Recently, major countries have been strengthening support policies for companies in strategic industries, emphasizing digital and green transitions, competition to secure advanced technologies, and supply chain stabilization for economic security. Among these, the increase in so-called “strategic investment subsidies,” where governments directly or indirectly support corporate investments in strategic industries, is particularly notable.

As the strategic industries designated by major governments often align with high value-added sectors or those with significant potential as future growth drivers, South Korea, with its prominent multinational corporations in such industries, is likely to be directly impacted by these changes. For example, the strategic investment subsidies provided under the U.S. Inflation Reduction Act (IRA) and the CHIPS Act are significantly influencing multinational corporations’ investment decisions and reshaping global supply chains. In addition to the U.S., other major economies such as the EU, Japan, and China are also implementing strategic investment subsidy policies, with continued support expected for key multinational corporations. Therefore, the Korean government must prepare for these changing trade environments and seek ways to leverage these changes as opportunities to maintain global competitiveness.

Against this backdrop, this study aims to provide an economic analytical framework to assess the impact of strategic investment subsidies on foreign direct investment (FDI) and global supply chains of multinational corporations. Furthermore, it seeks to offer insights that the Korean government can use when designing its strategic investment subsidy policies.

Chapter 2 examines the recent trends and characteristics of strategic investment subsidy policies using the GTA database and the NIPO (New Industrial Policy Observatory) database. The analysis reveals a sharp increase in both government interventions and strategic investment subsidies since 2020, with strategic investment subsidies generally having longer durations than ordinary interventions. The surge in government interventions post-2020 is attributed to the aftermath of COVID-19 and intensified technological competition. The U.S. leads in general government interventions, while China dominates in strategic investment subsidies. Key types of interventions include export-import policies, financial subsidies, and government loans. Strategic investment subsidies mainly involve financial subsidies, along with government loans and tax reductions. Technologically, general government interventions are heavily focused on intermediate goods, whereas strategic investment subsidies increasingly target advanced IT products, power and batteries, and eco-friendly products. Korea, on the other hand, emphasizes financial support and trade finance to secure overseas markets rather than directly incentivizing domestic facility investments, highlighting the limitations in its policies to attract domestic investments. Examining global cases in the semiconductor and battery industries, the U.S., EU, and Japan provide substantial subsidies to production facilities, including cash refunds for tax credits even when companies incur losses. In contrast, Korea relies on regional investment grants and non-liquid tax credit schemes, which offer weaker incentives. Korea’s strategic investment subsidy policies require improvements in these areas.

Chapter 3 introduces representative strategic investment subsidy policies of major countries and evaluates them from the perspective of WTO subsidy agreements. The analysis indicates that these policies, such as cash grants and tax reductions, are generally likely to violate WTO rules. However, the U.S., China, the EU, and Japan have made efforts to justify their policies by utilizing WTO exceptions for environmental and national security reasons. The EU’s “Temporary Crisis Framework,” which provides temporary tax benefits and favorable loan terms citing environmental and energy supply chain crises, is a prime example. Korea’s heavy reliance on tax credits necessitates diversifying support mechanisms, such as consumer tax credits and equity investments, which are less likely to violate WTO rules. Moreover, Korea must strengthen policy rationales for claiming environmental and national security exceptions and establish clearer grounds for supporting advanced strategic industries like semiconductors and batteries. Concurrently, major countries are working to reinforce WTO subsidy rules to address China’s practices, emphasizing stricter regulations and accountability for subsidy impacts. Korea must consider this context and design long-term policies to avoid excessive subsidy competition.

Chapter 4 explores the theoretical basis for supply chain stabilization policies and analyzes how strategic investment subsidies influence investment decisions of multinational corporations considering supply chain stability. The key findings are as follows: (1) Major countries’ supply chain stabilization policies are rational as interventions to address supply chain uncertainties arising from external factors, and international policy coordination is essential to achieve optimal policy levels. (2) Assuming that multinational corporations prioritize supply chain stability, outcomes deviating from the traditional horizontal FDI model with a proximity- concentration tradeoff may occur. (3) Governments aiming to attract advanced industrial facilities must consider tradeoffs between productivity screening and increased attraction probabilities when designing investment subsidies, optimizing between fixed-cost and production-cost subsidies depending on specific conditions.

Chapter 5 evaluates the impact of the U.S. IRA-based strategic investment subsidies targeting electric vehicle and battery companies on supply chains using structural modeling. The analysis demonstrates that “path-dependent subsidies,” which identify participating countries in the supply chain to allocate subsidies, are more effective than traditional subsidies in countering Chinese automotive and battery firms, as shown through simulation results.

Chapter 6 presents policy implications based on the previous chapters’ analyses. First, Korea should relax investment subsidy eligibility requirements. Although strategic investment subsidies have shifted towards incentivizing domestic investments through tax credits for facility investments and R&D since 2023, their effectiveness remains limited for companies with low profits or losses. Measures such as cash refunds for tax credits, credit transfers, or conditional clawbacks for excess profits could mitigate uncertainties and encourage investments. Second, Korea must design its subsidies to align with WTO rules. Utilizing consumer tax credits and equity investments and strengthening justifications for environmental and national security exceptions are critical. Third, differentiating investment subsidies by strategic technology and providing tailored support for facility and workforce investments can enhance policy efficiency. Finally, Korea must adopt a strategic approach to changes in global supply chain policies. Strengthening communication channels with host countries and addressing risks in investment realization, while advocating for the retention of subsidies such as those under the U.S. IRA, are crucial. By leveraging these approaches, Korea can navigate the changing trade environment and ensure sustained global competitiveness.

Cybersecurity can be defined as a state where national and citizen safety is guaranteed by defending against cyber attacks or threats, thereby ensuring proper functioning of cyberspace. Cyberspace is composed of ‘information systems’ and the ‘information’ stored within them.

International discussions on cybersecurity norms have continued, showing a standoff between Western liberal democratic countries led by the United States versus Russia and China. The United States and other Western nations recognize cyberspace as a separate domain and argue that international law can be directly applied to it. Non-Western countries like Russia and China contend that cyberspace is not a separate domain, and that domestic laws of the location of systems or information should apply.

The United States adopted an active defense strategy and strengthened collaboration with the private sector, considering that a significant portion of infrastructure is owned or operated privately. The EU implemented various voluntary certification systems and mandated labeling. Japan’s active cyber defense strategy is similar to the United States’, and it established a voluntary conformity assessment system for IoT products. South Korea also adopted an offensive cyber defense strategy in 2024. However, unlike major countries, we do not have a unified cybersecurity law.

The potential application of international trade law to cybersecurity measures is as follows. Even when arguing that cybersecurity measures do not apply to like products, such actions will likely be found by the panel as violations of WTO agreements. All WTO precedents addressing national security exceptions relate to wartime or emergency situations in international relations. There is a view that for measures during peacetime to be recognized under national security exceptions, there must be subjective evidence of understanding the purpose at the time of the measure and evidence of indirect supply to military facilities. Panels can assess whether parties have made good faith judgments about measures necessary to protect their essential security interests. A similar conclusion was reached in the international investment arbitration case of Seda v. Colombia.

Implications for South Korea’s cybersecurity policy are as follows. First, self-defense cannot be exercised for cyber misuse or cyber attacks that do not reach the level of armed cyber attacks. Second, offensive defense strategies must be pursued cautiously. While there is a view that preemptive self-defense targeting imminent armed attacks is permitted under international customary law, there are controversies regarding specific criteria for determining imminence. Third, the legal principle of state responsibility for domain management or due diligence in cyberspace can be usefully applied in responding to cyber threats from North South Korea. Fourth, there is a need to establish a unified cybersecurity law.

