Chapter 1. Introduction

Section 1. Research Background and Objectives
The Act on the Conclusion Procedure and Implementation of Commercial Treaties (hereinafter, the “Commerce Treaty Act”) was enacted in 2012 to address the lack of procedural transparency and insufficient public participation revealed during major trade negotiations, notably the Korea–U.S. Free Trade Agreement (FTA). The Act aimed to institutionalize transparency, predictability, and stakeholder participation across all stages—from negotiation to post-entry implementation—while ensuring systematic and democratic oversight of Korea’s trade policy.
Despite its initial promise, several institutional limitations have emerged. Certain procedures risked becoming mere formalities, undermining the Act’s purpose, while rapid shifts in the trade environment, including digital trade, supply chain realignment, and climate-related regulation, exposed gaps in its scope and adaptability. In particular, new forms of economic agreements that diverge from traditional tariff-based liberalization often fall outside the statutory definition of a “trade agreement,” weakening both democratic control and policy responsiveness.
This study therefore seeks to identify reform directions that can strengthen the Commerce Treaty Act’s legal coherence, democratic legitimacy, and practical effectiveness. The research focuses on four main objectives: enhancing institutional coherence, improving democratic transparency and oversight, ensuring effective domestic implementation, and reinforcing the legal framework to address structural changes in global trade governance.

Section 2. Scope and Limitations of the Study
This study examines the historical evolution, legislative intent, and operational performance of the Commerce Treaty Act, alongside a comparative analysis of treaty-making and implementation systems in the United States, the European Union, Japan, and China. Methodologically, it combines doctrinal and empirical approaches through the analysis of statutes, policy documents, and negotiation practices, complemented by expert interviews.
Although the confidentiality of trade negotiations imposes empirical limitations, the study nonetheless offers an analytical and policy framework for reforming Korea’s legal foundations for trade governance. It argues that international trade law research must extend beyond theoretical analysis to inform real policy reform and institutional design.

Chapter 2. Objectives and Legislative History of the Commerce Treaty Act

Section 1. Constitutional and Institutional Background
Article 6(1) of the Constitution of the Republic of Korea grants treaties the same legal effect as domestic statutes. Yet, before 2012, the practical exercise of this principle lacked sufficient checks and balances, as trade negotiations and ratifications were dominated by the executive branch with little parliamentary oversight. As modern trade agreements began to regulate sensitive domestic policy domains—such as environmental standards, labor protection, and investment policy—the need for greater transparency and democratic legitimacy became urgent.
The Commerce Treaty Act was thus established to give effect to constitutional principles of accountability and separation of powers. It introduced procedural obligations for prior, interim, and post-reporting to the National Assembly; mandated public hearings and information disclosure; and required the government to assess both the economic effects and implementation of trade agreements. These mechanisms were designed to secure procedural legitimacy and foster cooperation between the executive, the legislature, and civil society, thereby embedding democratic control into Korea’s trade policy architecture.

Section 2. Key Issues in the Legislative Process and Their Resolution
The legislative history of the Commerce Treaty Act reflects the accumulated tension between democratic oversight and the need for efficiency in foreign-economic negotiations. During the drafting process, lawmakers confronted several unresolved questions that had surfaced in earlier controversies surrounding the Korea–Chile, Korea–U.S., and Korea–EU FTAs. At the heart of the debate lay the appropriate degree of parliamentary participation. Some legislators argued that the National Assembly should possess the authority to approve the opening of negotiations in advance, thereby ensuring democratic legitimacy from the outset. The executive branch, however, warned that such ex ante approval would unduly constrain its flexibility in rapidly changing diplomatic contexts. The final text consequently adopted a compromise: the government would retain discretion to initiate negotiations but would be legally obliged to report to the Assembly at each major stage and to obtain its consent before ratification.
Another contested issue concerned the domestic effect of treaties. Certain early drafts had proposed conditioning the entry into force of an agreement on the prior enactment of implementing legislation, a design that would have delayed Korea’s international commitments until all domestic legal adjustments were complete. Because this approach was considered inconsistent with the country’s monist constitutional order, the provision was ultimately omitted. Instead, the Act emphasizes the timely preparation of necessary implementing legislation before a treaty’s entry into force.
Debates also arose over the definition of “trade agreement” and the treatment of information disclosure. Lawmakers sought to balance transparency with national security by adopting a principle of disclosure subject to narrowly tailored exceptions. When the National Assembly requests access to confidential materials, the executive is obliged to provide them under conditions safeguarding strategic interests. To enhance participatory governance, the Act further established a standing advisory committee composed of experts and industry representatives to channel stakeholder perspectives into negotiation planning. Finally, the Act introduced requirements for ex ante, interim, and ex post assessments of industrial impact and adjustment measures for sectors expected to suffer serious injury. In sum, the law emerged as a negotiated equilibrium between legislative demand for procedural legitimacy and executive insistence on operational flexibility.

Section 3. Assessment and Implications
The Act represents an important institutionalization of democratic control over Korea’s trade policy and a step toward restoring public confidence in governmental transparency. Nevertheless, continuous improvement is required to ensure that these procedures retain substantive meaning. Strengthening parliamentary review, enhancing legislative expertise, and linking trade policymaking to a medium- and long-term national strategy would ensure that democratic oversight remains compatible with efficient diplomacy.

Chapter 3. Treaty-Making and Implementation Systems in Major Jurisdictions

Section 1. United States
The United States operates under a dual system balancing executive flexibility and congressional authority. The Trade Promotion Authority (TPA) grants the President the power to negotiate trade agreements, subject to detailed congressional oversight and an expedited “up-or-down” approval procedure. While this enhances efficiency, it also preserves accountability through continuous consultation and reporting. The U.S. distinction between self-executing and non-self-executing treaties ensures that Congress retains control over domestic implementation. In comparison, Korea’s rigid parliamentary consent model provides clarity but can limit agility in fast-moving negotiations.

Section 2. European Union
The European Union’s common commercial policy, grounded in Articles 3 and 207 of the Treaty on the Functioning of the EU, constitutes an area of exclusive EU competence. The European Commission negotiates under mandates authorized by the Council, with the European Parliament exercising oversight and consent. Implementation occurs through the ordinary legislative procedure. Transparency is achieved through public negotiation directives, stakeholder consultations, Domestic Advisory Groups (DAGs), and annual implementation reports. The Chief Trade Enforcement Officer (CTEO) and Single Entry Point mechanism centralize enforcement. Korea could selectively adopt these practices—particularly in transparency, structured stakeholder participation, and integrated enforcement—to enhance the legitimacy and coherence of its trade governance.

Section 3. Japan
Japan, although lacking a dedicated statute equivalent to Korea’s Commerce Treaty Act, ensures coherence between international and domestic law through concurrent submission of implementing legislation and trade agreements to the Diet. This practice minimizes legal gaps between approval and enforceability, offering a pragmatic model that Korea could emulate to strengthen policy coordination.

Section 4. China
China maintains a dual ratification system shared between the State Council and the Standing Committee of the National People’s Congress. While WTO obligations are generally implemented through domestic legislation, many free trade agreements have achieved quasi-direct effect, reflecting pragmatic adaptation. China’s emerging mechanisms for treaty compliance review highlight the importance of maintaining internal consistency between domestic law and international commitments—a lesson equally relevant for Korea’s institutional development.

