company that wishes to start a business in Southeast Asia can be linked with the SMEs that have run in the market, this would increase the likelihood of success. Since private companies will not easily share their information for the benefit of other new comers, it is necessary to establish a support policy for enterprises that will enable SMEs to collaborate each other.
  In addition, as we have already confirmed, local subsidiaries in Southeast Asia and Korean headquarters, and domestic firms in Korea have established a strong relationship through production networks. Therefore, these firms expanding abroad does not necessarily mean the loss of jobs in Korea, but instead that new opportunities are brought to Korea. In addition, the establishment and localization of local subsidiaries in Southeast Asia is a process of growth for the company. Consulting support should be increased not only for SMEs seeking to enter Southeast Asia but also for SMEs already in the market. In addition, restructuring of regional production networks in Southeast Asia should be supported. For this purpose, this study suggests the direction of support policy for enterprises entering into Southeast Asia, considering that it is important to build a reciprocal ecosystem through collaboration between the enterprising companies and new entrants. First, it is necessary to construct a research infrastructure to grasp the status of SMEs entering Southeast Asia. As confirmed in Chapter 3, Japan checks local reactions and responses through surveys of Japanese SMEs in Southeast Asia whenever the international trade environment changes (see Figure 3-10, 3-11, 3-12, Table 3-10). Since we form the Korean SME support policy under the situation where we do not fully understand the current status of Korean SMEs in Southeast Asia, the effectiveness of the policy has come under doubt. Therefore, we need to construct an infrastructure that enables us to conduct periodic surveys upon SMEs abroad, like the case of Japan.
  Second, it is necessary to provide a tailored support plan based on the understanding of the status of Korean SMEs in Southeast Asia. Since most support policies for the Korean SMEs are concentrated in the pre-export promotion and overseas expansion stages, the support for Korean SMEs that already entered into Southeast Asian market is relatively poor. It is time to provide broad support for the Korean SMEs that are functioning to increase Korea’s exports. According to the results of this study, it is necessary to make efforts to produce solutions on a case-by-case basis as the difficulties felt by the Korean SMEs in Southeast Asia are different across countries. In particular, since Korean companies report various labor- and tax-related difficulties, it is necessary to establish a specialized center in the relevant field and cultivate relevant experts locally. If the relevant professional qualifications system is not available locally, it is necessary to support the formation of professional qualifications system through bilateral negotiation. ODA funds, CSR (corporate social responsibility) or CSV (creating shared value) funds can be utilized as a source of funds for this purpose.
  Third, it is necessary to prepare a plan to support the restructuring of business in line with the reorganization of regional production network in Southeast Asia. As seen in Chapter 3, as the economic conditions of China and Thailand change, the Japanese government encouraged its firms to adapt to the China plus One strategy and Thai plus One strategy. With the launch of the ASEAN Economic Community at the end of 2015, it has formed a single market and a single production base in this region. Along with these changes, the promotion of the mega-FTA involving ASEAN, changes in industrial and trade policies in each country have an impact on the overall economic structure of Southeast Asia. This policy change and the change of surrounding conditions in Southeast Asian countries are demanding the reorganization of the regional production network in Southeast Asia. Therefore, it is necessary to provide a plan to support Korean SMEs that entered into Southeast Asia in order to freely restructure their business. In the meantime, in order to diversify Korea’s production network concentrated in Vietnam, it is necessary to prepare support plans for Korean SMEs there to restructure their business.
  Fourth, it is necessary to establish a plan to create a linkage between the current Korean SMEs in the market and new Korean entrants of SMEs. As mentioned earlier, incumbent SMEs in the market have much more information about the local area than newcomers. The survey in Appendix 2 confirms that the local subsidiaries have more local information than the Korean head office in Seoul. It is necessary to establish an incentive system for incumbent SMEs to share information with new entrants of SMEs. Moreover, Korea has to work as a direction setter of the ASEAN regional production network by constructing a long-term roadmap.
  Finally, it is absolutely necessary to train regional experts on Southeast Asia for this purpose. The survey pointed out that communication and cultural differences are the biggest obstacles to Korean SMEs who have recently entered Southeast Asia (see Figure 4-36). Regional experts are needed to expand mutual understanding. There can be no doubt that the activities of regional experts will help strengthen economic cooperation between the two regions. 

