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  • 미국의 스위스 환율조작국 지정 원인 분석 및 평가
    On the U.S. 2020 Designation of Switzerland a Currency Manipulator

       In December 2020, the U.S. Treasury designated Switzerland, together with Vietnam, currency manipulators in its biannual report Macroeconomic Foreign Exchange Policies of Major Trading Partners of the United States to..

    Dong-Hee Joe et al. Date 2021.11.12

    Economic relations, Exchange rate United States of America Europe
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       In December 2020, the U.S. Treasury designated Switzerland, together with Vietnam, currency manipulators in its biannual report Macroeconomic Foreign Exchange Policies of Major Trading Partners of the United States to the congress. The report conducts an enhanced analysis on each country exceeding certain thresholds in three criteria: trade surplus with the U.S., current account surplus and foreign exchange market intervention. Based on this analysis, the Treasury can designate the country a currency manipulator. Switzerland met the three criterion during the period of the analysis of the December 2020 report, from the third quarter of 2019 to the second quarter of 2020, and the Treasury’s decision was the result of an enhanced analysis.
       During the period of the analysis, Switzerland had negative interest rates and deflation; and the Swiss Franc (CHF), considered to be a safe asset in the international financial market, severely appreciated following the outbreak of COVID-19. The report acknowledged the need for foreign exchange market intervention in such a situation to counter the pressure on CHF. However, it claimed that the magnitude of the intervention was excessive; that is, at least some of it was to improve the competitiveness of Swiss products.
    This study aims at evaluating the U.S. Treasury’s decision to designate Switzerland a currency manipulator, by surveying related empirical evidences. To evaluate the claim that Swiss intervention in the foreign exchange market was to improve the country’s price competitiveness, we survey the empirical evidences on the sensitivity of Swiss exports to the exchange rate of CHF. To evaluate the legitimacy of Swiss intervention in the foreign exchange market, we survey the empirical evidences on the impact of sudden exogenous appreciation of CHF on the country’s domestic economy.
       Swiss export is characterized by high technological intensity and value-added. At the HS 4-digit level, for instance, exports are highly concentrated in high value-added and technology-intensive products such as medicine, medical products, chemicals and luxury watches. This concentration is known to be a result of the country’s strategic choice during the first era globalization, from the late nineteenth century to the early twentieth century. Thanks to this export structure, the CHF exchange rate has little impact on Swiss exports, especially of medicine, medical products and luxury watches, which take up more than forty percentage of the country’s total exports.
       Sudden appreciation of CHF due to exogenous causes leads to a reduction in import prices, which in turn puts a downward pressure on domestically produced goods, resulting in deflation and distortion in the economic agents’ decision between imported goods and domestically produced goods in Switzerland. Intervention by the Swiss National Bank (SNB), the country’s central bank, is known to be effective in reducing exogenous appreciation pressure on CHF.
       Considering the characteristics of the Swiss economy, the SNB’s intervention in the foreign exchange market appears to be for countering the effect of CHF’s sudden appreciations on the country’s domestic economy, rather than for improving the country’s price competitiveness. Deflation had been happening for some time in Switzerland, to which the SNB’s mandate of price stability urged it to react; and as it kept its policy rate negative since late 2014, reducing it further would have been ineffective and inefficient.
       When the Treasury published its December 2020 report, the SNB immediately reacted by announcing its expectation that it could persuade the then-forthcoming Biden administration that its foreign exchange market intervention is solely a reaction to the exogenous appreciation pressure on CHF, not an effort to improve the country’s price competitiveness. Indeed, the April 2021 report, the first one in the Biden administration, did not designate Switzerland a currency manipulator, even though it conducted an enhanced analysis on Switzerland, as well as on Taiwan and Vietnam. This observation supports the suspicion that the conclusion of the December 2020 report was politically motivated. The Biden administration, which was about to take office at the time of the publication of the December 2020 report, was largely expected to change the Trump administration’s policies towards foreign countries, including the designation of currency manipulators. It appears plausible that the outgoing administration tried to constrain the incoming administration’s policies.
       This observation suggests that the Biden administration is unlikely to designate Switzerland a currency manipulator in the future. There is a high chance that Switzerland, due to the characteristics of its economy, will again meet the three criterion for an enhanced analysis. However, the Swiss government and central bank have consistently reacted to such criticisms, and the April 2021 report’s evaluation agrees with their reactions. Therefore, the conclusions of the enhanced analyses conducted in the Biden administration are likely to be in line with that of the April 2021 report.
  • Does digitalization help employment stability during the COVID-19 pandemic?: Evi..
    Does digitalization help employment stability during the COVID-19 pandemic?: Evidence from Korean survey data

    This paper investigates if workers’ ICT use intensity helps to improve their labor market outcomes in the early stage of the COVID-19 pandemic using real-time survey data produced in Korea. We first find that the impacts of the p..