Chapter 4. Core Provisions and Practical Operation of the Commerce Treaty Act

Section 1. Analysis of Key Provisions
The Commerce Treaty Act regulates the entire life cycle of trade agreements—pre-negotiation, negotiation, ratification, and post-implementation—with the goal of embedding democratic control in each phase.
At the pre-negotiation stage, the Act mandates public hearings, parliamentary reporting, and economic feasibility assessments. These mechanisms were designed to make early-stage decision-making transparent and participatory. In practice, however, hearings have often been perfunctory and conducted with limited disclosure of substantive information. The absence of uniform standards regarding timing, content, and participant selection has weakened their legitimacy. Future reform should specify minimum procedural guarantees, require publication of background materials in advance, and ensure that stakeholder comments are publicly addressed. Economic feasibility studies, though conceptually sound, frequently rely on government-led modeling that omits sustainability variables such as labor and environmental impacts; they would benefit from independent review and mandatory submission to the National Assembly.
During the negotiation phase, the Act entrusts the executive with the duty to report material developments and to receive the Assembly’s opinions. While this arrangement represents progress toward legislative oversight, ambiguity persists as to what qualifies as a “material” change, and there is no binding obligation for the executive to incorporate parliamentary feedback. Establishing phased reporting—before, during, and near the conclusion of negotiations—could transform these exchanges from formality into genuine deliberation.
At the ratification stage, the government must submit a comprehensive impact assessment together with the agreement for legislative consent. Yet the current focus on macro-economic indicators limits the analysis of social or environmental consequences. Because assessments are usually completed after negotiations are substantially finished, opportunities for meaningful revision are scarce. Introducing interim assessments during negotiations, as practiced in the European Union, would allow earlier corrective action.
Furthermore, explanatory sessions that accompany ratification have often functioned as one-way briefings. Converting them into structured dialogues involving experts, labor, and industry would enhance transparency and accountability.
After a treaty enters into force, the Act requires evaluation of its economic effects and the adequacy of adjustment measures within ten years. This long-term review is commendable but administratively burdensome. Developing standardized templates, prioritization criteria, and shorter review cycles could improve feasibility. Publication of evaluation results must also strike a balance between public transparency and the protection of sensitive negotiating information. Finally, evaluations should expand beyond compliance metrics to include distributive and regional impacts, thus linking the Act’s procedural legitimacy with tangible socio-economic outcomes.

Section 2. Practical Application and Assessment
The experiences accumulated through the Korea–Chile FTA, the Korea–U.S. FTA, and the Korea–EU FTA demonstrated the growing importance of procedural transparency. However, even after the Act’s adoption, its implementation revealed persistent weaknesses. Parliamentary engagement remained limited, public hearings were criticized as symbolic, and ex post evaluations were inconsistent. The rise of new-generation trade instruments such as the Digital Economy Partnership Agreement (DEPA) and the Indo-Pacific Economic Framework (IPEF) further exposed definitional blind spots, as these agreements often escaped the Act’s procedural requirements.
To address these issues, the study proposes expanding the Act’s definition of “trade agreement” to include economic security–oriented instruments and digital cooperation agreements, introducing a procedural trigger system based on anticipated economic and social impact, and institutionalizing regular post-entry evaluations to strengthen both accountability and adaptability.

Chapter 5. Key Issues and Reform Proposals Concerning the Commerce Treaty Act

Section 1. Definition of “Trade Agreement”
The Act’s current definition focuses narrowly on comprehensive market- opening treaties, excluding new economic instruments that substantially influence Korea’s domestic economy. The definition should be broadened to encompass agreements addressing digital trade, supply chain resilience, or economic cooperation. By creating an extended category—“trade agreements and related economic arrangements”—the law would ensure that emerging instruments are subject to democratic oversight and transparency obligations.

Section 2. Trade Negotiation Structure and Policy Formation
Korea’s trade policymaking remains fragmented among ministries, including the Ministry of Trade, Industry and Resources and the Ministry of Economy and Finance. This dispersion hinders coordination. A reinforced inter- ministerial mechanism that allows early joint decision-making is necessary. At the legislative level, oversight should be shared among relevant committees—such as foreign affairs, agriculture, and environment—to reflect the multi- sectoral nature of trade policy. Integration between evaluation and adjustment mechanisms should also be codified within the Act to clarify responsibility and accelerate remedial responses.

Section 3. Implementation and Evaluation
Despite the Act’s commitment to transparency, negotiation stages remain opaque due to frequent claims of confidentiality. Public hearings occur infrequently, and stakeholder input rarely influences outcomes. Introducing interim disclosure and assessment procedures would enable real-time accountability. The government should be obliged to respond substantively to public submissions, and standing consultation platforms involving industry, labor, and academia should be established to ensure continuous dialogue. These reforms would enhance policy credibility and predictability.

Section 4. Additional Considerations under the Act
Article 20 of the Commerce Treaty Act allows for reciprocal measures when a counterpart fails to comply with obligations. However, it lacks operational clarity. Establishing detailed conditions, proportionality criteria, and termination procedures would improve enforceability. Likewise, Articles 16 through 19, which provide for domestic relief, should be supplemented with enforceable timelines and inter-ministerial coordination duties to ensure that adjustment measures function effectively.

Chapter 6. Conclusion

Since its adoption in 2012, the Commerce Treaty Act has provided Korea with an essential procedural framework for democratizing trade policy. By institutionalizing public hearings, economic feasibility analyses, and parliamentary reporting, it has strengthened legislative oversight and partially restored public trust that was eroded by earlier non-transparent negotiations. Nevertheless, profound transformations in global trade—ranging from digitalization and data governance to supply-chain security and climate policy—have exposed the limits of a statute conceived in the era of traditional FTAs.
The study therefore concludes that the Act must evolve from a procedural instrument into a comprehensive Trade Governance Integration Act. This re-envisioned framework should expand its legal coverage to include digital, environmental, and economic-security agreements, thereby ensuring that all significant external economic instruments are subject to democratic scrutiny. It should incorporate a differentiated procedural trigger system calibrated to the anticipated economic and social impact of each agreement, enabling agility without sacrificing accountability. Parliamentary oversight should be broadened across multiple committees so that trade’s cross-sectoral effects are adequately examined, while confidential information-sharing mechanisms safeguard national interests. At the executive level, the Act should codify explicit accountability through structured reporting and establish a permanent advisory council representing industry, labor, and civil society. Implementing legislation should be reviewed in parallel with treaty ratification to minimize the temporal and legal gap between international obligations and domestic enforceability. The linkage between post-entry evaluations and adjustment measures must be formalized to ensure that assessment results translate into concrete policy responses. Finally, the reciprocity clause should be operationalized through clear procedures for proportional countermeasures, aligning Korea’s enforcement capacity with global standards.
Through these reforms, the Commerce Treaty Act could assume the character of a quasi-constitutional foundation for Korea’s trade policy—a framework that unites democratic legitimacy, legal coherence, and strategic flexibility. By embedding the guiding principles of legal comprehensiveness, procedural democracy, coherent implementation, and international credibility, Korea would reinforce its position as an advanced trade state capable of navigating the intertwined domains of digital transformation, economic security, and sustainable development in the twenty-first-century trading system.

Since the early 2020s, a series of global economic disruptions—including the escalation of the U.S.–China trade conflict, the outbreak of the COVID-19 pandemic, the Russia–Ukraine war, and persistent political instability in the Middle East—has heightened geopolitical risks across East Asia and intensified the pressure for a restructuring of global value chains. In particular, following the inauguration of the second Trump administration in 2025, deepening political and economic tensions between the United States and China have exerted a substantial impact on the Korean economy, which had long relied on China as a pivotal component of its value chain. Under these circumstances, ASEAN has emerged as an alternative production base to China, underscoring its growing significance as a potential partner for more dynamic and diversified value chain integration with Korea.

Major research on international supply chains and value chains between Korea and ASEAN can broadly be classified into two categories:
(1) studies that analyze the overall industrial structures of Korea and ASEAN member states to identify complementarities and substitutabilities between the two regions, and (2) studies that investigate the general patterns of trade relations between Korea and ASEAN.

Empirical analyses drawing on more than two decades of statistical data indicate that trade and investment flows between Korea and ASEAN have expanded significantly, leading to the formation of complementary value chains shaped by differences in per capita income levels, wage structures, and resource endowments.

However, as most existing studies concentrate on national and industrial levels, they do not directly examine the activities or organizational structures of firms—the fundamental entities that constitute supply chains. These studies also fail to differentiate among various types of firms, including large corporations, small and medium-sized enterprises (SMEs), and foreign-invested companies operating within ASEAN. The present study seeks to address this limitation by conducting a firm-level analysis of ASEAN enterprises in order to identify the structural patterns and distinctive characteristics of value chains linking Korea and ASEAN.

The scarcity of firm-level analyses on Korea–ASEAN value chains can be attributed to several factors. First, comprehensive datasets and statistics on individual firms are largely unavailable in most ASEAN countries. Owing to relatively low income levels and limited corporate transparency, substantial portions of firm-level information are not publicly disclosed. Although listed companies are required to publish data in accordance with stock exchange regulations, the absence of well-established international accounting standards reduces the reliability of these statistics. Furthermore, a considerable number of firms remain unlisted and are therefore under no legal obligation to disclose their financial or operational information.