Implications for South Korea’s trade policy are as follows. First, South Korea Government must continuously observe cybersecurity measures introduced by major countries to minimize negative impacts on our export companies. Second, the government should support our companies to gain a competitive advantage regarding cybersecurity labels and certifications when competing with third countries in markets like the United States or EU. Third, when implementing cybersecurity measures, precise institutional design and operation are necessary to avoid conflicting with trade norms. Fourth, even when a country claims national security exceptions in trade agreements, review will be conducted in accordance with the principle of good faith.

This study aimed to comprehensively analyze China’s advanced semiconductor innovation capabilities, focusing on policy support systems, High Bandwidth Memory (HBM), and third-generation semiconductors, and suggest response strategies for South Korea.

The analysis revealed the following characteristics of China’s advanced semiconductor innovation. First, China’s research in high-bandwidth memory has shown rapid growth since 2015, with strong research groups centered around Huazhong University of Science and Technology and Tsinghua University. Research topics have expanded from application technologies like GPU computing and system performance optimization to fundamental technologies such as hardware acceleration and architecture design.

Second, China’s HBM research has been developing through systematic research networks. Co-author network analysis revealed close collaboration systems between major universities, companies, and research institutes. Notably, Chinese researchers affiliated with overseas institutions, particularly in the United States, are actively conducting joint research with domestic researchers, transferring global-level research capabilities.

Third, in terms of future fundamental technology research, systematic support is being provided through the National Natural Science Foundation. Between 2019-2022, 474 semiconductor-related projects were supported, with general projects and young scientist fund projects accounting for about 45%, indicating a focus on nurturing next-generation research personnel. Additionally, according to the State-owned Assets Supervision and Administration Commission’s analysis of state-owned enterprise performance, among 49 advanced semiconductor-related products, core electronic components were the most numerous with 18 items, and 14 products were evaluated to have reached international leading levels.

Fourth, in the third-generation semiconductor field, systematic technology independence is being pursued through the National Semiconductor Technology Innovation Center and China Advanced Semiconductor Industry Innovation Strategic Alliance (CASA). Through the ‘1+N+X’ open joint construction and collaborative innovation operating model, they are promoting organic linkages between basic research, applied research, and industrialization, while focusing support on the localization of core materials such as SiC and GaN and linkages with demand industries like electric vehicles and renewable energy.

In response to these Chinese innovation trends, Korea needs the following strategies. First, to maintain its current competitive advantage in the HBM field, there needs to be a shift from manufacturing-centric to design-manufacturing integrated innovation. As shown in the research network analysis, while Korea is concentrated on hardware manufacturing technology, China shows a comprehensive approach at the system level, making it urgent to secure comprehensive technological capabilities through strengthening design capabilities. Second, diversification of global research networks is necessary. Co-author network analysis showed that while Korea actively researches with traditional partners like the US and Japan, collaboration with emerging research entities like India and Singapore is limited. New innovation opportunities need to be created through diversifying research collaboration partners.

Third, in the third-generation semiconductor field, a comprehensive strategy encompassing fundamental technology development, applied technology acquisition, and market expansion is needed. Particularly, as China provides many incentives for the spread of products based on domestic technology in addition to technical support, Korea also needs to introduce policies supporting market demand creation and technology diffusion along with technology advancement.

Finally, to enhance the effectiveness of these strategies, systematic government support including industry development stage-specific support policies, strategic R&D investment considering technological characteristics and timeliness, and talent development is necessary. In particular, policy focus should be placed on building an innovation ecosystem connecting basic research to commercialization and strengthening global cooperation networks.

This study is a research project that aims to more objectively and comprehensively understand Russia's new foreign policy direction, the Global South Strategy, after the outbreak of the Ukrainian War in February 2022. In particular, the main purpose of the study was to examine the structural changes and reorganization processes of the world order after the outbreak of the war, and to analyze the new foreign strategic direction of the Russian government in the midst of structural changes in the foreign strategic environment.

Chapter 2 examines the Russo-Ukrainian War and the rise of the Global South. The Russo-Ukrainian War has had a significant impact on the changes in the international order in terms of political diplomacy (deepening the process of fragmentation of international relations), security (creating a military confrontational structure between the West and Russia), and economic (damaging economic ties between Russia and the West). Meanwhile, the Global South is rising in the process of transforming international relations, symbolized by fragmentation. This is because, as the presence of the Global South (continuous economic growth and strengthening of political autonomy) has been highlighted since the war, its strategic value and importance in recent global international relations have increased even more. Ultimately, the Russo-Ukrainian War is creating a new phenomenon in international relations: the division of the world, changes in the international order, and the rise of the Global South.

Chapter 3 analyzes Russia’s Global South strategy concept, perception of the situation, goals, and tasks. Russia has recently preferred the term “World Majority” instead of the term “Global South.” According to Russia’s perception of the situation, the multipolarization of the world order, the growing interest in a new economic cooperation system, the emergence of comprehensive security threats and the risk of conflict between great powers, and the West’s all-out pressure on Russia are emphasized. The goals and tasks of Russia’s Global South strategy can be summarized in four points: promoting multipolarization of the world order through cooperation with Global South countries, intervention in the security of Global South countries, expanding economic cooperation with Global South countries, and spreading friendly perceptions of Russia in Global South countries.

Chapter 4 examines Russia’s Global South strategy in a multilateral context. In particular, it examines the launch and development process of BRICS, as well as Russia’s policy direction and economic relations toward BRICS. The recent expansion of BRICS has become a significant turning point and starting point in the history of BRICS, and a milestone in which BRICS has come to occupy the most important position in Russia’s “world majority” plan encompassing the global South.

Chapter 5 analyzes Russia’s Global South strategy in a regional context. In particular, it examines the nature and characteristics of the development of Russia’s relations with the Middle East, Africa, and Latin America, given that Russia has strengthened its diplomatic activities in the Middle East, Africa, and Latin America since the war in order to gather friendly forces to establish a multipolar order.

Chapter 6 presents policy implications for the research content and suggests policies that take into account the new external environment. First, policy implications are presented for each chapter: Chapter 2 (The Rise of the Global South and Pragmatic Balanced Diplomacy), Chapter 3 (Russia’s New Foreign Strategy and Seeking Changes in the World Order), Chapter 4 (The Means of BRICS Expansion and Potential Factors for Development), and Chapter 5 (Russia’s Means of Promoting Global Regional Strategy and Challenges). In addition, policy suggestions include strengthening and expanding middle-power diplomacy, establishing strategic cooperation plans for the Global South, establishing new perspectives and strategies for developing and fostering multilateral agendas at the global level, and establishing strategic management plans for Russia.

This paper investigates the global race in industrial policy and its intersection with national economic security strategies, examining how the Republic of Korea (ROK) can establish its strategic direction to mitigate risks from policy competition while maximizing its national interests. Driven by isolationist motives, a new trend in industrial policy has emerged, leading to the fragmentation of global value chains and, even worse, toward “deglobalization.” This trend threatens not only the international free trade system but also potentially undermines the ROK’s economic security interests. To address these challenges, we draw upon empirical and model evidence to propose strategic positioning for the ROK through clearly defined industrial policies.