    Seongman Moon Date 2021.10.20

    APEC, ICT economy
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    Executive Summary

    I. Introduction

    Ⅱ. Related Literature

    Ⅲ. Real-Time Survey Data
    3.1. Survey Design
    3.2. Summary Statistics

    Ⅳ. Empirical Models
    4.1. A Model for Different Impacts of COVID-19
    4.2. Models for the Role of Digitalization

    V. Heterogeneous Impacts of COVID-19

    VI. Workers’ ICT Use and Impacts of COVID-19
    6.1. ICT Use Intensity
    6.2. ICT Skills
    6.3. Internet Activities

    VII. Policy Implications and Concluding Remarks

    References

    Summary
    This paper investigates if workers’ ICT use intensity helps to improve their labor market outcomes in the early stage of the COVID-19 pandemic using real-time survey data produced in Korea. We first find that the impacts of the pandemic on labor market outcomes are different across workers’ socio-economic characteristics and industries where they are employed: workers in service or construction industries, temporary workers, and workers who had experienced unemployment before the pandemic are more likely to be unemployed, be furloughed, work less hours, and have earnings reduced in the early stage of the pandemic. We measure workers’ ICT use intensity by weekly computer, mobile, and internet usage hours and find that workers who belong to a group with high ICT use intensity tend to mitigate the adverse effects of the pandemic on their labor market outcomes, while controlling for skill-fixed, industry-fixed, and region-fixed effects as well as for individual characteristics.
  • FTA가 중소기업의 고용과 혁신에 미치는 영향
    The Effects of Free Trade Agreements on SMEs’ Employment and Innovation

    Beginning with the Korea-Chile Free Trade Agreement (FTA) in 2004, Korea has continued to actively implement FTA policies, and as of June 2020 a total of 16 FTAs ​​with 56 countries are in effect. As a result, Korea's trade volume..

    Kyong Hyun Koo et al. Date 2021.09.02

    Labor market, Trade policy
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    Beginning with the Korea-Chile Free Trade Agreement (FTA) in 2004, Korea has continued to actively implement FTA policies, and as of June 2020 a total of 16 FTAs ​​with 56 countries are in effect. As a result, Korea's trade volume has grown rapidly since the 2000s, providing an important driving force for Korea's economic growth.
      A number of studies have reviewed the positive impacts of the FTA policy on the overall economic growth of Korea from various aspects. However, there have been few attempts to explore whether the positive results of FTAs have been shared evenly between large and small/ medium enterprises, or if most of the benefits have been enjoyed mainly by large enterprises. Addressing this research gap, this study examines the effects of Korea's FTA policies on employment and innovation activities of SMEs and analyzes how each effect varies depending on firm characteristics to draw policy implications.
      According to the empirical results, the employment and real wages of SMEs significantly increased mainly in industries where the effect of export expansion due to FTAs was higher, with innovation activities also taking place more actively in such industries. On the other hand, although the SMEs in industries with high import competition due to FTAs showed a relatively low increase in the real wage, no negative effect was found on the employment or innovation activities of SMEs. Taken together, Korea's FTA policies seem to have played a positive role in boosting overall employment and innovation of SMEs in the manufacturing sector.
      However, when re-identifying the FTA effects by firm size of SMEs, most of the positive effects of FTAs ​​were mainly centered on medium- sized enterprises, and relatively small enterprises tended to be alienated from such positive effects or conversely exposed to the negative effects of FTAs. For example, the effect of reducing the real wage growth rate due to FTA-induced import competition effect mainly occurred in small enterprises, and the effect of FTAs toward increasing the innovation activities of small enterprises was not found. On the other hand, medium-sized firms led the increase in employment and innovation activities of SMEs due to the FTA export effect, and although they experienced a decrease in employment due to the FTA import competition effect, there was no significant decrease in real wages. This suggests that unlike small-sized firms, medium-sized ones have leveraged the import competition pressure from FTAs as an opportunity for efficient resource allocation and productivity improvement through restructuring.
      Based on the results of the empirical analysis above, we discuss some policy implications for improving FTAs’ benefits for SMEs’ employment and innovation.
  • ODA 시행기관의 성과관리체계 개선방안 연구
    Study on Results-Based Management System in Korea’s Aid Agencies

       Since Korea’s accession to the OECD Development Assistance Committee in 2010, there has been a continuous rise in Korea’s aid budget as well as the number of government ministries and public agencies engaging in the..