Second, even when firm-level data are obtainable at the national level, the process of compiling and analyzing regional datasets encompassing all ASEAN member states remains an extensive and resource-intensive undertaking. Given that ASEAN comprises ten countries, each with a vast number of enterprises, the collection and harmonization of such data represent a formidable challenge that is both time-consuming and difficult for individual researchers to execute independently.

To overcome these constraints, the present study assembled a comprehensive dataset on ASEAN firms and conducted the following analyses. First, financial information from listed companies across nine ASEAN stock exchanges was collected and systematically examined. The available data primarily encompassed indicators such as assets, liabilities, and profitability. A standardized analytical framework based on these financial metrics was employed to facilitate cross-country comparisons.

Second, for unlisted large firms, major representative companies in each country were selected, and publicly available information—such as newspapers, magazines, promotional materials, and websites—was used, given the lack of systematic financial data. For SMEs, the study relied on existing research on their characteristics and expert interviews.

Third, to examine the potential for cooperation between Korean and ASEAN firms, the presence and activities of Japanese and Chinese firms operating in ASEAN were also reviewed. Although most of these foreign companies were unlisted and reliable statistical data were limited, publicly accessible information sources were used.

The results of the analysis are as follows:
First, listed firms in ASEAN are mainly concentrated in (a) the domestic service sector, (b) the manufacturing sector—particularly food production, and (c) export-oriented mining and resource development. Within manufacturing, food processing had the highest share, followed by chemicals, basic metals, and rubber/plastics—indicating a focus on agro-processing and natural resource–based industries.

Second, unlisted large firms in ASEAN mainly focus on (i) domestic- oriented businesses and (ii) resource development. Specifically, they dominate sectors such as retail, real estate, and food production on the domestic side, and energy and resource extraction (e.g., oil, coal, cobalt, lithium) on the export side. These firms often operate as monopolies or oligopolies with close political ties and family-based management, resulting in non-transparent governance structures.

Third, while definitions vary by country, ASEAN SMEs are generally small in scale and concentrated in the service sector. They face limited access to finance, weak technological foundations, insufficient use of digital technology, and low productivity.

Fourth, Japanese and Chinese firms in ASEAN show distinct characteristics. Japanese firms have been active since the early 1990s, building regional value chains in electronics and automotive sectors, while also investing in local infrastructure and human resource training. In contrast, Chinese firms entered later, mainly after the 2010s, driven by the Belt and Road Initiative and China’s efforts to mitigate trade frictions with the U.S. Their investments have focused on large-scale, resource-related infrastructure projects financed by Chinese banks.

Fifth, Korean firms in ASEAN exhibit the following characteristics. Their initial entry in the 1990s was led by labor-intensive industries that were declining in Korea, expanded in the 2000s, and more recently diversified into electronics and automotive manufacturing, sometimes leveraging local natural resources. Large Korean firms operate local plants mainly in manufacturing, importing intermediate goods from Korea and exporting finished products to third countries. Many Korean SMEs and mid-sized firms function as suppliers to these large Korean firms, providing components and intermediate goods through local operations. However, cooperation with Japanese, Chinese, or local firms for parts procurement remains limited.

Future changes in Korea–ASEAN supply chains will depend on the evolution of ASEAN firms’ industries and roles. If ASEAN firms continue their current business models without expanding into manufacturing, Korea’s regional supply chains and value chains will likely continue to rely primarily on Korean firms operating locally.

In this case, the Korean government should implement policies to improve the productivity of Korean firms in ASEAN. Rising wages, land rents, and transport costs could erode profitability and even drive firms to relocate to other regions. As Latin America, India, and Africa are not yet viable alternatives, Korea must pursue policies that enhance labor productivity and business efficiency in ASEAN.

The most practical approach is to increase local labor productivity and reduce costs such as logistics.
1. Education and training for ASEAN workers are needed to upgrade them from unskilled to skilled or semi-skilled labor with higher productivity.
2. Management consulting should be provided to improve the productivity of both Korean and local firms in ASEAN.
3. Cooperation between large and small Korean firms should be strengthened to enhance overall supply chain efficiency.
4. Infrastructure support is crucial to control rising logistics costs—through port and road construction, customs digitalization, and energy system improvements.
5. New industrial parks and free trade zones should be established to mitigate rent and logistics cost increases.

To effectively promote these policies, several urgent tasks must be addressed: First, the Korean government and the public must recognize that supporting Korean firms in ASEAN is part of building global supply chains and value chains that contribute directly to Korea’s economic growth. Many policymakers and citizens still perceive international trade as simply exporting domestically produced goods abroad, overlooking the complex cooperation among firms across borders. Public communication and education should emphasize that supporting Korean firms in ASEAN ultimately strengthens Korea’s own industrial base.

Second, Korea should actively utilize ODA (Official Development Assistance) funds in ASEAN. Currently, about 23.8% of Korea’s ODA goes to ASEAN countries—five of which (Indonesia, Vietnam, Cambodia, the Philippines, and Laos) rank among Korea’s top ten ODA recipients. If ODA projects are designed to include participation by Korean firms in ASEAN, the effects of value chain formation could be maximized.

Third, political and business exchanges between Korea and ASEAN should be expanded through regular forums and seminars to build mutual understanding and cooperation.

Finally, youth and academic exchanges between Korea and ASEAN should be encouraged, as young people will be the future leaders of business collaboration between the two regions.

The study examines methodologies for quantitatively analyzing the impact of global supply chain fragmentation and applies these approaches to scenarios involving critical minerals. It identifies two primary analytical approaches: microeconomic and macroeconomic.

Microeconomic methods provide detailed insights at the item or firm level but face challenges due to limited access to specific supply chain data. Macroeconomic methods, while suitable for industry- or national-level analysis, often rely on unrealistic assumptions when applied to item-level fragmentation. Despite the significant macroeconomic effects of disruptions in critical supply chains, existing item-level analysis techniques struggle to capture these impacts accurately. For instance, efforts to link item-level analysis with GDP using linear programming or inoperability input-output analysis often encounter limitations due to rigid assumptions about input-output structures. High-tech items, in particular, pose challenges due to their complex supply chain interdependencies and their significant influence on final production.

To address these issues, the study proposes an integrated methodology combining machine learning techniques for microeconomic analysis with the OECD METRO model for macroeconomic evaluation. This approach considers key issues and transmission channels identified in previous research. The study also reviews critical mineral management policies in major economies such as the United States, European Union, China, and Korea. The United States identifies critical minerals essential for economic and national security through legislative measures like the 2020 Energy Act and has implemented strategies to strengthen North American supply chain resilience. The European Union has updated its critical raw materials list every three years since 2008 and enacted the Critical Raw Materials Act in 2024 to expand production capacity and enhance international cooperation. China, despite lacking a clear legal definition of critical minerals, strengthens its resource management through export controls and cooperation with resource-rich countries. Korea designated 33 minerals as critical through its 2023 Critical Minerals Securing Strategy, prioritizing 10 strategic minerals essential for industries like electric vehicles and semiconductors. However, Korea’s reliance on imports for most critical minerals highlights its vulnerability.

The study conducts a vulnerability analysis of Korea’s critical mineral supply chains using indicators such as the Trade Specialization Index (TSI) and Herfindahl-Hirschman Index (HHI). It identifies high global supply chain concentration in minerals like cobalt, lithium, and neodymium, which are crucial for secondary batteries and electric vehicles. To assess geopolitical risks, it examines import trends from China across seven countries from 2017 to 2023. Sharp declines in imports of gallium, graphite, and rare earth elements suggest potential disruptions due to trade conflicts or export controls.

The study employs a Dual-Stage Attention-Based Recurrent Neural Network (DA-RNN) model to predict the impact of critical mineral fragmentation on Korea’s exports of key items like batteries and semiconductors under three scenarios involving germanium, graphite, and rare earth elements. The results show significant decreases in export values across all scenarios. For example, restrictions on germanium imports led to a 3.9% decline in battery exports, while rare earth element shortages caused a 10.8% drop.

Using the OECD METRO model, the study evaluates the macroeconomic impact of critical mineral fragmentation under two approaches: direct analysis of import disruptions (Approach 1) and integration of microeconomic results into macroeconomic simulations (Approach 2). The findings indicate that germanium fragmentation could reduce Korea’s real GDP by 0.15%, while graphite and rare earth element disruptions could lead to decreases of 0.14% and 0.89%, respectively.