Chapter 2 analyzes historical trends in industrial policies across the United States, the European Union, and China, emphasizing government interventions in the semiconductor industry, secondary battery sector, and critical mineral supply chains. Our analysis reveals that since 2010, industrial policies have become increasingly integrated with national economic security interests. In response to political restrictions and shortcomings in government action, these countries implemented various isolationist measures through their industrial policies. In the U.S., industrial policies reemerged after a long period of institutional hibernation, though the sustainability of their current political and industrial success remains uncertain. The EU developed a horizontal industrial policy framework to coordinate member states’ interests, although their responses to economic security risks have been delayed by substantial coordination costs. China’s industrial policy incorporated state objectives and an “asymmetric decoupling strategy” for strategic sectors, though this commitment to national autonomy ironically requires international cooperation. Isolationist approaches to industrial policy face a fundamental “trilemma” between simultaneously promoting domestic industrial competitiveness, safeguarding national security interests, and maximizing economic profits.

Chapter 3 examines international trade flows, investment patterns, and research and development (R&D) cooperation to assess the impact of government interventions since the 2010s. Using the Global Trade Alert (GTA) data set, we confirm an increasing trend in harmful (“red-alerted”) government interventions, which we use as a proxy for isolationist industrial policy. As countries have diversified their trading partners, China’s share of global trade has declined. However, global dependence on China for energy and critical minerals sector continues to increase. Our findings indicate that harmful industrial policies are contributing to a fragmentation of global trade flows between the global North and South. Using the Orbis Crossborder Investment data set, we observe declining investment flows between the U.S. and China, creating an “investment gap. This gap has been partially filled by countries such as Korea, Japan, and Vietnam, which have either captured China’s previous investment share in the U.S. market or attracted investment capital seeking to detour U.S.-China tensions While China has nearly matched U.S. levels of R&D investment since 2010, bilateral R&D cooperation has declined significantly as tensions between the two nations have escalated. Similar decoupling trends are evident in Life Sciences, Artificial Intelligence, and Secondary Battery research. This growing separation poses significant challenges for addressing global challenges such as climate change and digital transformation.

Chapter 4 investigates the global competition in industrial policies and its associations with the ROK’s semiconductor and secondary battery sectors using data sets from New Industrial Policy Observatory and Korea Customs Service. The data shows that government interventions have been more pronounced among advanced economies compared to developing countries. Across all country groups, policy implementation has focused primarily on dual-use products, advanced technologies, and the low-carbon sector, indicating that global policy competition targets similar strategic sectors for economic security purposes. In the ROK’s semiconductor and secondary battery industries, exports of final products and machinery to the U.S. have increased while the same exports to China have declined. In contrast, imports of materials and equipment from China have shown significant growth in both sectors. To quantify the direct effects of global policy competition, we build a Bayesian Network Model incorporating government interventions and global uncertainty. Our counterfactual analysis illustrates that the benefits of participating in the policy race are minimal, resulting in an export trade-off between the US and China. These findings imply that the ROK needs a balanced strategy of cooperation with both the U.S. and China, rather than exclusively aligning with either nation, to retain the benefits of international trade.

In the final chapter, we propose a strategic framework to guide the ROK’s industrial policy development. Best practice in industrial policy requires clear targets, well-defined national priorities, effective policy instruments and robust governance structure, all informed by comprehensive private sector feedbacks. However, the ROK’s current industrial policy tends to imitate global policy trends without establishing distinct domestic directions and objectives. To address this, we introduce the “CORE” framework to reshape the philosophical foundation of the ROK’s industrial policy. “C” represents cooperative and coexistent approaches, “O” emphasizes openness, “R” stands for resilience, and “E” encompasses efficient and eco-friendly values. Following these CORE principles, we recommend that the ROK position itself as a “Green Premium Supplier” within global value chains. Moreover, we propose that the ROK’s bilateral cooperation strategy should emphasize how its supply chain capabilities can address its trading partners’ critical needs. We also recommend establishing an "Economic Security Conflict Dialogue" to reduce policy uncertainty and foster international cooperation. To implement these recommendations effectively, the ROK government should develop a decentralized network governance system supported by a coordinator program. These government-appointed coordinators would serve as intermediaries, gathering insights from private sector stakeholders and facilitating communication channels to strengthen public-private cooperation.

The three North American countries have traditionally been an economic region with active supply chain linkages. If the three countries of North America were considered a single nation, by 2020, for every dollar of exports generated within North America, $0.94 of the added value would by added within the region itself, demonstrating a high degree of self-sufficiency. The North American Free Trade Agreement (NAFTA), a free trade agreement among the three nations that came into effect in 1994, has evolved into the United States-Mexico-Canada Agreement (USMCA) with the aim of strengthening regional supply chain contributions. The Biden administration, through the Inflation Reduction Act, introduced requirements such as conducting final assembly of electric vehicles in North America and sourcing battery components and critical minerals from North America or specific countries to qualify for green vehicle subsidies. In addition, the revivedNorth American Leaders’ Summit under the Biden administration has sought to advance cooperation by focusing on key issues such as a trilateral semiconductor forum, identifying investment opportunities through supply chain mapping, and critical minerals exploration.

Although a potential second Trump administration is expected to pursue policies with a degree of international isolationism under the banner of “America First,” a significant reduction in North American cooperation seems unlikely. Ironically, the unilateral trade policies of Trump’s first administration, particularly with China, have increased the US dependence on Canada and Mexico. This is because it remains difficult to establish fully self-contained supply chains within the US, especially in key industries like semiconductors and batteries, remains challenging. If the U.S. were to raise trade barriers against China, it would be difficult to quickly replace Chinese imports with domestic production.

In this context, this paper examines the supply chain policies and collaborative efforts of the three North American countries and seeks to identify implications for South Korea.

In Chapter 2, various policies of the three North American countries are reviewed. Beyond the trilateral leaders’ summits, there are numerous bilateral consultative bodies in place to promote trade and investment. The USMCA, as previously mentioned, enhances regional trade and cooperation among the three countries. In particular, the USMCA improves rules of origin for automobiles and other products, increasing the proportion of value added within North America to reinforce trade and supply chains centered on the region. However, the agreement also includes new provisions, such as labor-related requirements, that are not present in NAFTA and that align the USMCA more closely with U.S. interests.

As noted earlier, the U.S. pursues a supply chain strengthening strategy centered on North America through policies such as the Inflation Reduction Act. In addition, industrial policies like the CHIPS and Science Act include large investments to strengthen manufacturing capacity, which also influence organic policy shifts in Canada and Mexico. The newly inaugurated Sheinbaum administration in October 2024 is expected to continue most of the policies pursued by the Obrador government, suggesting little change in the overall framework. Mexico is likely to maintain policies aimed at promoting nearshoring and strengthening domestic control over critical minerals. A key example is the “Tax Credit Decree for Promoting Nearshoring,” announced in October 2023, which applies to investments made between the date of enforcement and December 31, 2024. Items eligible for tax credits include agricultural products like food, feed, and pesticides, as well as pharmaceuticals, medical equipment, batteries, and various automobile and transportation components. Two criteria must be met for the tax credits: investment must be made in the production, processing, or manufacturing phase of the eligible items, and over 50% of the revenues generated by the investing enterprise’s Mexican operations must come from exports.