Executive Summary

1. Introduction

2. Summary of Regional Trade Agreements in Africa

3. Methodology and Data
3-1. Empirical Strategy
3-2. Data

4. Results

5. Conclusions

References

Appendix 

  Africa is one of the most economic-integrated continents by a number of regional trade agreements in the continent. There are about 30 bilateral and multilateral trade agreements within the continents so that each African coun-try is a member of at least one regional trade agreement. Trade between Afri-can countries, however, barely exceeds 10% of the total trade of Africa, which is much lower than other continents’ intra-regional trade share. This discrepancy between many regional trade agreements and small intra-continent trade share tells that regional economic integrations in Africa are very unsuccessful trade liberalization policies to promote trade. This paper examines a reason why trade liberalization policies in Africa fail. In particular, we investigate the impact of trade agreements in Africa on trade conditional on financial market development and political instability. An empirical study finds that Africa countries’ poor financial market accessibility and political instability are key barriers to trade integration in the region. These two factors can explain most disadvantage of African countries in their intra-regional trade. In a dynamic regression, the two factors depress the long-run growth of trade due to trade liberalization in the region significantly, while African continent dummy variable that captures other unobserved trade obstacles in the region has much less effect on trade compared to the literature on Afri-can regional economic integration. 

  The northeast region of China is historically an area of active exchange with Korea, due to its geographical proximity, language and cultural similarities, abundant natural resources, advanced level of manufacturing and transportation infrastructure, expanding consumer market, and active foreign investment inflow policy. However, as the recent economic downturn in the Northeast has continued, economic exchanges such as trade and investment between Korea and Northeast China have diminished and entered the worst phase since the establishment of Korea-China relations. In this time of deteriorating economic relations, this study intends to seek a new economic cooperation strategy for Korea in the Northeast China region. The Northeast is not only still an attractive land of opportunity, but also an important base of cooperation for the realization of the new North Korean policy introduced by the Korean government this year, or the “new economic map” for the Korean Peninsula.
  Economic growth has been slowing since the Chinese economy entered the so-called “new normal” stage in 2013. However, in the case of the Northeast region, the common problems experienced by the Chinese economy have been exacerbated by structural problems, making it an area with the lowest growth rate. Accordingly, the Chinese government announced a new Northeast Development Plan in 2016 that promotes system reform, restructuring, encouraging innovation, and ensuring public welfare. In the new plan, reform and innovation are emphasized as the first priority policy task, while economic efficiency and reform, such as the reform of state-owned enterprises and administrative systems, are carried out as well. The new development plan also emphasizes the improvement of investment environments, expansion of the state-owned enterprise mixed ownership system, manufacturing innovation and advancement, and the establishment of an open foreign platform. Under the new development plan, the three provinces of Northeast China are expected to move away from the quantitative growth trend centered on past investments, and instead concentrate on reform and qualitative development for future marketization and efficiency.
  In the midst of a severe recession in the Northeast economy, economic exchanges such as Korea-Northeast trade, investment, and local enterprise performance are also decreasing. Trade fell by an annual average of 0.86% since 2012, when medium-term growth began. Exports of major items, excluding organic chemicals, have fallen sharply, and exports are becoming dominated by single items. Investment fell to US$770 million (US$150 million) in the period of 2012–2016, far below the US$2.69 billion (US$540 million a year) total investment generated between 2007 and 2011. By industry, total investment in manufacturing from 2007 to 2011 was US$11.9 billion, while the service industry recorded US$1.37 billion. The period from 2012 to 2016 saw these investments fall by US$650 million in manufacturing and US$120 million in services. Overall investment has shrunk significantly regardless of industry.
  The business difficulties of local companies is becoming more pronounced, with the majority of Korean companies enduring acute difficulties in their operations. This situation is caused by problems within the Northeastern provinces themselves, such as: ① lack of sensitivity to market changes and a poor business business environment due to the economic structure centering on resource-oriented and heavy industries; ② small economic size compared to other regions; ③ low level of financial services and lack of financial supply to private companies; ④ randomness of local government policies at various levels, and high flexibility to simplify policy implementation, lack of standardization, and lack of transparency; ⑤ low external openness, and lack of institutional and systemic policy support by local governments. In addition, the problems of local companies have been identified as well, such as ① a lack of understanding of local culture, systems and policies (localization), ② weakening of preferential policies and strengthening of regulations, ③ an increase in the cost ratio (raw material costs and labor costs), ④ decreased competitiveness due to preferential treatment of domestic enterprises and the rise of Chinese enterprises, ⑤ lack of coherence in implementation of related policies in China, ⑥ influence of external (political) problems, ⑦ difficulties in local financing due to lack of financial services, ⑧ lack of their own strategies to advance into the Chinese market. In the case of Korean banks that have entered China and Northeast China, they have shown poor performance in terms of growth potential and profitability, and displayed limitations in their development by failing to compete with local banks. The major obstacles for Korean banks to grow in the Northeast region have been: (1) difficulties in positioning and localizing as a local bank, (2) difficulty in accepting systemic risk, (3) regulations and management policies of strict supervisory institutions, and (4) the reduction of Korean companies and their entry into the market.
  As such, the situation in the Northeast’s economy, industry, Korea- Northeast trade, investment, and entry are all not favorable. However, China’s central government is taking measures to overcome the downturn in China’s Northeast economy, and the 13th Five-Year Plan, a comprehensive edition of the new Northeast Development Plan in 2016, will be introduced to overcome the recession. In addition, while the Korean government is newly introducing the “New Economic Map on the Korean Peninsula” and its new North Korean policy, the need to deeply understand the Northeast region, which is the key link between Eurasia and the Korean Peninsula, continues to increase.
  In light of the above, this study has divided the important tasks of the Northeast Economic Cooperation Strategy into their respective stages.
  When considering the long-term improvement of ROK-China relations and the possibility of mitigating issues on the Korean Peninsula, we propose the following stages of economic cooperation with the Northeast region. Phase 1: Innovation and maintenance of an economic cooperation model and platform of the enterprises and companies that enter the Northeast. Phase 2: Active response according to the successful achievement of the new Northeast development policy. Phase 3: Strengthening economic relations between South and North Korea and the Northeast province in relation to the improvement of inter-Korean relations. Based on this step-by-step strategy, we have devised the following detailed policies.
  In the short term, the priority task of Northeast economic cooperation is to provide the institutions and enterprises that are already in the Northeast region of China to create conditions for continuous economic cooperation even under the difficult circumstances. For example, it is necessary to devise a platform that provides detailed information on changes in the investment environment of the three Northeastern provinces of China. Next, we need to revitalize the matching system between the emerging growth industries in the Northeast region and the Korean companies, which is proposed in the new Northeast Development Plan. These projects can be implemented in the form of a private- partnership exchange platform led by the private sector and supported by the government authorities, which can enhance the flexibility and efficiency. In addition, it will be possible to consider establishing a research center (or a council) to strengthen monitoring of the Northeast economy.
  In the long term, after inter-Korean relations have improved and North Korea has gradually opened up, it will become possible to consider a land route between Korea and the three Northeast provinces. This would make it possible to plan a joint development strategy between South Korea, North Korea and China, and to design a cooperation strategy by utilizing the Northeast region as a bridgehead for economic cooperation with China and the Eurasian region. In addition, Korea could promote the development of the Yalu and Tumen River international tourism zones in the Yellow Sea region and the Far East Sea region, respectively, in line with the Korean Peninsula New Plan. Finally, after reunification, it will become possible to construct a trans-border industrial belt in the northern part of the Korean Peninsula. 