Based on these findings, the study recommends strengthening supply chain monitoring systems by integrating fragmented platforms across government agencies and establishing a centralized control tower. It also suggests diversifying procurement strategies, promoting R&D for substitute materials, and supporting SMEs through digital-based supply chain management platforms. Additionally, it emphasizes harmonizing policies with major economies to prevent over-securitization and redundant investments while expanding international cooperation for joint mineral exploration and development projects.

Korea’s Official Development Assistance (ODA) has recently experienced rapid growth, surpassing 6 trillion KRW in 2025. However, according to the Ministry of Economy and Finance’s 2026 budget proposal, the ODA budget is projected to decrease by approximately 1.2 trillion KRW to 5.3 trillion KRW compared to the previous year. While budgetary adjustments due to the national fiscal situation are necessary, Korea’s ODA/GNI ratio remains at 0.21%, falling short of the OECD Development Assistance Committee (DAC) member average of 0.33%. Therefore, securing financial resources for development is crucial for Korea to remain a responsible contributor to the international community.

The global community has increasingly emphasized the role of public finance as a lever to mobilize private capital. Since 2023, the DAC requires members to report data on Private Sector Instruments (PSI) when submitting ODA statistics. PSI refers to public financial resources used for loans, guarantees, and equity injections aimed at inducing private investment in developing countries. This shift acknowledges the efforts of donor governments to steer private investment toward international development sectors that are otherwise less attractive to the private market. Major developed countries, such as the UK (BII), Germany (DEG), and France (Proparco), have long operated Development Finance Institutions (DFIs) to engage the private sector in international development. More recently, the US (DFC) and Canada (FinDev) have established their own DFIs. These institutions operate on the premise that the private sector is the engine of growth, contributing to the advancement of developing countries through strategic investments. DFIs use various financial instruments to facilitate private investment. They are typically subsidiaries of government ministries or public corporations, receiving initial capital from the government but sourcing subsequent operational and project funding through market borrowing or reinvestment of portfolio returns, rather than relying solely on government budgets. This operational model presents a new and challenging paradigm for Korea, whose international development cooperation has traditionally been confined to ODA.

The purpose of this study is to propose policy directions for Korea to reduce its dependence on government budget for international development and enhance the utilization of private sector resources.

Chapter 2: Reviews the theoretical background and DAC discussions, focusing on the importance of the private sector and the role of donor governments. It analyzes the concept and principles of Blended Finance and examines how PSI data is accounted for in ODA to understand the modernization of the ODA definition.

Chapter 3: Analyzes the status and characteristics of Mobilized Private Finance (MPF) and PSI using DAC CRS statistics. While MPF aggregates are available, details on investment sectors, regions, and mobilization types are derived from DAC reports. The analysis of PSI trends utilizes CRS PSI project-level statistics, noting that time-series analysis is limited due to the official collection starting only in 2023.

Chapter 4: Focuses on the DFI model of major donor countries. The DFIs examined in this chapter operate with the distinct goal of supporting private sector growth in developing countries. Their funding model—primarily relying on market borrowing rather than government budgets—offers critical lessons for Korea, which currently uses the national budget as its sole source of international development finance.

Chapter 5: Diagnoses Korea’s current limitations and proposes policy directions and institutional improvements based on the preceding analysis. It examines recent shifts by the Korea Eximbank and outlines strategies for sustainable international development cooperation, focusing on resource mobilization, financial cooperation methods, beneficiary targeting, and risk management.

Since the reform and opening-up period, China’s economy has experienced sustained rapid growth despite repeated cycles of expansion and contraction. Although growth rates have steadily declined since 2007, this slowdown remained stable and predictable for a considerable period, consistently exceeding government targets. Recently, however, China’s economic growth appears to have reached a new turning point. Mounting domestic pressures and external uncertainties have pushed its growth to around 5%, and as these challenges are increasingly perceived as structural rather than cyclical, assessments of China’s slowdown have shifted from “prospects” to “concerns.”

Currently, China faces a range of external uncertainties, including intensifying U.S.–China tensions and technological competition, escalating geopolitical conflicts, the global spread of protectionist industrial policies, and ongoing fragmentation of global supply chains. Domestically, the economy is experiencing multiple downward pressures, including weakened growth momentum due to the delayed recovery of the real estate sector, potential shocks stemming from risks such as local government debt, and persistently high youth unemployment. Nevertheless, concerns about a sharp economic downturn remain limited, as the Chinese government continues to implement various policy measures to foster a new phase of economic growth. These efforts appear broadly aligned with addressing the structural causes of the slowdown. China’s key growth strategies—such as the “dual circulation strategy,” “new quality productive forces,” and “Chinese-style modernization”—combined with strong policy support, are driving rapid industrial transformation and technological innovation, thereby laying the foundation for new growth momentum.

Overall, China’s economy is currently influenced by a complex mix of positive and negative factors. However, it remains difficult to determine which factors will ultimately dominate. Given South Korea’s extensive economic ties with China across multiple sectors, a careful assessment of China’s growth outlook and a recalibration of cooperation strategies have become increasingly important. Accordingly, this report analyzes structural changes from both supply-side (Chapter 2) and demand-side (Chapter 3) perspectives, conducts univariate time-series analysis, and develops a GVAR (Global Vector Autoregression) model to examine structural changes in China’s economic growth and to generate medium- to long-term growth forecasts (Chapter 4), and derives policy implications for South Korea (Chapter 5).

In Chapter 2, the supply-side analysis (capital, labor, and total factor productivity) examines changes in each factor, key growth challenges, and government responses, followed by an evaluation of their implications.

First, China’s capital-driven growth model became increasingly unsustainable after 2006 due to declining returns on capital and rising ICOR. In response, the government implemented supply-side structural reforms, industrial policies (e.g., Made in China 2025), and SOE reforms. While policy support for strategic industries such as solar energy, electric vehicles, and batteries rapidly enhanced competitiveness, it also led to concerns about overcapacity. Maintaining a balance between state-led capital expansion and fair competition with private enterprises remains a critical issue.

Second, China’s working-age population is declining, with fertility rates around 1.0 and the elderly population reaching 14.2% in 2023. Despite continued investment in education and R&D, mismatches between urban concentration and labor demand have resulted in the coexistence of high youth unemployment and shortages of skilled labor in high-tech industries. Rising labor costs and regional disparities further constrain productivity growth.

Third, TFP has declined since 2008 due to inefficient resource allocation, institutional rigidities, and weak commercialization of innovation. Although China has achieved strong quantitative performance in R&D investment and patent output, persistent issues such as overinvestment and the weak linkage between innovation and profitability continue to limit productivity gains.

Chapter 3 focuses on demand-side factors (investment, consumption, net exports, and government spending) to analyze growth challenges, policy responses, and their implications.

First, the traditional investment-driven growth model—centered on fixed asset investment and real estate—is weakening due to prolonged market stagnation, rising corporate debt, and subdued private investment. Although the government is redirecting investment toward advanced manufacturing and new infrastructure, concerns about duplicative investments led by SOEs and policy inconsistency continue to undermine private sector confidence.

Second, while the contribution of consumption to GDP has been increasing, recovery has remained sluggish since 2020 due to stagnant incomes and weak consumer sentiment. Government policies have largely relied on short-term subsidies, rather than addressing the structural reforms required for sustained consumption growth.

Third, China is prioritizing improvements in the quality of trade over its volume, expanding high value-added goods, digital trade, and services trade through participation in frameworks such as CPTPP and RCEP. However, the contribution of net exports to growth remains limited and volatile.

Fourth, since 2008, fiscal expansion has played a key role in supporting economic activity, with increased spending on healthcare and social welfare following the pandemic. However, declining real estate-related revenues and rising hidden local government debt—particularly through LGFVs—pose risks to fiscal sustainability. The central government is attempting to balance the need for economic stimulus with fiscal discipline through measures such as ultra- long-term bonds and debt restructuring.

Chapter 4 utilizes time-series data from Q3 1979 to Q1 2025 for univariate analysis and applies a GVAR model covering 34 countries to conduct a multi-layered analysis of structural characteristics, medium- to long-term prospects, and global spillover effects of China’s real GDP growth.