As the U.S. promotes tax incentives and subsidies to secure raw materials and advanced industries domestically, Canada and Mexico are wellpositioned to become major beneficiaries of supply chain restructuring. For example, electric vehicles manufactured in Canada that meet a 75% regional value content (RVC) threshold qualify for USMCA preferential tariffs. Canada also serves as an option for meeting the North American final assembly requirement under the Inflation Reduction Act’s electric vehicle subsidy criteria. Amid these changes, the Canadian government unveiled a comprehensive plan in March 2023 to accelerate supply chain restructuring under the “Made in Canada” initiative. This initiative aims to maintain Canada’s competitive edge in the global market and address two fundamental challenges: the need for significant long-term investment to create a sustainable framework for supply chain restructuring and a net-zero future, and the mitigation of competitive disadvantages resulting from the U.S. Inflation Reduction Act. To address these issues, the Canadian government is focusing on sectors such as green energy, electric vehicles, batteries, and critical minerals, supported by various strategies and policies.

Chapter 3 examines the current state of the supply chain for semiconductors, batteries, and critical minerals in North America is examined. In semiconductors, as of 2022, the U.S. held a 48% share of the global semiconductor market, with particular strengths in upstream supply chain areas like design, design tools, materials, and equipment. Leveraging these strengths, the U.S.-centric North American semiconductor supply chain is well-established. Canada is a leader in AI research, notably through institutions like the University of Toronto, Alberta, and Waterloo, whose graduates fuelresearch in U.S. AI companies and drive downstream semiconductor demand. Additionally, Canadian strengths in design and AI research have attracted companies like Synopsys and NVIDIA to establish R&D centers there. On the midstream side of semiconductor manufacturing, Canada hosts companies like Teledyne DALSA and facilities for U.S. firms such as ON Semiconductor. Mexico, meanwhile, has attracted investments in mid-to-downstream semiconductor production, with companies like Vishay, Skyworks, Infineon, Texas Instruments, and NXP setting up production facilities.

In the battery sector, the U.S., Canada, and Mexico are competitively attracting leading global companies. This has boosted intra-regional trade, with notable exports of cathode materials from the U.S. to Canada and Mexico and significant reliance on Canadian imports of natural graphite for anode production.

Regarding critical minerals, the U.S. remains highly dependent on imports, with a notable concentration on a few countries. In 2023, the U.S. was 100% dependent on imports for 12 critical minerals and had over 50% dependency for 29 minerals. Mexico’s mineral exports to the U.S. exceeded 50% of its total mineral trade in 2023, reflecting its strong U.S.-centric orientation. Canada updated its critical minerals list in June 2024 to include 34 minerals, largely imported from the U.S., with iron and copper imports predominantly sourced from Mexico. However, policies in North American countries aim to enhance domestic value-added for critical minerals, with greater national control as a key strategy. Mexico revised its mining law in April 2022 to strengthen national control over lithium, a critical mineral for EV batteries and energy storage, creating a state-owned company, Litio para México (LitioMX), under the Ministry of Energy to oversee exploration, mining, use, and value chain management. Similarly, under the Biden administration, the U.S. has sought to boost domestic value-added for critical minerals, using mechanisms like Title III of the Defense Production Act (DPA). For instance, in March 2022, President Biden designated sustainable domestic mining, beneficiation, and processing of strategic materials for large-capacity batteries in the automotive and stationary storage sectors as critical to national defense, supporting domestic activities through various measures. Canada’s Critical Minerals Strategy, announced in December 2022, emphasizes locating critical mineral value chains within the country in partnership with allies. To achieve this, Canada implements tax credits such as the Critical Mineral Exploration Tax Credit (CMETC) and Clean Technology Manufacturing Investment Tax Credit.

In Chapter 4, the economic impacts of strengthened North American supply chain integration are analyzed from three perspectives. Section 4.1 examines the impact of North American supply chain integration on Korea’s forward and backward industries. To this end, the study devised a North American supply chain integration index using the international input-output table. Usingthe international input-output table, the value added contributed within North America for every unit of export within the region was measured, subtracting the added value contributed by the U.S., Canada, and Mexico to their respective exports. This approach aimed to assess the value added purely generated within North America through the activation of trade among the U.S., Canada, and Mexico.

Using this supply chain integration index, various trends have been observed. Notably, the index has shown a gradual upward trend since 2016. Given that the Trump administration began in 2017, it is noteworthy that North American supply chain integration has strengthened overall despite the “America First” policies of the Trump administration. This phenomenon remains consistent even when limited to the manufacturing sector and is particularly pronounced in industries such as automobiles, coke and petroleum refining, electrical equipment, and computers, electronics, and optical products. The supply chain integration index also shows a statistically significant positive (+) correlation with Korea’s total exports and value-added exports. A one-unit increase in the North American supply chain integration index (a $1 increase in the value-added contribution from North American trade) increases Korea’s value-added exports by about 10.5–12.7% ($0.105–$0.127). Furthermore, when North American supply chain integration occurs in one industry, it significantly contributes to Korea’s value-added exports in other industries as well. A closer examination by individual industries reveals that Korea’s retail trade, electrical equipment (batteries), and chemical industries benefit from North American supply chain integration within the same industries. In contrast, Korea’s value-added exports in coke and petroleum refining and computers, electronics, and optical products, increase more significantly when North American supply chain integration occurs in other industries. Section 4.2 analyzes the impact of policies aimed at strengthening North American trade and supply chains, such as the USMCA and the IRA, on Korea’s exports to the U.S. The quantitative analysis shows that these policies are associated with an increase in Korea’s exports to the U.S. Notably, after the IRA went into effect, monthly U.S. imports of Korean EV batteries more than doubled, driven by increased U.S.-directed investment by Korean battery manufacturers and the corresponding surge in exports of these items to the U.S.

Section 4.3 uses an event study approach to analyze the impact of the U.S.’s Section 301 tariffs on China on U.S. imports from Canada and Mexico. Tracking the long-term effects over 36 months revealed that the U.S. tariffs on China significantly and statistically increased imports from both Canada and Mexico in the long run. By industry, the effect was particularly pronounced in intermediate goods for Canada and capital goods for Mexico during the mid-term. With the expectation that the Trump administration’s second term will continue to increase U.S. efforts to contain China, these policies are likely to have positive effects on trade between the U.S. and its North American partners, Canada and Mexico.

Considering the preceding analysis, the Trump administration’s second term is expected to bring both obstacles and opportunities for North American supply chain cooperation. Potential obstacles include the possible suspension of government-led channels such as trilateral summits among the three North American countries. If the USMCA is amended again in favor of U.S. interests, tariff benefits may decrease, leading to a potential decline in North American trade. Additionally, Trump has expressed his intention to impose additional tariffs on Canada and Mexico, citing issues such as immigration and fentanyl, which could reduce U.S. imports from these countries. On the other hand, strengthened measures to contain China are likely to increase U.S. dependence on Canada and Mexico. Moreover, if universal tariffs are imposed globally rather than specifically targeting Canada and Mexico, the relative impact on these two countries could be mitigated. Overall, considering the already advanced level of integration among the three North American countries, significant disruptions to supply chain cooperation are unlikely.

Based on this outlook, the following implications are presented:
Given the high likelihood of USMCA revisions, it is necessary to review the current state of North American supply chain integration in major export sectors such as automobiles, which are central to Korea’s exports to the U.S., and prepare for a possible tightening of regional rules of origin. Since Korean automobiles enjoy stable exports driven by strong U.S. demand, it is worth considering a gradual expansion of local production volumes not only in the U.S. but also in Mexican production facilities. Additionally, in the semiconductor sector, Korea should actively pursue supply chain integration with USMCA member countries, including the U.S.