  The Regional Comprehensive Economic Partnership (RCEP) is an ongoing multilateral trade agreement involving ASEAN member states, Australia, China, India, Japan, South Korea and New Zealand. With the global trade slowdown, the importance of the RCEP including various dimensions, such as trade in goods, trade in services, investment, trade facilitating measures, competition, intellectual property, e-commerce, is increasing. In this study, I conduct GVC analysis to identify the intra -regional trade and production network of RCEP-participating countries (RPCs). This study provides a number of indicators that capture the RCEP value chains, and provides a picture of the economic integration within the region. Through this work, we can identify the economic significance of the comprehensive multilateral agreement amid growing complexity of production networks. This study also investigates the level of liberalization in tariffs of ASEAN+1 FTAs, then provides specific policy implications for RPCs to leverage engagement in RCEP value chains.

  This study aims to draw some implications for Korea to develope its FTA policy, by reviewing the financial services regulations of Korea’s Free Trade Agreements (FTAs) and compare them with other major countries’ so-called ‘Best’ FTAs.
  In the second chapter, the study overviews the financial services regulations of Korea’s and major countries’ FTAs. The financial services regulations of Korea’s FTAs indicate significant deviations, especially in terms of definition and scope, depending on the timing of the signing and the other Party. On the other hands, those of the Trans-Pacific Partnership (TPP) and the Comprehensive Economic and Trade Agreement (CETA) are also reviewed, with some changes identified, which were not found in Korea’s FTAs. It is evaluated that these parts needs to be further scrutinized for Korea’s amendment negotiations with countries which are parties of those FTAs. In the TPP, the Article 11.17 on the performance of back-office functions mentions on avoiding the imposition of arbitrary requirements. In the CETA, the definition of the financial institution clearly regards a branch as a financial institution.
  In the third chapter, the study analyzed the provisions on prudential measures of Korea’s and major countries’ FTAs. In Korea’s FTAs. those provisions can be classified into three types: Kor-US FTA type, Kor-EU FTA type, and GATS type. In the TPP, the term of prudential reasons newly added the phrase of “as well as the safety, and financial and operational integrity of payment and clearing systems” to the existing “the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions or crossborder financial service suppliers.” The CETA also newly added the reasonableness requirement.
  In the fourth chapter, the study reviewed relevant dispute settlement cases. In the NAFTA case of Fireman’s Fund Insurance Company v United Mexican States, the tribunal viewed that the article 1410(1) of the NAFTA is not a self-judging provision but requires a State-Party to establish an affirmative defense. In the WTO case of Argentina Financial Services, the Appellate Body found that the Panel did not err in finding, that “paragraph 2(a) of the Annex on Financial Services covers all types of measures affecting the supply of financial services within the meaning of paragraph 1(a)” of the Annex. It means that although the GATS Annex on Financial Services stipulates prudential measures under the title of domestic regulations, the prudential measures are not limited to domestic regulations but they can be measures relating to market access, national treatment or most favored nation treatment.
  As a conclusion, from these findings this study draws some implications for Korea to develope its FTA policy. First, there is a possibility that room for the financial authority to take prudential measures might be narrowed by incorporating the investment chapters and its articles on investor-state disputes system (ISDS), and the domestic regulation chapters without limiting the extent incorporated. Such attempts are observed in the CETA. Other newly added parts in the TPP and the CETA identified in this study need to be further scrutinized for Korea’s amendment negotiates with the countries which are the parties to those FTAs. Second, Korea should review the financial service regulations of its FTAs to make some necessary amendments. Particularly, it will be good if the lessons of the WTO case are reflected into Korea’s FTAs. 

   In the past decade, China has emerged as a key partner of Southeast Asia across trade, investment, and infrastructure development. Southeast Asian economies have significantly benefited from the strong economic growth of China over the years, but the resulting dependency on China has created political and economic vulnerability in the region. The challenge is how to steer these relationships toward more mutually beneficial ones.
   Bilateral trade reached $395 billion in 2015, accounting for 15 percent of the region’s external trade and making China Southeast Asia’s top trading partner. Yet, cross-country variation in China’s share of exports to the total trade is huge, ranging from 5 to 38 percent among major countries, while China’s share of total trade with the region has been rather stable in recent years. Amid a marked expansion of trade, Southeast Asia’s trade deficits are rising fast since 2011. This coincides with the ASEAN-China Free Trade Area (ACFTA) entering into force and the onset of the new wave of investment in the region’s electronics sector, especially in Vietnam.