The three downward shifts identified in the structural break analysis broadly correspond to periods of policy regime change (the 2012 “New Normal,” the 2016 supply-side reforms) and external shocks (the 2019 U.S.–China trade dispute). Volatility analysis suggests that China’s economy may have transitioned from a high-growth, high-volatility regime to a medium-growth, low-volatility regime after 2012. However, the sharp contraction of -10.50% during the 2020 pandemic highlights continued vulnerability to external shocks. Under the baseline scenario of the GVAR model, projected average growth rates for five-year periods are 4.57% for 2025–2030, 2.84% for 2030–2035, 2.06% for 2035–2040, 2.22% for 2040–2045, and 1.01% for 2045–2050, indicating a clear long-term slowdown trend. A key implication of these projections is the likely decoupling between demand and supply after the mid-2030s. While investment-driven expansion of supply capacity may generate short-term demand, it could also lead to a self-reinforcing cycle of overcapacity in the medium to long term, with demand constraints emerging as a significant drag on growth.

In the global spillover analysis, South Korea exhibits a persistent GDP response of -0.22% to China’s demand shocks, indicating relatively high sensitivity compared to other countries. Inflation responses vary across countries, and some results for demand and supply components are inconsistent with theoretical expectations or GDP responses, suggesting the need for cautious interpretation.

Finally, Chapter 5 presents the conclusions and policy implications for South Korea. China’s medium- to long-term growth trajectory reflects an ongoing effort to overcome structural constraints on both the supply and demand sides, while transitioning toward a more quality-oriented growth model driven by high-efficiency industrial development. This transformation represents not merely cyclical adjustment but a broader restructuring of industrial policy, technological strategy, and institutional frameworks. South Korea faces a complex relationship with China in which cooperation and competition coexist, and must respond carefully to changes in China’s growth structure and strategic direction. Based on these findings, the report derives the following implications for South Korea:

1) Responding to Intensifying Industrial Competition and Mitigating Restructuring Risks
China’s structural economic changes are driving transformations in industrial structures and shifts in productivity paradigms. The country is pursuing strong industrial policies centered on high-tech industries to expand “new quality productive forces” and achieve technological self-reliance and self-strengthening, which acts as a structural pressure factor on South Korea’s economy. Given the policy directions of both countries, competition in high-tech industries is likely to intensify further, particularly in sectors where both countries are strengthening technological capabilities, such as semiconductors, AI, and secondary batteries. In response, South Korea needs to support firms’ high-tech development and expand R&D investment. In addition to capital support to enhance firms’ innovation capabilities, it is also necessary to assess whether excessive regulations hinder the commercialization of innovative technologies, while simultaneously promoting regulatory sandbox programs and developing industrialization platforms.
In addition, in response to China’s industrial upgrading and technological advancement, South Korea needs to strengthen its frameworks for standards, patents, and intellectual property rights. This is because China’s growing technological capabilities are expanding competition beyond industrial production to include standards, patents, and IP systems that shape global norms and trends. Accordingly, South Korea should reinforce national-level response systems centered on technology standardization and patent strategy institutions, and establish mechanisms that incorporate international standardization from the early stages of R&D. Furthermore, as competition for technological self-reliance intensifies, the importance of technology security is also increasing, necessitating the development of comprehensive national systems for technology protection and industrial security.
Moreover, attention should be paid to the possibility that domestic overinvestment resulting from China’s strategic industry expansion may lead to global oversupply, thereby directly affecting the profitability of South Korea’s high-tech industries. South Korea should pursue strategies such as increasing value-added production in advanced materials and components and strengthening brand loyalty, thereby facilitating a transition toward a technology-driven export model that moves beyond price competition. In response to intensifying subsidy competition, South Korea may also consider regulatory approaches through international cooperation channels based on WTO norms, while establishing monitoring systems to track the impact of China’s excess supply on global market prices.

2) Institutionalizing Growth Opportunities and Upgrading Industrial Cooperation
China is pursuing a transformation toward consumption-driven growth alongside industrial upgrading, which is likely to generate new markets and expand demand in related industries. In addition, increased fiscal spending by the Chinese government in social service sectors such as welfare, healthcare, and education is expected to create new opportunities for cooperation in South Korea’s service industries.
In particular, China’s demographic changes present significant opportunities for South Korea. The expansion of aging and welfare-related demand is driving rapid growth in China’s healthcare and silver industries. South Korea can consider entering these markets by leveraging its comparative advantages in medical services, smart healthcare devices, and health data management solutions. Furthermore, based on Korea’s experience in health insurance and long-term care systems, expansion into integrated healthcare and elderly care industries can be pursued through public–private partnership (PPP) projects with Chinese local governments and state-owned enterprises.
As China’s middle class is expected to expand due to policies aimed at stabilizing employment and increasing household income, opportunities also arise for cooperation aligned with evolving consumption patterns. As consumption upgrading continues, demand for high value-added sectors such as premium consumer goods and cultural content is expected to increase. Given that China’s younger consumer groups (MZ generation) emphasize “quality, storytelling, and experience,” South Korea can expand its consumer base by adopting tailored marketing and export strategies linked to Chinese digital consumption platforms, as well as brand premiumization strategies based on K-culture. However, it is also necessary to strengthen preemptive institutional cooperation between the Korean and Chinese governments to address issues such as brand IP infringement and design patent protection that may arise in the process of entering the Chinese market.

3) Building Buffer Systems for Uncertainty and Macroeconomic Volatility
China’s medium- to long-term economic slowdown and policy uncertainty are likely to have direct implications for South Korea’s economic stability. In particular, the anticipated weakening of growth potential after 2040 and risks associated with local government finances may pose practical risks for Korean firms participating in China-related projects and PPP initiatives. Given that China’s industrial policies are often strongly implemented at the local government level, the Korean government and relevant agencies supporting overseas business expansion should comprehensively assess policy conditions across regions and provide targeted support for Korean firms entering the Chinese market.
In addition, as China actively promotes its own standards in areas such as technology standards, intellectual property rights, and FTA frameworks while expanding its influence in the international standard-setting system, South Korea should strengthen its capacity for standard diplomacy and institutionalize channels for technology standard consultations within multilateral cooperation frameworks, including Korea–China–ASEAN.
Furthermore, if China’s structural slowdown materializes, its impact could significantly spill over into South Korea’s exports, investment, and financial markets. In response, South Korea should establish a medium- to long-term, scenario-based policy management framework to reduce dependence on China, while simultaneously developing financial risk mitigation mechanisms to address supply chain instability and increased volatility in the RMB exchange rate. Accordingly, South Korea should adopt a strategic approach across three dimensions—policy, market, and institutional—by pursuing proactive risk management for China’s economic slowdown, strengthening international cooperation safety nets, and enhancing the resilience of its domestic industrial system.

As the world undergoes a demographic transition characterized by simultaneous low fertility and population aging, Korea is experiencing this shift at a particularly rapid pace. These demographic changes are triggering extensive structural transformations across interest rates, growth, industrial structure, government finances, and external balances. This report quantitatively evaluates the impact of global demographic changes on five pillars of the Korean economy—neutral interest rates, productivity, industry and trade, public finance, and external sector—and presents integrated policy responses.

Chapter 2 demonstrates through a cross-country state-space model that Korea's long-term neutral interest rate has been structurally declining. Productivity slowdown, demographic transition (around 2015), and global safe asset supply-demand dynamics and their spillover channels have been identified as the primary determinants, with Korea's neutral rate continuing its downward trend even after COVID-19. Incorporating future domestic and global demographic projections, the neutral rate is likely to face additional downward pressure in the medium to long term.

Chapter 3 utilizes growth accounting and an OLG model to analyze how population aging reduces total factor productivity and output through decreased intangible asset investment efficiency. The analysis shows that a 10 percentage point decline in efficiency reduces TFP by 2%, while a 20 percentage point decline results in a 10% decrease in TFP and 6% in gross output, with even greater impacts at a 30 percentage point decline. However, low international interest rates in an open economy partially buffer these shocks through capital deepening, reducing the impact from 13% to 4% for TFP and from 14% to 4% for gross output even under extreme assumptions.