    Yul Kwon et al. Date 2021.08.31

    Economic development, Economic cooperation
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       Since Korea’s accession to the OECD Development Assistance Committee in 2010, there has been a continuous rise in Korea’s aid budget as well as the number of government ministries and public agencies engaging in the aid industry. The proliferation of new actors has led to growing concerns on the organizational capacity to ensure aid effectiveness of new aid-spending ministries and agencies. Aside from the main aid agencies such as the Korea International Cooperation Agency (KOICA) and the Economic Development and Cooperation Fund (EDCF) under the Export-Import Bank of Korea, the number of government ministries and public agencies (hereafter referred to as non-aid agencies) that spend aid budget is up to forty-one as of the financial year 2021. In terms of budget composition, the non-aid agencies account for approximately half of Korea’s grant aid budget.
       In this context, this paper reviews aid management schemes at Korea’s aid agencies as well as non-aid agencies with special attention on their organizational capacity to ensure aid effectiveness and results-based management. Chapter two starts by reviewing the aid management schemes of Korea’s aid agencies and non-aid agencies in terms of their aid strategy and programs, key channels and modalities, budget allocation and result-management system. In addition, the paper moves on to analyze the aid portfolio and governance mechanism of the fourteen top aid-spending agencies, examining whether and to what extent there exists a strategic coordination system among multiple executing agencies to ensure internal coherence of their projects and programs. Based on a case-study approach, chapter three explores the cases of three agencies that have different cooperation schemes for results management and evaluation. The first model is the case of the main grant aid agency, namely KOICA, which has an independent evaluation unit within the agency. The second model is the case of the Ministry of Health and Welfare and its executing agency, the Korea Foundation for International Healthcare (KOFIH), which incorporates an evaluation function within the agency. The organizational structure for evaluation at the KOFIH is somehow similar to that of the KOICA, albeit with much smaller budget. The third model is the case of the Ministry of Agriculture, Food and Rural Affairs and its main executing agency, the Korea Rural Community Corporation, which delegates the evaluation function to the state-led think tank, the Korea Rural Economic Institute. Having evaluation functions within or outside the agency, the experience of these three agencies provides valuable lessons for other agencies with relatively limited budget, human resources and expertise. It was found that in order to strengthen evidence-based policy and implementation and ensure aid effectiveness, Korea’s aid agencies need to invest more on building evaluation expertise, addressing resource constraints and make more efforts to use and learn from the evaluation results and recommendations. 
       Based on the analysis, the paper concludes with suggestions for future policy direction. Amid the growing demand for evidence-based decision-making and value for money, it is recommended that the Korean government introduce periodical assessment of results management systems at Korea’s aid agencies and strengthen strategic evaluation and learning systems for increasingly diverse actors in aid industries. The paper also suggests that the newly established Office for International Development Cooperation under the Office for Government Policy Coordination of Korea exercise enhanced leadership to provide policy directions and guidelines in the realm of results-based management and evaluation systems for Korea’s aid and non-aid agencies. 

  • Consumer Responses to Price Shocks of Wine Imports in Korea
    Consumer Responses to Price Shocks of Wine Imports in Korea

    The main purpose of the study is to develop a methodology that divides consumers' responses to FTAs or commodity taxes into quantitative and qualitative margins, which cause exogenous price changes for some specific goods. The use..