   Intermediate goods account for more than 50 percent for both Southeast Asia’s exports and imports with China, reflecting the establishment of a regional production network across East Asia. Among intermediate goods, the shares of semi-finished goods have risen in both Southeast Asian exports to and imports from China. At the same time the shares of parts and components, which usually are higher value-added than semi-finished goods, have declined in both directions. This may suggest that China may be producing more parts and components domestically, thus relying less on imports. China now has a strong electronic components industry, especially for commonly used and medium- and low-end components. On the other, the decline of parts and components of Southeast Asia’s imports from China also suggest that some Southeast Asian economies may be diversifying imports of parts and components away from China.
   Although relatively smaller in share to the total trade, agricultural trade is a strategic area for bilateral economic relations, especially in the form of Southeast Asian agricultural exports to China. Agriculture is a critical sector for most Southeast Asian countries, with a large share of employment and major political importance. With the demand rising in China, China’s food imports from and investment in the agricultural sector of Southeast Asia is likely to increase. This creates both opportunities and difficult challenges for the region’s countries. For trade in services, tourism is one of the key sectors between China and Southeast Asia. The growing number of Chinese tourists to Southeast Asia has created a tourism boom in local economies, but has also presented risks as well as challenges.
   China’s FDI in Southeast Asia is growing fast from a low base. Its FDI into the region reached $8.3 billion dollars in 2015, increasing more than 2.4 fold from $3.5 billion dollars in 2010. This makes China the fourth-largest investor in Southeast Asia, following the EU, Japan, and US, although its growth rates are higher than the top three investors. China is not a dominant investor in the wealthier countries of the region while its presence is overwhelming in lower income countries. The sectoral distribution of China’s FDI suggests that finance, real estate, and manufacturing are important sectors. The extent to which China, especially its private companies, invests in the region’s manufacturing will have a large impact on Southeast Asia’s development. China’s investment in the manufacturing sector of Southeast Asia is limited compared to other investor countries, but is still much larger than its investment in Africa and Latin America, which tends to be concentrated in natural resources and construction. China’ state-owned enterprises (SOEs) and policy banks are capturing global attention by their large infrastructure projects and massive loans. Nonetheless, it is Chinese private companies who will play a more important role in transforming the regional economic relations. China used to function largely as a major processing hub in the global value chain but has increasingly expanded into the role of a supplier of intermediate inputs for assembly operations in other developing Asian economies. Yet it may also be moving toward establishing its own production chains led by Chinese private firms.
   Although Cambodia is the key partner for China in the region, its small size and low level of development makes it difficult to be developed into a platform for China’s region-wide cooperation. China’s investment in the region is concentrated in Singapore, Malaysia, and Indonesia, but these economies are relatively developed and highly open to international competition, limiting China’s dominant influence. The Philippines is an interesting case where its political ties with China are expanding rapidly despite significantly weak preexisting trade and investment relations with China.
   Infrastructure development is the most visible area of China’s rising economic influence in Southeast Asia under the Belt and Road Initiative. Responding to huge demand for infrastructure development in the region using its large capital, China is implementing large-scale development projects in transport and energy infrastructure and developing special economic zones across the region. China is building a high-speed railway in Laos and Indonesia and participating in a project in Thailand. The “Pan-Asia Railway Network,” also known as the “Kunming-Singapore Railway,” is an ambitious transport infrastructure project now incorporated into the Belt and Road Initiative with an aim to integrate China’s Southwest with mainland Southeast Asia. The Asian Infrastructure Investment Bank, formally proposed in 2013 and established in 2015, is a major instrument for China’s Southeast Asia strategy focused on infrastructure development. The Thai-Chinese Rayong Industrial Zone in Thailand and the Sihanoukville Special Economic Zone in Cambodia are success cases of China-led SEZ development in the region. Chinese private companies, especially in the garment and footwear sector, are well represented in these SEZs.
   Korea needs to respond to the changing economic landscape in Southeast Asia proactively and constructively. China’s deeper engagement in Southeast Asia may place competitive pressures on Korean business interests, yet China’s expanding business networks and China-financed infrastructure improvement are likely to offer more business opportunities for everyone, including Korean firms. Korea needs to make greater efforts in the fields of innovation and productivity enhancement, in addition to paying greater attention to labor and environmental standards compliance in its FDI and infrastructure development, taking lessons from some of the backlashes against China’s investment activities. Finally, Korea and Southeast Asia have mutual interests in diversifying their economic relations away from over-dependency on China, as recent economic and security events have clearly suggested. 