Chapter 4 demonstrates how the interaction between task skill intensity and age structure reshapes comparative advantages in trade. In a counterfactual scenario where only Korea ages, competitiveness risks increase in labor-intensive manufacturing. However, when considering simultaneous global aging, relative strengths may emerge in cognitive and technology-intensive manufacturing. The analysis confirms that sectors with higher shares of young and college-educated workers and greater capital intensity in equipment and intellectual property show significant correlation with export shares.

Chapter 5 shows that demographic changes alone will rapidly increase mandatory spending and reduce fiscal space, concluding that ensuring fiscal sustainability through tax increases alone is infeasible. In an open economy, the possibility of capital flight following capital income tax increases must also be considered, necessitating a medium- to long-term framework centered on expenditure efficiency, structural adjustment, and fiscal discipline.

Chapter 6 confirms through panel and polynomial age structure models that domestic demographics have nonlinear effects on the current account through savings-investment balance. Considering only domestic demographics, Korea's current account is expected to turn to deficit in 2041 with subsequent widening. However, when incorporating global demographic structures, international factors partially offset domestic effects, delaying the deficit transition to 2059—an 18-year postponement. While the trade balance is sensitive to demographics, the income balance depends on net foreign assets and returns, making income balance strengthening a crucial buffer mechanism.

Based on these analyses, the following policy implications emerge. First, in preparation for declining neutral rates, legal and institutional frameworks for unconventional monetary tools in zero lower bound environments should be established, range-based neutral rate estimation with continuous updates should be implemented, and policy coordination with fiscal and macroprudential measures should be strengthened. Second, as expanding intangible asset investment and improving efficiency are key to mitigating aging impacts, it is necessary to establish neutrality between tangible and intangible assets in taxation, accounting, and finance, expand diffusion infrastructure such as data and standards along with risk-sharing mechanisms, and strengthen lifelong learning and transition support. Third, industrial and trade strategies require enhancing competitiveness in cognitive and technology-intensive industries, expanding service tradability, and implementing tailored responses based on sector-specific value chain characteristics. Fourth, public finance must secure sustainability through expenditure efficiency, structural reform, and tax equity. Finally, external strategies should shift toward strengthening the income balance through increasing net foreign asset scale and returns to offset trade balance weakening.

Amid complex global crises and the intensifying U.S.–China rivalry, the world economy has been shifting from an efficient system based on global division of labor toward a structure prioritizing supply chain resilience. In response, Korea has been emphasizing diversification of its economic partnership, and expanding its production bases beyond China to other regions. Southeast Asia has emerged as one of the major economic partners in this strategy, yet Korean investment remains heavily concentrated in Vietnam. As regional economies continue to advance, Korean companies are increasingly compelled to seek new alternative manufacturing bases both within and beyond the region. In this context, Africa, endowed with abundant human and natural resources and strategically positioned as a gateway to U.S. and European markets, has gained prominence as a potential partner for industrial cooperation.

The process of industrialization drives structural transformation from agriculture to manufacturing and services, and serves as a key engine for economic diversification, job creation, and technological advancement, ultimately fostering a high value-added economic structure. Both Southeast Asia and Africa have been striving to transform their economic structures through development of the manufacturing sector. While Southeast Asia has achieved significant economic growth through export-oriented strategies, Africa’s production base continues to experience sluggish growth. Measured by Manufacturing Value Added (MVA) per capita, countries such as Singapore, Brunei, and Malaysia exhibit advanced levels of industrialization, and Indonesia, Vietnam, and Thailand also are showing steady progress. In contrast, many African countries still remain in the early stage of industrial transition.

A comparison of their industrialization trajectories reveals that Southeast Asia has built a stable foundation for growth through export-led manufacturing development, while Africa has faced structural challenges stemming from underdeveloped infrastructure and limited integration into global production networks. In the early 1990s, both regions accounted for similar shares of global manufacturing value added. Since then, Southeast Asia’s share has steadily expanded to 3.5% in 2024, while Africa’s has stagnated at around 1.5%. From a trade perspective, Southeast Asia has maintained trade surpluses driven by increased exports of manufactured goods. In contrast, Africa’s persistent reliance on imports of manufactured products has resulted in chronic trade deficits. As a result, Southeast Asia has achieved greater export diversification, higher economic complexity, and stronger backward participation in global value chains (GVCs). Africa, by comparison, remains predominantly engaged in forward participation through the exports of unprocessed or semi-processed materials. These structural disparities suggest that Africa must promote industrialization and manufacturing development to enhance value addition and achieve a more resilient and diversified export structure for sustainable growth. However, the resurgence of protectionism marked by the United States’ reciprocal tariff measures in 2025 poses risks to Southeast Asia’s momentum of industrial transformation. Similarly, Africa could be adversely affected by the expiration of the African Growth and Opportunity Act (AGOA) and the enforcement of new U.S. reciprocal and universal tariffs, particularly in light industries such as apparel and textiles.

The export-oriented industrialization model that underpinned Southeast Asia’s growth could be relevant for African countries, as the current global dynamics have become increasingly favorable to the continent. Demographic changes, rapid urbanization and expansion of the middle class, regional efforts for economic integration through the Africa Continental Free Trade Area (AfCFTA), and advances in digital technology create new opportunities for industrial development. Nonetheless, Africa faces a range of internal and external challenges that constrain industrial progress. Domestic obstacles include macroeconomic instability, poor infrastructure, weak institutional and administrative capacity, unfavorable business environments, political instability, and corruption. Externally, rising protectionism and decline in development assistance further complicate the industrial landscape. Moreover, the imperative to pursue green industrialization to mitigate climate change adds another layer of complexity, demanding substantial financial and technical support for green technology innovation and robust regulatory frameworks.

Despite their different stages of development, both Southeast Asia and Africa share common policy goals in their industrialization strategies: transforming economic structures, creating high value-added industries, deepening regional integration, diversifying industrial bases, fostering sustainable growth, and strengthening supply chain resilience. ASEAN seeks to become a single market and an advanced manufacturing hub under the ASEAN Community Vision 2045 and the AEC Strategic Plan 2026-2030. Meanwhile, Africa through the African Union’s Agenda 2063 and the AfCFTA aims to enhance regional integration and expand its manufacturing base. On the other hand, a strategic difference exists. Southeast Asia is transitioning toward high-tech industries, having adopted distinct strategies, such as Vietnam’s semiconductor initiative, Thailand’s “Thailand 4.0,” and Indonesia’s promotion of downstream industry, focusing on digital transformation, green growth, and high-tech industries like semiconductors and electric vehicles. In contrast, African countries, in the foundational stage of industrialization, are prioritizing labor-intensive sectors such as agro-processing, and textiles and apparels while formulating country-specific industrial strategies suited to their respective conditions. In Southeast Asia, Japan has leveraged ASEAN’s institutional frameworks to establish a region-wide production network targeting its domestic market, promoting localization of value chains through public–private human capital development programs. China, in turn, has advanced vertical integration in emerging industries such as electric vehicles, batteries, and solar energy by utilizing policy finance, and selectively transferring core technologies.

Korea, meanwhile, has established production bases primarily in Vietnam and Indonesia, but its operations are mainly limited to labor-intensive activities such as assembly and testing. This structure has led to limited value addition within the region and a high reliance on Chinese suppliers for critical components and materials. To address these challenges, Korea should refer to Japan’s division-based supply chain model to expand local parts production and strengthen local partnerships and supply chains. Furthermore, Korea needs to proactively invest in emerging sectors, such as digital, green transition, and bio-industries, and establish a sustainable growth framework grounded in ESG management. Enhancing localization capacity also requires comprehensive technology transfer packages covering R&D, technology diffusion, and standardization, alongside joint public–private programs to develop local human resources.

Japan, China, and Korea have each adopted distinct approaches to cooperate with Africa. Japan, through the Tokyo International Conference on African Development (TICAD) launched in 1993, has evolved from an aid-focused model to one emphasizing private investment, supporting SMEs, human resource development, and institutional capacity building. China, through the Forum on China–Africa Cooperation (FOCAC) since 2000 and the Belt and Road Initiative (BRI) since 2013, has promoted an integrated industrial cooperation model centered on infrastructure development. Notably, it has facilitated the establishment of industrial parks through intergovernmental partnership to support Chinese manufacturers’ local expansion.