Although the three North American countries form a large economic bloc, they cannot achieve supply chain completeness on their own. Therefore, Korea should consistently develop cooperative strategies leveraging its complementarity with the North American countries. The findings from Chapter 4 suggest that industries such as retailing, electrical equipment (batteries), and chemicals, as well as semiconductors included in computers, electronics, and optical products, are closely related to Korea’s value-added exports when North American integration strengthens. Therefore, cooperative strategies can be developed, focusing on forward and backward linkages in these sectors.

Furthermore, to continuously identify agendas, it is essential to activate regular diplomatic channels such as summits between Korea and the three North American countries. By leveraging Korea’s manufacturing strengths in sectors such as semiconductors, critical minerals, and batteries—key areas of focus for the North American countries—Korea can create sustained demand for cooperation. While organizing trilateral North American summits may not be a priority for the Trump administration’s second term, if pursued, efforts should be made to align these summits with Korea-North America meetings. Even if such trilateral summits do not occur, Korea should upgrade its U.S.-focused cooperation strategy to a broader North America-focused approach through various government communication channels.

This research rigorously analyzes structural changes in Central Asia’s global value chains following the Russia-Ukraine war and proposes new directions for economic cooperation between Korea and Central Asia. Given the high likelihood of prolonged Western economic sanctions against Russia, which have been sustained at unprecedented levels since the war, it is essential to examine the structural impact of these sanctions on Central Asia’s global value chains. In particular, as Central Asian countries have exerted national efforts to enhance export competitiveness to achieve stable economic growth, this study identifies the effects of the sanctions on Central Asia’s trade structure, primarily from the perspective of exports. Moreover, amid the deepening fragmentation of the global trade environment, it is necessary to explore new directions for economic cooperation that reflect the impact of the sanctions on Central Asia’s global value chains to enhance the quality of Korea-Central Asia economic cooperation. Based on the analysis of Central Asia’s global value chains, this research presents future directions for economic cooperation between Korea and Central Asia. In Chapter 2, we analyze the foreign value-added in the exports of Central Asian countries. Specifically, using Eora’s MRIO data, we decompose the value-added of Central Asian exports from 2014 to 2022 to quantitatively identify which countries’ value-added was utilized and in which industries. There are commonalities and differences among the five Central Asian countries in terms of the share of foreign value-added in total exports, the industry-specific share of foreign value-added in exports, and changes in foreign value-added in total exports over time. Since the 2014 Crimea crisis, the share of foreign value-added in exports increased in Kazakhstan and Uzbekistan, while it declined in all other Central Asian countries. In terms of industry-specific trends, Kazakhstan and Uzbekistan primarily utilized foreign value-added in manufacturing exports, while Kyrgyzstan and Tajikistan relied more on foreign value-added in service exports. Notably, the share of foreign value-added in manufacturing exports for Kazakhstan and Uzbekistan also declined after the Crimea crisis, similar to the trends observed in the other three Central Asian countries. The relative importance of Russia as a major supplier of export value-added for all five Central Asian countries weakened after 2016. These findings suggest that the 2014 Crimea crisis has served as an external shock, triggering structural changes in the export trend of Central Asia. If the 2014 Crimea crisis has acted as an external shock that caused structural changes in Central Asia’s exports, the Western sanctions against Russia introduced after 2014 could represent those economic effects. Based on this intuition, Chapter 3 analyzes the impact of Western sanctions on Russia on the export structure of Central Asia. To this end, this research uses bilateral trade data for 190 trading partners in 26 industry categories from 2011 to 2022. Total export volumes are divided into intermediate goods and final goods exports to separately identify effects of sanctions against Russia on Central Asia’s exports of intermediate and final goods, respectively. Additionally, exports to 35 sanction-participating countries and 155 non-participating countries are distinguished to examine how sanctions against Russia influence Central Asia’s integration into global value chains. The sanctions imposed after the 2014 Crimea crisis led to a decline in intermediate goods exports from Central Asia until 2016. However, a sharp increase followed until 2018, after which the growth slowed. In contrast, final goods exports did not experience significant declines around 2014 but steadily increased after 2015, with growth moderating slightly after 2019. These findings suggest that the sanctions have heterogeneous effects on intermediate and final goods exports from Central Asia. Also, significant differences were observed in intermediate goods exports to sanction-participating and non-participating countries. After 2015, exports to sanction-participating countries continued to decline, while exports to non-participating countries recovered rapidly. This indicates a possible shift in Central Asia’s global value chain participation after the 2014 Crimea crisis, suggesting that intermediate goods exports initially directed to sanction-participating countries were redirected to non-participating countries. Notably, in the manufacturing sector, exports to non-participating countries began to concentrate more rapidly after 2014, indicating a deepening of export concentration patterns in manufacturing intermediate goods. Finally, the sanctions significantly reduced Central Asia’s intermediate goods exports, excluding those to Russia and Ukraine. Additional sanctions against Russia are estimated to have decreased manufacturing intermediate goods exports from the five Central Asian countries by 10–20%. This raises concerns that economic sanctions against Russia could limit the participation of Central Asia’s manufacturing sector in global value chains.

Based on the analyses in Chapters 2 and 3, it seems that the 2022 Russia-Ukraine war serves as an external shock that delays the integration of Central Asian exports into global value chains, both upstream and downstream, as long as economic sanctions against Russia persist. In particular, similar to the structural changes following the 2014 Crimea crisis, the 2022 war is likely to have a significant adverse impact on Central Asia’s manufacturing exports. In this backdrop, Chapter 4 explores policies to expand economic cooperation between Korea and Central Asia, focusing on the manufacturing sector. The findings in Chapter 2 reveal that, despite substantial progress in trade volume between Korea and Central Asia, Korea’s relative contribution to the value-added of Central Asian exports remains minimal. Therefore, to effectively enhance bilateral economic cooperation, it is essential to identify new cooperation strategies that reflect the structural changes in Central Asia’s trade environment caused by the Russia-Ukraine war. In particular, to respond to Central Asia’s increasing demand for cooperation aimed at export expansion(enhancing export competitiveness) and manufacturing development after the war, emphasis should be placed on strategies that enhance the value-added of Central Asia’s manufacturing exports. Additionally, with the growing importance of stabilizing supply chains for strategic resources, Central Asian countries are aiming to add higher value and expand exports of their abundant mineral resources. Central Asia is rich in key minerals critical to Korea, such as uranium, copper, anthracite, and nickel, which are also designated as strategic minerals in Korea. Furthermore, Uzbekistan and Kyrgyzstan are actively pursuing lithium development, making it necessary to explore cooperative directions for critical mineral resources as well.

In Chapter 4, an extensive review of the literature examines the development strategies and industrial status of the manufacturing and mining sectors in Central Asia. It identifies opportunities and risks for cooperation in each sector. Based on this analysis, specific directions for collaboration in these areas are proposed. For the manufacturing sector, differentiated cooperation strategies tailored to each country’s economic development stage and industrial structure are necessary. For instance, high-value-added manufacturing sectors, such as automobiles and automobile parts, are promising areas for collaboration with Kazakhstan and Uzbekistan, the more industrially advanced countries in Central Asia, given their established industrial infrastructure, financial industries, institutional frameworks, and manufacturing bases. It is important to note that the impact of sanctions against Russia varies across sectors in Central Asia’s exports. While these sanctions have significantly hindered the region’s exports of intermediate goods, their effect on final goods exports has been relatively small. Thus, cooperation between Korea and Central Asia in the manufacturing of intermediate goods should focus on supporting local production of final goods. Specifically, Korean intermediate goods manufacturers should establish a presence in the region to facilitate the local production and export of final products. Notably, Kazakhstan and Kyrgyzstan, as members of the Eurasian Economic Union (EAEU), utilize tariff benefits when exporting within the union. Additionally, Uzbekistan and Kyrgyzstan benefit from the European Union’s Generalized Scheme of Preferences Plus (GSP+), which allows duty-free exports of over 6,000 items to the EU. Local production of manufactured goods can thus offer advantages in terms of tariff reductions for exports, and the overall trade environment is expected to improve gradually.