Executive Summary

Contributor

1. Introduction

1.1 Overview
1.2 Bilateral investment rules
1.3 Multilateral investment rules

2. The Investor-State Dispute Settlement (ISDS) System

2.1 Recent trends in ISDS cases
2.2 Reform issues in ISDS

3. Main Features of the EU’s Investment Court System

3.1 Key aspects of the ICS
3.2 ICS in the CETA

4. Potentiality and Constraints of Establishing a Multilateral Investment Dispute Settlement Mechanism

4.1 Opportunities and obstacles
4.2 The Mauritius Convention on Transparency as a benchmarkfor a possible multilateral investment tribunal

5. Conclusion

References 

The EU’s proposal to establish a new Investment Court System during the TTIP negotiations has well represented the cumulative resentment of the public, governments, civil societies as well as academics in regard to the existing ISDS mechanism. Such issues as the lack of legitimacy, transparency, consistency, the absence of a review mechanism, and the high burden to public finance in the existing system have been criticized as undermining the sovereignty of the State and its right to regulate for legitimate policy objectives such as the environment, health, and safety. Despite the merits of the existing ISDS mechanism, the increasing demand for improved safeguards against abusive claims and discretionary power of private adjudicators should be adequately addressed in consideration of the democratic principles and the objectives of sustainable development goals. It is also noteworthy that the function of the traditional ISDS system, devised as a preferential instrument for foreign investors, has evolved over time as the distinction between capital-exporting and capital-importing countries became blurred and more attention is focused on the equality and balance of power among domestic and foreign businesses as well as between investors and the host States.
In this vein, the establishment of a permanent tribunal and the public appointment of tribunal members with a fixed-term, as proposed by the EU in the new ICS, are indicative of the shifting paradigm in the discourse of treaty-based investor to State arbitration systems. Despite the fact that the system of ICS can hardly solve all of the problems, it may possibly improve the level of legitimacy by incorporating public features of the procedure. At the same time, it is noteworthy that the objective of improving the legitimacy and consistency of the dispute settlement system cannot be achieved without the prospect of establishing a multilateral dispute settlement mechanism with consolidated and harmonized standards of investment rules. Considering the difficulties of reaching a multilateral agreement on investment as witnessed in the past decades, the approach of the Mauritius Convention, which adopted an opt-in mechanism, would be useful as it reduces the risk of failure in negotiations while building a consensus among participants and allowing them to decide when to ratify the Convention in consideration of their domestic circumstances.
Considering the extensive network of trade and investment agreements that Korea has concluded in the past decade, it is more than necessary for the Korean government to pay close attention to the recent development in this process and actively participate in discussions on the possibility of establishing a multilateral investment court and the key principles of investment protection and facilitation in international fora.