    Chul Chung et al. Date 2021.07.30

    Trade policy, Free trade
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    Executive Summary

    1. Introduction

    2. Literature Review
    2-1. Research on the Effects of FTAs and Consumption in Korea
    2-2. Research on Demand Analysis

    3. Methodology

    4. Empirical Analysis
    4-1. Data
    4-2. Empirical Results

    5. Conclusion

    References
    Summary
    The main purpose of the study is to develop a methodology that divides consumers' responses to FTAs or commodity taxes into quantitative and qualitative margins, which cause exogenous price changes for some specific goods. The use of unit values as a dependent variable for consumers' qualitative choice, unlike the usual method of utilization of unit values as a proxy variable for market prices, showed that qualitative response to price changes exists and its size is significant. The methodology of separating and estimating qualitative responses to income changes as in economic crises is also presented, and the empirical analysis using this methodology showed that much of the existing income effects were qualitative responses. As a key result, the price elasticity of -1.178 estimated by the usual demand model based on a single commodity assumption is reduced to -0.712 for the quantitative margin only, and the qualitative margin is the remaining -0.466, accounting for more than a third of the overall response. The significant degree of qualitative response estimates suggests that policy makers and researchers should consider qualitative response as an important factor when analyzing the effectiveness of FTAs, especially on consumption.
  • KIEP가 함께 한 한국의 FTA 20년
    20 Years of FTAs in Korea with KIEP

    Korea Institute for International Economic Policy Date 2021.07.30

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  • 미국 바이든 행정부 시대 미중 전략경쟁과 한국의 선택 연구
    A Study on the US China Strategic Competition in the Era of Biden Administration: Policy Recommendations for South Korea

       This study aims to understand the US-China strategic competition in the Biden era and explore future strategy and policy options for Korea. The US-China strategic competition has recently increased in science and tech..

    Heungkyu Kim et al Date 2021.07.20

    Political economy, International politics United States of America China
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       This study aims to understand the US-China strategic competition in the Biden era and explore future strategy and policy options for Korea. The US-China strategic competition has recently increased in science and technology, military, and geo-strategic terms on a global scale. This competition has provided Korea with an opportunity to rise as a great power, together with various challenges in diplomatic, security, and economic terms. This process will naturally come with certain difficulties. Korea could face the constant pressure of making choices. The consequences of the strategic competition are uncertain. It accompanies a paradigm shift in which numerous events and behaviors cannot be explained and predicted with given norms, patterns, or practices.

    It is imperative to evaluate the possible consequences of the US-China strategic competition and its implications for South Korea. The following four scenarios are possible:

    - A new form of Cold War
    - Strategic competition with complementary cooperation
    - Strategic cooperation with complementary competition
    - US-China coevolution or compromise

    This study evaluated each scenario and its implications for South Korea.

       Noteworthy is that two broadly accepted assumptions must be reexamined under these new circumstances. First is the assumption that the US-China strategic competition will be protracted. The second assumption lies in the belief of US superiority over China and the solid US-ROK alliance as a constant factor. In reality, we could consider a scenario where China assumes regional supremacy over East Asia. Regardless of any wishes on our part, there is a need to consider all these assumptions as variables, and to remain flexible and creative when formulating counter-strategies.
       This study tentatively suggests strategy to strengthen the ROK-US alliance to the global level. The ROK-US alliance remains the pillar of the ROK’s diplomatic and security policies. However, the ROK must also respect its strategic cooperative partnership with China. More importantly, the ROK has worked hard to establish active collaboration with like-minded countries. The ROK should not fall into the trap of rashly choosing one country over the other, and instead opt for a strategy which minimizes possible costs rather than maximizing potential benefits.
  • 북한 대외 채무의 쟁점과 과제: 국제 규범과 해외 사례를 중심으로
    Issues and Tasks Regarding External Debt of the DPRK: Centering around International Rules and Cases Abroad

       The Democratic People’s Republic of Korea (hereinafter DPRK) holds external debt against the rest of the world yet has not made its position clear on how to repay this after declaring moratorium in 1984. The magnitud..