In mineral resource cooperation, the key priority is creating high value-added through mineral processing. The five Central Asian countries, all landlocked and facing challenging international logistics conditions, have relatively underdeveloped transportation and logistics infrastructure, rendering value creation an urgent necessity. Local mineral processing not only helps overcome high logistics costs but also aligns with Central Asia’s goals of advancing its mineral processing industries to add value to its resources. In the long term, improving transportation and logistics infrastructure must include efforts such as building roads, railways, and airport facilities, as well as enhancing traffic network management through digital technologies. Since the physical expansion of logistics infrastructure requires active private sector participation, appropriate government measures are essential to encourage such involvement. Many infrastructure projects in Central Asia are currently carried out as public-private partnerships(PPPs), necessitating accurate information sharing and sufficient guarantees to mitigate risks. Additionally, initiatives such as logistics network digitalization can be pursued as part of development assistance (ODA) programs. Meanwhile, corruption poses a critical barrier, especially in the exploration, extraction, and development of natural resources, underscoring the importance of government actions. Similarly to logistics infrastructure, mineral resource cooperation generally involves large-scale, long-term investments. Thus, it is vital to establish and maintain regular intergovernmental communication channels to ensure robust enforcement of contract against corruption and rent-seeking behaviors. Given the significant power wielded by political elites in Central Asia, intergovernmental mediation and resolution efforts are even more critical when issues arise. Furthermore, as with the expansion of transportation and logistics infrastructure, it is necessary to develop policies that induce private companies to participate in mineral resource exploration, extraction, and development with a certain level of government guarantees to help distribute risks effectively.

Global trade uncertainty is exposing vulnerabilities in the supply chain and presenting challenges to international economic cooperation. The U.S.-China competition for economic and technological dominance is reshaping global trade dynamics and influencing foreign economic policies worldwide.

In this context, South Korea is enhancing economic cooperation with Latin America through agreements like the Korea-Central America Free Trade Agreement (FTA), the Korea-Brazil Trade and Investment Promotion Framework (TIPF), and the Korea-Ecuador Strategic Economic Cooperation Agreement (SECA).

Korea faces new challenges in its trade with Latin America due to the reorganization of global supply chains, the formation of economic blocs, increasing protectionism within countries, and upcoming elections in major nations. To address these issues, there is a growing need for Korea to diversify its export markets and establish stable supply chains through collaboration with Latin America. This region is rich in resources, including minerals and energy, making it a vital partner for Korea’s energy and resource security.

Korea’s exports to Latin America have been decreasing for the past decade, while imports from the region have risen. This trend persists despite FTAs with Chile, Peru, and Colombia, highlighting the need to identify the causes behind the decline and explore new export opportunities.

This report analyzes the trade dynamics between Korea and Latin America to pinpoint challenges and opportunities. It provides targeted policy recommendations and long-term trade objectives for the region that have not been previously considered, setting this study apart from existing research.

In Chapter 2, we analyze the trade and investment trends between Korea and Latin America to understand the characteristics of Korea’s exports to and imports from this region. Since 2013, Korea’s exports to Latin America have been on a downward trend, differing from its global export patterns, although its import patterns remain similar. Notably, exports to Mexico and the Dominican Republic did not decline during this period, unlike exports to other Latin American countries. Additionally, even with the implementation of the Korea-Peru FTA and the Korea- Chile FTA, Korea’s exports to Peru and Chile have decreased after some time.

When analyzing Korea’s exports to Latin America by item, it becomes clear that exports to Brazil, Mexico, and El Salvador consist largely of intermediate goods, with these exports exceeding Korea’s overall global proportion of intermediate goods. Conversely, the share of intermediate goods exported to Chile, Peru, Costa Rica, and the Dominican Republic is lower than Korea’s global average. Notably, the intermediate goods in these exports are primarily composed of automobile parts and flat panel displays.

Korean investment in Latin America varies by period and country, influenced by Korea’s investment system, Latin American economic fluctuations, protectionism, and export conditions to the U.S. Investments in Mexico focus on exporting to the U.S. and are less affected by regional economic changes. In contrast, MERCOSUR investments aim to enhance price competitiveness in local markets due to high tariffs and non-tariff barriers. Investment in the Central American Integration System (SICA) is smaller, mainly concentrated in transportation, warehousing, and business services, compared to the Pacific Alliance and MERCOSUR.

Chapter 3 examines the trade, investment, and major issues between China and Japan, which are viewed as competitors of Korea in the global market. It also discusses the United States, which has historically had a significant influence on Latin American economies. China has been enhancing its economic cooperation with Latin America by focusing on expanding trade in high-value-added products, facilitating trade through free trade agreements (FTAs), increasing investment in the manufacturing sector, and developing resources, energy, and infrastructure in the region. This trend of cooperation is believed to continue to the present day.

Japan’s export patterns to Latin America since the 2010s have mirrored those of Korea, making it important to examine Japan’s situation more closely. There is a need for in-depth research on Japan’s cooperation with Latin America moving forward. Since the 2010s, the Japanese government has been actively working to finalize FTAs with Latin American countries and enhance the utilization of existing FTAs. Beginning in 2020, the focus has shifted to eliminating trade barriers and identifying new export opportunities through intergovernmental dialogue.

For example, Japan has been using this dialogue to ease investment barriers, support the growth of new startups, and establish tax and investment agreements. Additionally, in response to rapidly changing global trade conditions, the Japanese government is promoting the establishment of supply chains for crucial minerals. In February 2024, the Japanese Ministry of Foreign Affairs announced the “Latin America Diplomacy Initiative,” aimed at strengthening the supply chain by positioning Latin America as a strategic economic security hub and supporting the expansion of Japanese companies in the region.

While the United States has significantly influenced the economies of Latin America, it is challenging to assert that it has recently adopted a specific trade policy directed at Central America. The U.S. initiated the Americas Partnership for Economic Prosperity (APEP), which emphasizes cooperation and support but lacks normative elements that directly impact trade and investment. However, as China’s presence and cooperation in Central America grow stronger, the United States is likely to seek changes in its trade policy towards the region in the future. This potential shift in policy is particularly relevant in light of the increasing Chinese investment in Mexico, indicating that a comprehensive trade policy for the Central American region could be a plausible scenario.

Chapter 4 presents the results of an analysis examining the reasons behind the sluggish growth of Korean exports to Latin America, along with policy recommendations from previous studies. As the global supply chain has evolved due to de-Sinicization and the rise of ASEAN in the manufacturing sector, Korea’s direct exports to Latin America may have been shifted to exports routed through ASEAN to Latin America. However, empirical analysis of the data indicates that, while the increase in Korean exports to ASEAN has contributed to a rise in ASEAN exports to Latin America, it cannot be concluded that Korean exports to ASEAN have significantly reduced Korean exports to Latin America—at least not until recently.