Following the Korea–Africa Summit held in 2024, Korea has established a comprehensive foundation for cooperation in trade and investment, critical minerals, and infrastructure. However, Korea’s engagement in Africa still remains concentrated on development aid, with private participation dominated by large conglomerates and limited SME involvement. Moving forward, Korea should draw lessons from Japan’s public–private partnership model and China’s comprehensive support measures for private-sector expansion, to create a long-term and predictable cooperation framework for industrial cooperation with Africa. Strengthened institutional support will also be crucial to boost SME participation and enhance local adaptation capabilities in African markets.

Industrialization rests on three pillars: infrastructure, skilled labor, and technology transfer. Countries seeking to industrialize must tailor their mix of investment, technology adoption, and innovation policies according to their income levels and stages of industrial development. For Southeast Asia, which already possesses a certain level of basic infrastructure, the priorities lie in enhancing industrial competitiveness through skilled labor development, technology absorption, and innovation ecosystems, while ensuring industrial stability. In contrast, Africa must first focus on establishing the foundational elements of industrialization by expanding essential infrastructure such as transportation and electricity, and effectively implementing industrialization policies that strengthen participation in GVCs. To attract foreign direct investment (FDI) in manufacturing, African countries should develop mechanisms for foreign investment and technology cooperation in priority sectors and promote industrial clustering through building special economic zones (SEZs). Strengthening technological capabilities will also be needed for improving industrial competitiveness.

Building on lessons from Japan and China, Korea should expand its manufacturing footprint in Southeast Asia and Africa as part of its broader strategy to diversify economic cooperation. In Southeast Asia, Korea should reduce its excessive concentration in Vietnam by adopting a “Vietnam+1” strategy that incorporates Indonesia and Cambodia. Leveraging incentives from localization in sectors such as electric vehicles and batteries would be important to tap into the region’s growing domestic market. Directions of cooperation should be aligned with ASEAN’s efforts for regional integration so as to develop the regional value chain (RVC) and promote mutually beneficial partnerships through technology transfer and human capital development.

In Africa, Korea needs to adopt a gradual and long-term cooperation strategy. Given the continent’s low level of regional integration, Korea should pursue broad and continent-wide partnerships while concurrently directing practical efforts toward bilateral and country-specific cooperation models that could deliver measurable outcomes. In the manufacturing sector, Korean companies can follow a two-track approach: initially establishing export-oriented production bases and gradually expanding toward targeting the local markets. In the short term, North Africa can serve as a strategic production hub for exports to Europe.

Considering Korea’s limited networks and experience in Africa, it would be essential to advance triangular cooperation with partners such as Europe, the Middle East, or India, the regions with strong ties with Africa. To facilitate more private participation in African manufacturing, Korea should establish an integrated support framework that links ODA and other financing measures while expanding channels and projects for private-public partnership to boost participation of SMEs. In parallel, Korea must develop specialized systems to provide market intelligence, mitigate investment risks, and foster local partnerships, thereby creating a sustainable ecosystem for industrial cooperation.

Recent demographic and technological changes have deepened labor market imbalances – disparity between labor supply and demand - across industries, regions, and skill levels. Although international migration is often proposed as an alternative to mitigate these imbalances, assessing the economic and social impacts of immigrant inflows remains challenging. This report examines whether the influx of foreign labor can help ease Korea’s labor shortages by (1) reviewing the immigration policies of Korea and other major countries (Chs. 2-3) , (2) conducting empirical analyses on the effect of labor mobility (Chs. 4-6), and (3) proposing policy options for Korea (Ch. 7).

Chapter 2 defines labor imbalance as a mismatch between labor demand and supply in specific periods or sectors, driven not only by short-term wage rigidity but also by structural change such as demographic decline and industrial transition. Previous studies project widening labor shortages over the next decade in Korea, particularly in health and social care, ICT, logistics, food services, and agriculture. Korea’s immigration policy is gradually shifting from a short-term rotational model toward longer-term residence, yet restrictions on low-skilled labor, weak competitiveness in attracting skilled workers, and public concerns about social integration remain major obstacles.

Chapter 3 compares labor mobility trends in the EU, the US, Japan, Vietnam and India. EU’s Free movement enables labor exchange that eases shortages in manufacturing and construction. The EU uses instruments such as the Single Permit Directive, Seasonal Workers Directive, and Blue Card to attract various types of labor. The US experienced persistent shortages in low-wage sectors, leading to the establishment of short-term labor visas such as H-1B, H-2A, and H-2B, with undocumented immigrants filling remaining gaps.

Recent political pressures have reduced both unauthorized and legal entries, raising costs and disrupting production in immigrant-dependent industries. Facing rapid aging, Japan has strengthened both low-skilled and high-skilled labor channels. Japan recently introduced a new “Skilled Labor” system in 2024 and expanded highly skilled visas such as J-SKIP and J-FIND. Vietnam, which sends a large number of workers to Korea, maintains a state-led labor export system, characterized by stricter regulation and cost controls to reduce illegal migration. India also shows strong incentives for overseas migration, as low-skilled workers mainly migrate to the Middle East while high-skilled professionals move to advanced economies. The Indian government is expanding bilateral mobility agreements and diaspora engagement.

Chapter 4, then, analyzes the impact of increasing immigrant shares within the EU on labor market efficiency using indicators such as labor market tightness, vacancy rates, unemployment, and labor market slack. The EU has a unique background of significantly increased immigration inflows during its expansion process. 2SLS analyses report that higher immigrant share reduces labor market tightness by decreasing vacancies and increasing labor. Notably, short-term effects showed a significant increase in employment for low-skilled immigrants, while the influx of highly skilled immigrants drives employment expansion in the service sector in the long term.

Chapter 5 analyzes the effects of expanding Korea’s Employment Permit System. The results show that regions with increased foreign labor experienced a reduction in labor shortages with a lag of about one year. However, no improvement in labor productivity was observed from the influx of foreign workers, potentially because of the lack of skills among new foreign workers and the delayed exit of low-productivity businesses from the market. It suggests that it is necessary to improve the employment permit system by allowing longer-term stay rather than simply increasing new foreign labor.

Chapter 6 represents the original contribution of this report by analyzing the link between trade and migration. This chapter examines the effects of the trade-migration linkage by analyzing the operational effects of Mode 4 (movement of natural persons) in service trade agreements. According to this chapter’s empirical analysis, while simple Mobility provisions alone show no clear trade-enhancing effect, combining them with illegal migration control provisions yields an expansionary effect on service trade. Specifically, concessions for intra-corporate transferees and trainees show positive impacts, whereas those for CSS or business visitors sometimes show negative effects. This indicates that Mode 4 concessions become less effective when not linked to visa systems or when conditions are overly restrictive. Subsequently, an investigation of Mode 4 concession best practices revealed a growing trend toward opening that increasingly includes CSS and IP.

Based on these findings, Chapter 7 proposes three policy directions: (1) streamline foreign labor inflow and strengthen employment management by improving data, simplifying residency and workplace rules, accelerating matching processes, and enhancing oversight; (2) link immigration and trade by setting targets for professional inflows and aligning Mode 4 concessions with Korea’s visa system, including for care workers; and (3) deepen cooperation with sending countries to support skill development and coordinate labor supply. Although the report provides a comprehensive review and broad policy direction, further research is needed on immigration governance, strategies for attracting high-skilled talent, effect of changing global trends in migration, management of illegal stays, and a full cost–benefit analysis of immigration.

In response to the unprecedented crisis triggered by the COVID- 19 pandemic in 2020, governments and central banks around the world injected massive fiscal stimulus and liquidity support. These bold policy measures succeeded in averting the worst recession, but as a consequence, the world is now facing historically high levels of debt. According to the Institute of International Finance, global debt surpassed USD 324 trillion in the first quarter of 2025-roughly three times the size of global GDP and “[a level unseen] since the Napoleonic Wars.” Moreover, global debt increased by USD 7.5 trillion during the same quarter, more than four times the quarterly average increase of USD 1.7 trillion since late 2022, indicating that the global debt problem has worsened rather than eased after the pandemic. Against this backdrop, this report reassesses the structure of the post-pandemic high-debt environment, analyzes vulnerabilities across advanced economies, emerging markets, and Korea, and derives policy implications for proactive responses.