    Yoojeong Choi and Halin Han Date 2021.07.08

    Economic integration, North Korean economy North Korea
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       The Democratic People’s Republic of Korea (hereinafter DPRK) holds external debt against the rest of the world yet has not made its position clear on how to repay this after declaring moratorium in 1984. The magnitude of the debt subject for repayment is increasing annually as the interest for arrears has accumulated. The issues regarding approaches that the DPRK would take in regards to repayment of its debt were raised when Russia relieved it from its duties for repayment of external debt against the former Soviet Union in 2012. In light of the situation in 2018 and 2019, when rapprochement between the DPRK and the United States was burgeoning, once the former shows its willingness to open its economy and to enter the phase of reformation, it is reasonable to believe that the discussion on how to resolve the mounting external debt of DPRK would be expedited when US-DPRK relations enter this new phase. 
       Against this background, the external debt of DPRK will likely be one of the primary diplomatic and economic matters facing the Republic of Korea in the longer perspective, albeit not an imminent issue to be taken care of. Therefore, this study examines the current state of external debt incurred by the DPRK and international norms on how to manage this, as well as cases abroad to identify the tasks at hand for the Republic of Korea’s government to respond to various scenarios on changes in circumstances on the Korean Peninsula.
       More specifically, it analyzes international standards, cases in other countries, and policy measures to consider when resolving the DPRK external debt issue, separating itself from previous ones in the following four features. First, it covers the estimates of the magnitude of the external debt that the DPRK holds. Second, it delves into international rules on resolving debt. Third, it suggests means to relieve the external debt of DPRK under two different scenarios, one of which is when both Koreas are united, and the other where the two economies are integrated but not the countries themselves. And last but not least, it offers a systematic overview on tasks for both Koreas’ administrations once the DPRK initiates transition to a market economy and the process of economic integration of the two Koreas. Most of the related literature prior to 2020 covered the measures to relieve external debt of the North Korea postulating a situation where the two Koreas are united. In this study, however, a scenario where the two Koreas are united is briefly reviewed, with the primary focus placed on the premise of the two Koreas coexisting with economic cooperation in progress. 
       The details of each chapter are as follows. First, Chapter 2 reviews all the statistics on the external debt of the DPRK. There are various sources of estimates on how much external debt the DPRK holds against its counterparts, showing different ranges and figures depending upon the source. This study aggregated statistics open to the public based upon the counterparts, sources and types of external debt. Chapter 3 covers the international rules that manage the relief/cancellation of public and private debt as well as the international laws on state succession. Chapter 4 examines cases abroad, categorizing the countries into three subgroups: ① countries in transition (Vietnam, Myanmar), ② united countries (Germany, Yemen), and ③ China. The case of China is extremely intriguing as it holds the largest claims against the DPRK and has become one of the biggest creditors for low-income and developing countries recently. This study, unlike the previous literature, takes China into account as one of the biggest creditors of the DPRK, a key variable to consider in the future. The final chapter, Chapter 5, discusses potential measures to relieve/cancel the DPRK’s external debt under two different scenarios for two Koreas’ geopolitical situation. It concludes with the policy tasks for the administration of the Republic of Korea, bearing in mind two different scenarios of geopolitical circumstances surrounding the Korean Peninsula. 
       This study confirms that the DPRK external debt can vary depending on the inter-Korean relationship, negotiations of denuclearization, its gaining membership at international financial institutions, and measures to relieve/cancel debt against China. First, if the DPRK finds itself in the transition process and tries to relieve the debt on its own, restoration of the US-DPRK relationship and joining the IMF will be prerequisites. This is because in order for the external debt to be rescheduled via the Paris or London Club, it is a must to go through programs imposed by the IMF. In order to do so, the US needs to lift its sanctions specifically prohibiting the DPRK from joining the international financial institutions, and the DPRK must be able to show its willingness to transform its country. Second, it is predicted that if the two Koreas are united under an extreme emergency, then it is most likely the Republic of Korea would succeed the external debt of the DPRK, in accordance with international rules and practices. However, the magnitude of the debt that the administration would take on and measures on how to deal with them would hinge upon the Republic of Korea’s tactics towards its neighboring countries. 
       This study substantiates that the DPRK’s external debt against China will be a major factor that would affect not only the process of relieving this debt but also on procurement of potential financial sources after it opens its economy. In light of recent examples of how China handled its claims against developing countries, it would be imperative to determine when to resolve the bilateral debt between China and DPRK within the process of restoration of the US-DPRK relationship. At that point, bilateral talks between the DPRK and China, which potentially would improve economic circumstances within DPRK thanks to a supply of new funds or drastic debt cancellation from China, would challenge the DPRK’s attempt to reinstate its status as a normal nation. 
       It is believed that the outcomes of this study will be able to provide insights to the government of the Republic of Korea when there is significant progress in denuclearization of the DPRK and an attempt to normalize its relations with the rest of the world. 
  • 현안대응자료 요약 모음집(2021 상반기)
    현안대응자료 요약 모음집(2021 상반기)

    KIEP Date 2021.06.30

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  • 한ㆍ중ㆍ일 소재ㆍ부품ㆍ장비 산업의 GVC 연계성 연구
    A study on GVC linkage of materials, parts, and equipment industries in China, Japan and Korea

       China, Japan and Korea (CJK) have been competing and cooperating in many fields in the material, parts and equipment industries due to their geographical proximity and similarity in industrial structure. However, non-..