Another reason for the decline in Korea’s exports to Latin America is the reduction in Korean companies’ investments in the region. The correlation coefficient between Korea’s investment in Latin America and its exports is quite high, indicating that the ongoing decrease in investment since the mid-2010s has directly impacted the decline in exports. Interestingly, the correlation coefficient for Korea is significantly higher than that of Japan. This suggests that Japan’s decline in investment in Latin America has a lesser effect on its exports. Future research on Japan’s investment trends and export patterns in Latin America could yield valuable insights.

Korea’s limited entry into the Latin American market contributes to the sluggishness of its exports to the region. Most of Korea’s outbound foreign direct investment in Latin America is concentrated in the manufacturing and financial sectors. Additionally, investments in the service industry mainly focus on the financial, insurance, and real estate sectors, where purchases from Korea are minimal. As a result, the potential for export expansion through overseas direct investment remains relatively low.

Chronic political and social instability in Latin America, along with issues such as public safety, corruption, and inconsistent policy changes, poses significant challenges for advancing into Latin America. In Chapter 4, public safety concerns were highlighted as a particular issue for Korean companies investing in the region.

A survey conducted on Korean companies highlights several challenges they face when investing in Latin America. These challenges include difficulties in local production and parts procurement due to protectionist policies, price competition with Chinese products, challenges in gathering relevant information, excessive administrative burdens, competition with local construction firms, stringent environmental standards, and fluctuations in exchange rates.

These issues may cause companies to hesitate in making new or expanding existing investments in Latin America. However, it is important to note that it may be difficult for the government to address these challenges directly. Competition with Chinese products is a common hurdle for all global companies, not just those operating in Latin America. Similarly, the strict environmental regulations, competition with local businesses, excessive administrative work, and currency fluctuations are inherent costs associated with doing business in the region, which leaves little room for direct government intervention.

Moreover, the rise of protectionism seen today is part of a broader trend in global trade. As such, the Korean government should develop a trade strategy that takes these factors into account. However, this area is also one where direct government involvement may be limited.

Therefore, most of the difficulties presented by our companies are in areas that are difficult for the government to resolve, and rather than expecting the government to resolve them, companies should accept them and devise strategies utilizing Latin America. The beginning of devising strategies is to analyze why many multinational companies have invested in Latin America and what their strategic goals are, based on this, it is necessary to consider how advancing into Latin America can increase corporate profits.

In Section 2 of Chapter 4, we assess whether the policy recommendations from previous studies—diversifying export items, expanding exports to new markets, and increasing FTAs with Latin American countries—have been achieved at the current level. Over the past 10 years, Korea’s exports to Latin America have made some progress in diversifying export items. This improvement appears to stem from a higher proportion of intermediate goods being exported, particularly various manufacturing-related products, to many Latin American countries. However, it is challenging to provide a positive evaluation regarding the development of new markets and the expansion of exports, as Korea’s exports to this region still lag significantly behind the import scales and potential of each Latin American country.

The expansion of FTAs with Latin American countries is generally viewed positively, particularly regarding external growth. This is evident in the conclusion and implementation of the Korea-Central America FTA, following the enforcement of the Korea-Colombia FTA, as well as the completion of negotiations for the SECA agreement with Ecuador. Additionally, Korea has experienced significant short-term trade benefits from FTAs with Chile, Peru, and Colombia. However, the increase in exports that these agreements promote does not persist in the long term; instead, it gradually declines after the agreements are put into effect. Therefore, future responses and adjustments are necessary.

Based on the content of Chapters 2 to 4, policy goals and tasks have been proposed as recommendations for Korea’s trade policies toward Latin America, organized by period and target country, and detailed in a table in Section 2 of Chapter 6. In the short term, a key trade policy goal is to establish and activate a cooperation channel between Latin America. This can be achieved by focusing on countries where consultative bodies, such as the Resource Cooperation Committee, Senior Policy Council, and Joint Economic Committee, are already in place. This approach is expected to be more cost-effective compared to pursuing other goals.

The proposal for the trade policy toward Latin America includes the ‘Expansion of exports to Latin America’ as a mid-term goal. This goal requires more time to achieve than the previously mentioned goal of ‘Establishment and Activation of Collaboration Channels for Latin America,’ as it involves the collective efforts of both the government and companies. To achieve the ‘Expansion of exports to Latin America,’ several tasks have been identified, including the ‘Expansion of investment in Latin America’ and the ‘Increase in the proportion of intermediate goods exports.’ Additional mid-term tasks for the trade policy include the ‘Diversification of export items’ and the ‘Exploration of exports aimed at the domestic market’ to help alleviate uncertainty in the trade environment in Latin America. As a long-term task, the proposal to “prepare for the possibility of economic integration between the United States and Latin America” aims to “ease uncertainty in the trade environment” within the region. Given the likelihood that tensions between the US and China will persist, enhancing economic integration between Latin America and the US could benefit Korea by mitigating some of the trade uncertainties faced by Mexico.

However, the policy experiments detailed in Section 2 of Chapter 5 indicate that in certain industries where Korea is competitive, deteriorating trade conditions—specifically a worsening trade balance—could adversely affect Korea’s welfare. Therefore, it has been suggested that a localization strategy should be developed for these specific industries.

Additionally, while expanding economic integration between the US and Latin America presents challenges for Korea to directly influence, it necessitates both economic and diplomatic efforts. As such, achieving this goal is likely to be difficult in the short or medium term, which is why it has been framed as a long-term objective.

The global economy experienced disinflation from 1980 up until the pandemic of 2020. After reaching a peak of 39.1% in 1993, global inflation stabilized at 4.9% by 2000 and remained stable for about 20 years, recording 3.2% in 2020. During the same period, inflation in G7 advanced economies peaked at 12.4% in 1980, quickly stabilized at 4.8% by 1983, and continued to stay below 5% before declining to 0.8% in 2020. This phenomenon of global disinflation is often attributed to the following factors: reduced production costs and heightened price competition due to globalization; and advancements in macroeconomic policies.

However, the COVID-19 pandemic in 2020 disrupted global supply chains, which, combined with a rapid recovery in demand, rising commodity prices due to the Russia-Ukraine war, and massive liquidity injections during the pandemic, led to sharp inflation in the global economy between 2021 and 2022. Inflation in the G7 countries rose by 2.5 percentage points from 0.8% in 2020 to 3.3% in 2021, then surged by another 4 percentage points to reach 7.3% in 2022. The inflation rate rose particularly sharply in the European Union, which was heavily affected by the Russia-Ukraine war, climbing from 0.7% in 2020 to 2.9% in 2021, and then to 9.3% in 2022. Global inflation also hit a high of 8.7% in 2022―the highest in 26 years since 1996.

In view of these significant shifts in the global economy, this study analyzes how global inflation affects domestic prices and other macroeconomic variables in the Republic of Korea.

First, in Chapter 2, we provide an overview of post-2020 global inflation trends and examine regional differences and the underlying factors based on a literature review. Immediately following the pandemic outbreak, inflation decreased due to economic recession caused by lockdowns. However, after the pandemic began to subside in 2021, inflation increased sharply across regions and countries. Demand-side factors were found to contribute more significantly to this period's inflation decline and rebound. Comparing different regions, Europe experienced higher inflation than the United States, which is attributed to European countries' relatively higher dependence on external factors for consumer goods. The return of elevated inflation to steady-state levels occurred smoothly when wage rigidity was low or inflation expectations were stable. Labor market matching efficiency also influenced inflation. Post-pandemic matching inefficiencies caused a sluggish normalization of inflation in the United States. In contrast, South Korea's quick recovery in matching efficiency helped contain increases in wages and inflation rates.