To begin, Chapter 2 analyzes external debt crises in emerging market economies using the Threshold-augmented Global Vector AutoRegression (TGVAR) model developed by Chudik et al. (2021). In this model, the dependent variable is GDP growth, while one of the main explanatory variables is the growth rate of the external- debt-to-GDP ratio. A threshold variable captures the non-linear effect: When the growth rate of external debt exceeds its threshold value, an additional constant term affects GDP growth. The model is estimated using quarterly data for 14 emerging economies-including China, India, and Brazil-from 1985Q1 to 2024Q4. The estimation results are as follows.

Countries such as India (1.46%), China (3.14%), Saudi Arabia (3.61%), South Africa (4.39%), and Brazil (4.59%) show relatively low thresholds (below 5%), while Peru (19.19%), Thailand (10.71%), Mexico (10.13%), Indonesia (8.82%), and Malaysia (8.84%) exhibit much higher ones. Interestingly, the coefficient on the non-linear term (the indicator that takes 1 when external-debt growth exceeds the threshold) is not uniformly negative; it is positive for Brazil, China, Mexico, Saudi Arabia, and Turkiye. This implies that the non-linear growth effects of rapid external-debt accumulation cannot be explained merely by differences in size or development stage among countries.

Chapter 3 turns to advanced economies and examines the sustainability of public debt. Using the debt dynamics equation, we decompose changes in the government-debt-to-GDP ratio into contributions from the interest rate, growth rate, and primary balance. The results show that advanced economies’ government-debt ratios have risen by an average of 2.3 percentage points annually since 2008, driven by expansionary fiscal responses to successive crises and persistent fiscal deficits, and are projected to continue rising by 0.8 percentage points per year until 2030. To assess the growth implications of sustained high public debt, the analysis applies the Panel Threshold-AutoRegressive Distributed Lags (Panel Threshold-ARDL) and Panel Threshold-Distributed Lags (Panel Threshold-DL) models of Chudik et al. (2017), where the threshold variable is the level of government-debt-to-GDP itself.

The estimated threshold for advanced economies lies between 78% and 89% of GDP, broadly consistent with earlier literature (80–100%). When public debt exceeds this threshold, GDP declines by 0.013–0.020 percentage points on average, and a 1-percentage- point rise in the debt-to-GDP ratio reduces GDP in the long run by 0.151–0.210 percentage points. A time-series analysis shows that since the 2008 global financial crisis, the debt threshold rose sharply-from 32–36% of GDP before the crisis to 87–89% afterward- while the long-run cumulative impact of public debt on growth deepened from –0.059~–0.049 to –0.137~–0.091 percentage points.

Finally, Chapter 4 investigates how private debt affects Korea’s real economy and financial stability.

For real effects, a state-dependent local projection model incorporating a smooth-transition function is employed. The transition function depends on the gap between the actual private- debt-to-GDP ratio and its long-term trend. The results show that private-debt growth exerts a statistically significant negative impact on GDP when the debt ratio is in a high regime, with the adverse effect persisting for about two quarters. Specifically, household- debt growth boosts GDP in low-debt regimes with a lag-likely reflecting a liquidity channel through which credit expansion supports consumption. In contrast, when the debt ratio is high, household-debt growth no longer has a significant effect on GDP, while corporate-debt growth is insignificant in both regimes.

To analyze the effect on financial stability, a regime-switching vector autoregression (VAR) model is estimated using a financial stress index from FnGuide. In Regime 1 (which is highly consistent with periods of a declining output gap-namely, phases of economic slowdown or contraction), a shock to private-debt growth initially raises financial stress but subsequently eases it, whereas no significant effect is found in the alternative regime. Disaggregating by borrower type, corporate-debt growth generally amplifies financial stress, while household-debt growth mitigates it.

These findings yield several policy implications for Korea.

First, private-debt accumulation is not inherently harmful; depending on the macroeconomic environment, it can support both economic recovery and financial stability. Hence, policy should go beyond aggregate restrictions and account for cyclical and sectoral differences.

Second, policy responses should differentiate between household and corporate debt. Household debt shows positive effects on growth and dampens financial stress; thus, encouraging long-term, fixed-rate, amortizing loans and targeted support for vulnerable borrowers can preserve its stabilizing role. In contrast, corporate- debt expansion-especially during downturns-tends to intensify financial stress. Therefore, authorities should closely monitor the pace and composition of credit growth by firm and industry, prepare liquidity backstops for the corporate bond market, and manage refinancing and maturity risks.

Third, macroprudential surveillance should move from static, indicator-based early-warning systems to dynamic monitoring frameworks that capture interactions between macroeconomic conditions and debt structures. The econometric analyses demonstrate that the impact of private debt depends on debt levels, business- cycle phases, and interest-rate conditions, underscoring the need for integrated, system-wide approaches to risk assessment.

Fourth, while Korea’s government-debt-to-GDP ratio (47.2%) appears well below the estimated threshold range of 78–89%, this should not lead to complacency. The threshold is derived as a cross-country average and may vary by nation and period; moreover, estimation results are not immune to issues such as reverse causality and omitted variables. Thus, the threshold should be interpreted as a reference point, not a rigid limit, in fiscal policy design.

Finally, the analysis of emerging-market external-debt vulnerabilities also holds lessons for Korea. The finding that a debt-growth shock in Thailand-the epicenter of the 1997 Asian financial crisis-has a far greater spillover effect on Indonesia and Malaysia than on the U.S. highlights the importance of regional financial-stability cooperation. As a key member of ASEAN+3, Korea should remain committed to strengthening the Chiang Mai Initiative Multilateralisation (CMIM) liquidity facility and enhancing the ASEAN+3 Macroeconomic Research Office (AMRO) surveillance capacity.

Amid growing geoeconomic uncertainty and intensifying U.S.–China competition, the Bay of Bengal region has emerged as a new focal point for global production networks. Seeking alternative manufacturing bases beyond China, multinational firms are increasingly investing in coastal areas of India, Bangladesh, and Malaysia, regions that are rapidly integrating into Asia’s evolving “flying geese industrialization” pattern.

India’s coastal states exhibit distinct industrial profiles: Andhra Pradesh specializes in food processing, Tamil Nadu serves as a hub for automotive and electronics manufacturing, and Odisha and West Bengal host resource-based industries supported by abundant mineral and energy reserves. Bangladesh’s coastal zones are anchored in textiles and ship recycling while expanding into pharmaceuticals. Malaysia’s western region remains a critical node in the global semiconductor value chain.

Central and state governments across the region are implementing proactive industrial policies characterized by clear target sectors, investment incentives, institutional coordination, and detailed implementation roadmaps. Their two-track approach promotes both comparative advantage–conforming industries that build on existing strengths and comparative advantage–defying sectors that aim to move up the global value chain. Industrial park development is at the core of this strategy, offering concentrated, infrastructure-ready production bases designed to maximize agglomeration effects and attract investment.

The study identifies over 1,400 industrial clusters across the Bay of Bengal, with expansion occurring through two major patterns: (1) hub-and-spoke growth around established clusters and (2) corridor-based development integrating multimodal logistics infrastructure. While most parks are government-led, an increasing number involve private developers, often supported through public–private partnerships. Cluster ecosystems typically involve a network of industrial associations, resident firms, research institutions, and local organizations.

Although the region’s geopolitical landscape remains relatively calm, the Bay of Bengal nevertheless faces its own regional risks. Military and infrastructure competition among global and regional powers, illegal marine activities, and undersea cables are among the risk factors that could destabilize the Bay of Bengal’s value chain and production bases.

The report concludes with three key policy implications for the Korean government. First, provide Korea’s small and medium enterprises with detailed and practical information on the region’s industrial parks while offering financial and administrative support to those relocating production bases to the region in pursuit of greater economic security. Second, step up the monitoring of regional risks as the Bay of Bengal becomes an increasingly integral part of Korean companies’ global value chains. In addition to the geopolitical and infrastructural risks highlighted in the report, potential risks related to climate change could also have significant implications for regional supply chains, warranting the establishment of appropriate contingency plans in advance. Finally, mobilize Korea’s development financing to support the creation and management of industrial parks in the region. Korea’s development finance policy increasingly emphasizes scale, visibility, strategic value, and development impact, criteria that industrial park projects meet effectively. Supporting such projects directly or indirectly would not only strengthen local development outcomes but also provide enabling environments for Korean companies seeking to expand their presence in the Bay of Bengal.