    Hyung-Gon Jeong et al. Date 2021.06.30

    Trade structure, Industrial policy China Japan
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       China, Japan and Korea (CJK) have been competing and cooperating in many fields in the material, parts and equipment industries due to their geographical proximity and similarity in industrial structure. However, non-economic factors such as COVID-19 and sanctions against Korea by Japan and China pose obstacles to economic cooperation among CJK. Therefore, this study derives policy implications for the efficient management of global value chains (GVCs) in the materials, parts and equipment industries by comparing the supply chain structure of Korea’s materials, parts and equipment industries with Japan and China. The main contents of this study consist of four parts. 

       First, this study analyzes changes in the trade structure and mutual connections between Korea, China and Japan in the materials, parts and equipment industries, from 2000 to 2018.
       Over the past 20 years, Korea’s materials, parts and equipment industries have grown significantly. During this period, the top industries for Korean exports/imports in the materials, parts and equipment  sectors have been electronic components (1st), chemicals and chemical products (2nd), and primary metal products (3rd) ‒ areas of high competition with Japan and China in the global market. 
       The biggest change in Korea’s materials, parts and equipment industries came in 2018, when the import and export rankings of textile products and non-metallic mineral products sharply declined, and the transportation machinery parts and semiconductor display equipment industries rose in their ranking. These changes reflect the fall in production of general-purpose technology industries in Korea, accompanied by an increase in the proportion of industries requiring advanced technology and specialization in related industries. General purpose technology products have changed to a trend of importing from China or third countries.
       Trade in China’s materials, parts and equipment industries also grew rapidly during the same period, and imports and exports of general-purpose technology products increased significantly. The top trade items of China’s materials, parts and equipment industries are electronic products, electrical equipment parts, chemicals and chemical products. China shows very high competitiveness in textile products, but when compared to other industries in terms of export and import data for 2018, these were found to have declined significantly in terms of size and competitiveness against 2001 levels.
       Japan’s materials, parts and equipment industries are still highly competitive. However, the share of industries related to general-purpose technology has been reduced, and only industries specializing in advanced technology fields remain visibly competitive. The remarkable changes in the Japanese materials, parts and equipment industries over the past 20 years have led to a decline in the stature of the textile industry, and the status of the semiconductor display equipment industry has risen far higher than in the past.
       Meanwhile, the characteristics of imports and exports between Korea and China, Korea and Japan, and Japan and China were identified by classifying the materials, parts, and equipment industries into 231 fields. Trade between Korea and China in the materials, parts and equipment industries is concentrated in 20 items, each accounting for more than 1% of the import and export items. As for Japan’s exports in materials, parts and equipment industries to China, there was no detectable phenomenon of specific items dominating exports. The characteristics of Japanese imports from China are similar to those of Korea, but differed in that no items account for more than 1% of imports from China in the equipment industries.

       Second, the study examined the competitiveness of materials, parts and equipment industries of CJK by comparing the share of imports and exports of materials, parts, and equipment industries, and calculating Revealed Symmetric Comparative Advantage Index (RSCA), Export Similarity Index (ESI), and Trade Specialization Index (TSI) for each country.
       When looking at the share of imports and exports of the materials, parts and equipment industries by CJK in the global market, the rise of China (3.2% in 2001 → 14.4% in 2018) is prominent. On the other hand, Japan’s share of exports declined, while Korea’s increased. A field in which Japan occupies an overwhelming position in the export market of the global materials, parts and equipment industries is the semiconductor display equipment industry. The Korean semiconductor display equipment industry relies on overseas sources for over 90% of its procurement, indicating the need for caution of dependence on Japan in the field.
       When analyzing RSCA, Japan had the highest competitiveness, but the gap with Korea has been narrowing since 2016 after peaking in 2011. China continues to show a large gap with Korea and Japan.
    Korea-China, Korea-Japan, and Japan-China ESI has steadily increased over the past 20 years. During the same period, ESI between Korea and China (56.4 → 66.9) increased the most. ESI between Korea and Japan (57.5 → 61.3) and ESI between Japan and China (55.0 → 60.2) also increased.
       When examining TSI data, Korea’s competitiveness in textile products, rubber and plastic products, and semiconductor display equipment has weakened compared to the beginning of 2000. All other 13 fields show improved competitiveness. China has improved its competitiveness in all 16 fields. On the other hand, Japan’s competitiveness in the primary metal products, semiconductor display equipment, and measurement equipment industries has improved, while its competitiveness in the other 13 fields has weakened.