Then, in Chapter 3, we examine the impact of global inflation (foreign inflation) on domestic inflation in major countries through linear regression analysis. This can be considered a focused preliminary examination of foreign inflation effects before conducting a more systematic analysis in Chapter 4 of factors affecting domestic inflation using a structural model. We select 39 countries including Korea depending on data availability and use for each of the countries a weighted average of the inflation rates of the foreign 38 countries as the measure of foreign inflation (weights based on import shares) while controlling for exchange rate fluctuations. More specifically, domestic inflation is examined using import price inflation, producer price inflation, and consumer price inflation, while in calculating foreign inflation, producer price inflation is used in all cases.

The results show that, in most of the countries analyzed, including Korea, foreign inflation was statistically significantly transmitted to domestic inflation. In particular, in Korea, a 1 percentage point increase in foreign inflation led to a 0.42 percentage point rise in the domestic consumer price inflation (commodities) in the short term and a 0.52 percentage point increase in the long term (cumulative over two years). While countries like Canada and New Zealand did not show statistically significant pass-through effects of foreign inflation, the effect was generally significant elsewhere. For example, in the United States, a 1 percentage point increase in foreign inflation resulted in a 1.14 percentage point increase in the domestic consumer price inflation (commodities) in the short term and a 1.17 percentage point increase in the long term. These findings contribute to both academic research and policy discussions by statistically validating the pass-through effect of foreign inflation and quantifying its magnitude.

Finally, in Chapter 4, we systematically examine the domestic spillover effects of global inflation using the structural model known as the Integrated Policy Framework (IPF) by Chen et al. (2023). The IPF is a Dynamic Stochastic General Equilibrium (DSGE) model assuming one small open economy and one large closed economy, and we assign Korea to the former and the United States to the latter. In particular, we estimate the parameters of the model using Bayesian methods and then analyze the effects of 16 exogenous shocks, including foreign price fluctuations, on domestic inflation. The results show that the main factors driving domestic inflation (core PCE inflation) fluctuations were wages, domestic costs, import costs, and import demand, suggesting relatively modest spillover effects of global inflation.

However, as observed in Chapter 3, the effect of global inflation on domestic inflation is statistically and economically significant in absolute terms. The aforementioned figures (a 1 percentage point increase in global inflation leading to a 0.42 percentage point increase in Korea’s domestic consumer price inflation (commodities) in the short term and a 0.52 percentage point increase in the long term) are not small compared to those of Italy, which has an economy similar in size to Korea (0.06 percentage points short-term, 0.34 percentage points long-term). Moreover, these spillover effects are even larger for Korea’s short-term import price inflation (1.27 percentage points). Therefore, in designing and implementing relevant policies, it is necessary in the short term to strengthen monitoring of international commodity market trends, while in the medium to long term, efforts are needed to diversify import sources; expand domestic production bases and seek substitutes to alleviate dependence on raw material imports; and enhance the efficiency of import-export logistics systems. Additionally, the IPF in Chapter 4 is a comprehensive model encompassing demand, supply, international financial markets, and monetary and fiscal policies, allowing us to analyze broader business cycle fluctuations—including GDP, imports and exports, interest rates, and exchange rates—beyond just inflation. This study is the first to apply the IPF to Korean data, and as such it provides a foundation for more diverse and in-depth policy research in the future.

This report examines recent EU industrial and trade policy in relation to Net-Zero strategic technologies and analyzes their impact on the global supply chains. The introduction section places the recent return of industrial policy in historical context and emphasizes the importance of EU policies as a major player in global supply chains. Against this background, this report introduces the recent status of EU policies in Chapter 2, analyzes and compares supply chains of Net-Zero strategic industries in Korea and the EU in Chapter 3, conducts an empirical analysis of policy effects in Chapter 4, and finally draws implications for Korea in Chapter 5.

Chapter 2 introduces the EU's industrial and trade policies related to Net-Zero strategic technologies and compares them with those pursued in major countries. As the EU seeks to transform its entire socio-economic structure to achieve climate neutrality by 2050, it is seeking to strengthen the competitiveness of related industries within the EU while reducing offshore dependence through the Green Deal Industrial Plan. To this end, the government has put forward policies to (1) foster domestic companies such as the Net-Zero Industry Act (NZIA), Critical Raw Materials Act, and temporary subsidy deregulation, and (2) regulate overseas supply chains such as the Carbon Border Adjustment Mechanism, Foreign Subsidy Regulation, and Corporate Sustainability Due Diligence Directive. Among these, the Net-Zero Industry Act designated Net-Zero strategic technologies in 19 fields, including renewable energy, batteries, hydrogen, and carbon capture, and set local production targets for designated technologies. To achieve this, it provides support measures such as simplifying regulations, creating industry clusters, and fostering human resources. Also, regulating policies require companies to meet the EU’s environmental, labor, human rights, and competition standards before they can trade or partner with EU companies. Similar policies are in place in other major countries around the world, including the United States, China, and Japan, making the measures to combat climate change a trade barrier for other countries.

Chapter 3 then analyzes import and export data by production stage to compare the current status of supply chains in the EU and Korea. We selected 499 items directly or indirectly related to the EU’s Net-Zero strategic technologies and analyzed the overall status of imports and exports, export competitiveness, and import supply chains for each item. While the EU remains competitive in the capital goods sector, it is highly dependent on raw materials and intermediate goods, and the shift in dependence from other countries to China over the past decade has been pronounced. Korea’s supply chain of climate-neutral strategic technology imports is also highly dependent on China, which exposes supply chain vulnerabilities. In particular, the concentration of imports in intermediate and capital goods is getting worse, and the dependence on China for key raw materials for batteries is very high. For both the EU and South Korea, reducing import dependence on specific countries for climate-neutral strategic technologies has emerged as a key challenge.

Chapter 4 utilizes a gravity model to identify the impact of EU policies on bilateral imports and exports of climate neutral strategic technologies. Due to data limitations, the analysis is limited to the period from 2008 to 2021 and does not include the effects of the more recent policies reviewed in Chapter 2. Nevertheless, the results show that the EU’s subsidies, import and export controls, trade defense measures, and government procurement regulations promote intra- EU trade and reduce extra-EU trade. This effect is particularly pronounced in ICT and strategic industries. The above analysis suggests that the EU’s upcoming climate neutrality policies are likely to strengthen intra-EU trade and weaken extra-EU trade. This means that South Korea, a country outside the EU, could also be affected by the EU’s climate neutrality policy.

Finally, Chapter 5 draws policy implications based on the above analysis. While developing countermeasures to minimize the impact of major countries’ industrial and trade policies on the Korean economy, Korea should select and focus on key domestic industries to maintain competitiveness in the global market. In addition, Korea should take full advantage of cooperation opportunities with like-minded countries to build stable supply chains. Specifically, the report suggests policy alternatives such as (1) establishing a control tower led by the Prime Minister to establish an inter-ministerial coordination system; (2) establishing a high-level industrial and trade strategy that encompasses core industries, trade policies, and supply chains; (3) setting targets for local production and diversification of domestic companies and providing support policies; (4) establishing policies for training and exchanging experts in the strategic industry; and (5) cooperating with international allies through bilateral channels. As a mid-sized country, Korea needs both insight into the big picture of global economic flows and wisdom in formulating detailed policies to maintain stable economic growth. We hope that this report will be utilized as a reference for the development of Korean industrial policies.