JEL Classification: F13, K33
Keywords: investor-State dispute settlement (ISDS), investment court system (ICS), multilateral investment court, TTIP, CETA, UNCITRAL Transparency Rules, Mauritius Convention 

  Since the turn of the 21st century, the growing interdependence and interconnectedness of the global economies intensified the need for individual economies to engage in regional economic cooperation and integration. Recent statistics indicate that the number of regional trade agreements notified to the WTO by APEC economies has reached 265 cases, making it the most prolific period in APEC history. Given this upsurge, the significance of policy coordination and cooperation within the framework of APEC’s Regional Economic Integration activities ― inter alia, discussion on implementing “Free Trade Area of the Asia-Pacific (FTAAP)” ― has attracted considerable attention from Korean policy makers and stakeholders.
  APEC’s vision to create a single economic community was designed not only to reduce obstacles of trade in goods and services but also to adopt more advanced trade- and investment-related rules and measures to increase the transparency and efficiency of the economic system. Successful regulatory reforms and conformity to the international rules and standards embodied in the FTAAP framework, therefore, would help accelerate the regional economic restructuring and opening of the Asia-Pacific economy. These will eventually provide the Korean economy with increased participation in global value chains (GVCs), the export and investment markets, and strengthen political and economic ties among members. In this context, the opportunity cost of being excluded from the general trend of economic integration has become a tangible threat.
  At the critical juncture of reinvigorating the Regional Economic Integration (REI) agenda, 21 APEC economic leaders will convene in Hanoi in November 2017. The main objective of their 25th annual meeting is to stimulate both individual and collective economic reform and keep up the momentum of ensuring the formation of an Asia Pacific Economic Community. Against this backdrop, this paper attempts to draw the following policy implications and suggest concrete areas and ways in which Korea can contribute to the progress of APEC REI activities, then share the benefit of integration with members.
  First of all, as a mid- to long-term policy initiative, Korea may consider to design a new integration model building on its existing FTA networks with major powers. For example, the sequence and combination of this scheme may take the following patterns: ① Korea, USA, Japan (KUJ) + NAFTA (5 countries) or ② Australia, New Zealand (7 countries) + APEC ASEAN Member States (13). Australia, Canada, China, New Zealand, Singapore, USA, and Vietnam are already signatories to Korea’s existing bilateral FTAs and have been promoting market-driven trade and investment policy measures as their growth engine. At the same time, Korea’s strengthening its economic cooperation scheme with the ASEAN and Pacific Alliance market has attracted considerable attention. The relevance of its continuous market openings and comprehensive reform agenda supported by strong political commitment from the new government is another important factor that underpins Korea’s potential to be a new leader of regional economic integration.
  The idea of open regionalism has evolved into the realm of behind the border issues, service, labor, climates and environment cooperation, which are the main components of the 21st century regional integration model. As a short term strategy, development of the “APEC Regulation Principle of Service Sector” will contribute to the fostering of the 4th industrial revolution with the growth of communication, IT and professional service sectors in member economies.
  One of the biggest constraints on progress towards structural adjustment and cooperative arrangements to move APEC’s integration agenda is largely the issue of sharing information, experience, expertise and knowledge. This kind of cooperation is in line with the comparative advantage of Korea in its capacity as an early adapter of an outward- oriented policy strategy. In particular, considering the challenges lying ahead, Korea could make tailored policy suggestions in the area of human resource development, and the number of instruments, measures and initiatives most likely to make a positive contribution to the integration process. In the process, this will ensure growing confidence in strengthening collaboration with APEC members as a means of propelling a growth engine that is inclusive and sustainable. In practice, such an outward- looking policy forces the market to minimize the negative impact of trade diversion and make the regional market more competitive.
  A strategy for the REI process needs to be consistent with the strategic context and purpose of members’ unilateral, bilateral, regional and multilateral commitments. It needs to take advantage of experience in developed APEC members. Therefore, if APEC’s REI agenda could be linked to the Korean-initiated Capacity Building Needs Initiative program, the developing member economies may be able to enjoy significant economic gains from economic integration without having to pay extra policy cost. To retain the relevance of this agenda, it is recommended to assess which potential areas are likely to make a positive contribution to the REI process. 