      Third, the study analyzed the changes and characteristics of GVCs in the materials, parts and equipment industries of CJK using the World Input-Output Table.
       Taking into account the structural characteristics of production and trade taking place from 2010 to 2018 in the materials, parts and equipment industries of China, Japan and Korea, the production-induced effects (feedback effects, spillover effects, domestic induced effects, etc.) generated under global value chains in the three nations were calculated. It was also analyzed how each country’s production and trade induce other countries’ production and trade. The analysis results are as follows.

       1) The backward linkage effect of materials, parts and equipment industries in CJK was significantly different in 2018 compared to the year 2000, leading to a significant change in GVC from the perspective of production technology.
       2) It was observed that the level of production-induced effects to partner countries in the materials, parts and equipment industries of CJK has also changed significantly.
       3) The globalization of the economy among CJK is having a significant impact on the GVCs change in the materials, parts and equipment industries. In addition, Korea’s import-dependent GVCs linkage with China and Japan is becoming relatively deeper than that of China and Japan.
       4) All three nations show deeper GVCs linkage of production technology, focusing on key export products such as electrical equipment and electronic parts, primary metals and metal processing products, textile products, general machinery parts and equipment, and transportation machinery parts. Through this, it was confirmed that a horizontal division of labor and competition systems are being established not only in the global market but in partner markets as well.
       5) Measuring the inducement structure of production and trade in the materials, parts and equipment industries of CJK shows that the spillover effects of all three countries increased in each other, indicating the formation of interdependent GVC linkage.
       6) The direction of CJK spillover effect changed from “China → Japan, Japan → China, Korea → Japan” in 2000 to “China → Korea, Japan → China, Korea → China” in 2000, signifying a rise in China’s influence.
       7) When examining the results of direct and indirect decomposition of the spillover effects among the three countries, indirect spillover effects were found to be quite small.
       8) Overall, Japan’s materials, parts and equipment industries are highly concentrated in domestic production and show a relatively low level of production-induced effects for other countries.

       Fourth, GVC linkage was verified through a survey of materials, parts and equipment companies. The survey was conducted on 3,260 materials, parts and equipment companies during January 2021, and 502 valid samples were obtained.
       The importance of China and Japan was once again confirmed as a result of a survey on the need to reorganize the supply chain of the materials, parts and equipment industries in Japan and China caused by COVID-19 and diplomatic issues. The results indicate it will be difficult for a new form of GVCs to replace Japan and China for the time being.
       The importance of Japan and China as trading partners is still high, and there is low possibility of changing sources of procurement from Japan or China. In the end, despite many restrictions due to non-economic issues, Japan and China remain important partners for Korean’s materials, parts and equipment companies. Therefore, the government needs to take this situation into account and actively engage in diplomatic efforts for a win-win approach with China and Japan.
       However, CJK represent one of the most sensitive regions to non-economic shocks such as natural disasters and disputes between the United States and China. Therefore, it is necessary to shift from the existing cost- and efficiency-based global value chains (GVC) management to a rational GVC management based on supply chain stabilization.
       As the trend of strategic weaponization is expected to continue gaining strength in the core materials, parts and equipment industries, it is necessary to move away from monopolistic supply chains and pursue a strategy for multi-polarization of the supply chain, and reasonable decoupling from countries where potential risks exist.
       In addition, domestic self-reliance should be promoted in fields with high foreign dependence, such as the semiconductor display equipment industry. Also, most companies in the materials, parts and equipment industries are small and medium-sized enterprises (SMEs) greatly lacking in terms of  technology development and market dominance, meaning that measures are urgently needed to address this concern.

       Finally, considering the pace of development in China’s materials, parts and equipment industries over the past 20 years, the gap in competitiveness of the materials, parts and equipment industries in CJK will be greatly reduced, and the GVCs of China-centered materials, parts and equipment industries are expected to show significant advances. It will be necessary to prepare countermeasures by the government and companies accordingly.
       The materials, parts and equipment industries in Korea should transition from general-purpose technology to more specialized and advanced technology. Towards this, the policy proposals in this report, based on an analysis of competitiveness and corporate satisfaction with government policies, merit careful consideration.


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