   The aim of the research is to suggest policy implications for Korean companies that want to expand their business in the Middle Eastern electricity industry, examining industrial policies in the generation, transmission, distribution, and energy efficiency sectors.
   Chapter 2 touches upon supply and demand of electricity in the region and their characteristics, deriving some policy trends such as diversification of power sources, improvement of the efficiency of electricity consumption and supply, and more involvement of the private sector in electricity businesses. The Middle Eastern countries, which are yet highly dependent on fossil fuel energy, have been recently concentrating on developing renewable energy as an alternative in order to prepare for the post-oil era. In particular, it is generally assumed that the proportion of solar and wind power will increase due to environmental circumstances favorable to their development and the decreasing cost of generation. Energy efficiency programs and smart grids have been also adopted to respond to the rapidly increasing demand for electricity as well as relatively high rate of electricity losses in the transmission and distribution sectors. Moreover, Middle Eastern governments have been promoting the private sector’s participation in the electricity industry to mitigate the financial burdens caused by lower oil prices.
   Chapters 3 and 4 deal with sectoral policies in the cases of Saudi Arabia, UAE and Egypt. Policies in the generation sector have been examined in Chapter 3. The three Middle Eastern countries have been expanding their power infrastructure, implementing policies to diversify their energy mix. Although thermal power plants using oil and gas are prevalent in these nations, accounting for more than 90% of total generation, those countries are trying to increase the share of alternative energy power plants including renewable and nuclear energy. Moreover, decreasing costs associated with solar and wind power generation have led these countries to be more active in expanding renewable power generation. Egypt, on the other hand, is promoting coal-fired power plants to compensate for its diminishing supply of natural gas. With the economic slowdown and fiscal aggravation in those countries since the drop in oil prices in the second half of 2014, heavier reliance on private investment is expected, eventually leading to the expansion of IPP (Independent Power Producer) and IWPP (Independent Water and Power Producer) projects in the region. With priority being placed on investment to the power sector, Korean companies will have more opportunities to enter into the Middle East power market. With the share of IPP and IWPP projects growing in the power sector, in particular, Korean companies need to transform their role into that of a developer in charge of overall operation of projects, including financing.
   The three countries are pushing ahead with policies to modernize transmission and distribution lines, introduce smart grid technology and improve the efficiency of energy consumption shown in Chapter 4. In the transmission and distribution sector, GCC countries such as Saudi Arabia and UAE are working to connect each country with a power grid that applies a 400 kV HVDC (High Voltage Direct Current) transmission scheme to improve the efficiency of electric supply. It is expected that the GCC countries will introduce a sophisticated power trading system and expand this grid to Egypt, Jordan and other Middle Eastern countries. Egypt is also concentrating on modernizing its local transmission and distribution lines. In the smart grid sector, most policies and business projects are focused on AMI (Advanced Metering Infrastructure) test projects or the introduction of smart meters. In particular, UAE is carrying forward smart grid projects that combine renewable energy and ESS (Energy Storage System). In the area of improving energy consumption efficiency, policies to grade and regulate energy efficiency standards, or to improve public awareness on energy savings are being promoted. For the efficient management of energy consumption, Middle Eastern countries are introducing BEMS (Building Energy Management Services) with Saudi Arabia and UAE showing higher growth in the field. It will be necessary to develop high value-added products to advance into the market for electric power equipment in these countries. This is because local companies in Saudi Arabia and UAE are producing general electric equipment and their governments are encouraging construction companies to use local products to nurture the domestic industry. In addition, Korean companies should consider joint ventures with local power companies, and conduct OJT (On the Job Training) programs and technology transfer with local companies to establish favorable business conditions for their advance into the region.
   Chapter 5 suggests government policies that help Korean companies expand their market in the Middle Eastern electricity industry. First, financial support policies are necessary to assist their project-developing costs including feasibility study. More financial incentives could be also provided as more Korean contents are used in the projects. Korean companies’ financial burden arising out of higher borrowing rate of interest could be relieved with the help of a longer tenor for Korean financial institutions. Second, more support should be considered for small and medium sized enterprises that cannot go into the Middle Eastern market by themselves because of lack of financial resources and track record in the region. Cooperative relations between large companies and SMEs are necessary for SMEs to expand exports of equipment and materials used in the power plant projects. The sharing of information on the projects among large companies and SMEs could be helpful in strengthening their cooperation. Joint ventures between SMEs and local companies need to be supported with policy loans. Third, new business with ICT in the electricity industry such as smart grids, AMI (Advanced Metering Infrastructure), ESS (Energy Storage System) should be systematically developed in the region. Initially, consulting business should be promoted with government officials including master plan for smart grid establishment, energy efficiency improvement programs. Then test-bed programs should be followed to examine the feasibility of the masterplan. Korean consortium between large companies and the SMEs could be awarded orders based on consulting and test-bed results. Fourth, a control tower should be set up in order to coordinate differing interests among companies, banks, supporting institutions. It can also work as a platform to build a strategy to win government contracts. In addition, corporate cooperation system should be established to share information on various projects, financial sources, success and failure cases of winning orders, and so on. This would be helpful to expand cooperation among Korean companies and financial institutions, exploring new business opportunities in the Middle East. 

Preface

Executive Summary

Acknowledgements

GDI: Research Team and Advisors

Chapter 1. Project Introduction and Purpose

Chapter 2. The Nature of Scenario Analyses and Its Use

Why Scenario Analysis?
The Methodology Underlying Scenario Analysis
Use of Scenario Analysis in This Report

Chapter 3. The Gamut of Economic Risks Facing Korea Today

The Idea of a Risk Profile
Korea’s Risk Profile in Brief
Medium Term Risks Facing the Korean Economy
Conclusions

Chapter 4. Mega-trends Influencing Medium-Term Scenarios

An Overview
Mega-trend 1: The Trend Towards De-globalization
Introduction
The global trade slowdown
Corporate retrenchment away from the Global Production Model
Globalization failures magnified by policy myopia
Conclusion
Mega-trend 2: Disruptive Technologies and Impacts
An overview
Disruptive technologies
The impact of disruptive technologies on jobs
Impact of disruptive technologies on trade
Impact of disruptive technologies on global value chains
Conclusions
Mega-trend 3: Persistent Global Uncertainty
An overview
Post crisis trends that prompt greater uncertainty
Does uncertainty drag down growth?
Uncertainty and the economy
Black swans
Concluding observations

Chapter 5. A Trade War Scenario

Introduction
A Historical Perspective
Why a U.S. Trade War with China?
Starting a Trade War is Easy, Controlling it Less So
The Impact on Korea

Chapter 6. A Troubled China Scenario

Introduction to the Current Baseline Scenario
The Troubled China Scenario
The Case of a China Slowdown
The Case of a Financial Crisis
The Case of Dramatic Rebalancing
Combined Troubled China scenario and its Implications

Chapter 7. A Global Meltdown Scenario

Introduction
A Global Meltdown Scenario
The Major Economies
The Trade Story Dominates
Financial Stagnation and Protectionism
Global Inaction Increases Risks

Chapter 8. Risk Assessment and Analysis: Vulnerabilities and Resilience

Introduction
The Chinese Challenge
Rapid Development of Technological Capability
Competition in Exports
Ambitious innovation plans
Managing Risks
Improving Efficiency and Flexibility in the Economy
Overall competitiveness and the institutional and market regime
Labor market efficiency
Financial market development
Social protection systems
Strengthening Innovation Capacity
Innovation capacity indicators
Skills of the labor force
Entrepreneurial skills and entrepreneurial ecosystem
Conclusions on strengthening innovation
Increasing Trade Diversification
The Asian Region and RCEP
Potential for increasing trade with India
Conclusions and Key Recommendations
Improving Efficiency and Flexibility of the Economy
Strengthening Innovation
Increasing Trade Diversification
Final Thoughts

Annex

Background Notes
A. The Economic Relationship between China and the U.S.
B. U.S. Trade Policy toward China
C. Implications of Disruptive Technology for Korea
D. The Economic Relationship between Korea and the U.S.
E. Levels of Economic Integration between Korea and China

References 

  This paper aims to examine some plausible external shocks that can significantly affect Korea’s economic future. It does so by analyzing game-changing scenarios that emanate from a candid assessment of the risks inherent in the global economy. It is based on the premise that it is extremely useful to plan for the less likely events, especially if those events are associated with significantly altered outcomes. These “Black Swan” occurrences are not as far-fetched as one may think, particularly for a country as vulnerable as South Korea.
  It is for this reason that the report examines scenarios that might materially alter the policy choices facing Korean authorities in the medium term (2017-2022). These scenarios are analyzed in the context of relations between Korea and China, China and the United States and Korea and the United States.
  The approach of the Report is to first examine major “mega-trends” of de-globalization, disruptive technologies, and greater global uncertainty, and in this context of “shifting sands” to build three game- changing scenarios that can substantially affect Korea.
  There are three scenarios: A Trade War, initially between China and the United States but with global ramifications; a Troubled China, with significantly lower growth and trade implications; and a Global Meltdown, reminiscent of 2008-2009. We believe there are few countries for which this kind of analysis is more germane than for Korea. The Report aims to hasten further deliberation on the topics of risk and resilience in the Korean policy community to increase preparedness for events that could cause significant disruption to the Korean economy in the medium term.