Import source diversification policy(ISDP) presupposes that foreign trade deficit vis-a-vis one nation is undesirable and its purpose lies in maintaining the balance of trade with each country. The background for this policy can be found in a search for ways to cushion the impact stemming from import liberalization, which began in 1978 and furthermore, to protect and foment domestic industry.
In the meanwhile import source diversification policy(ISDP) has had some merits in terms of controlling the trade deficit vis-a-vis Japan and fomenting domestic capital goods industry.
But on the other hand, there have been criticism about the negative side-effects of ISDP. First of all, for the most part, no consistent principles have been established on the types of products which are to be included or excluded from the policy. Thus, some suspect whether ISDP has only succeeded in protecting industry interests while creating many inefficiencies by restricting competition. In particular, since the end of 1980s when the export competitiveness of Korean products has dropped sharply, many people question the efficiency of ISDP.
Further, with respect to the outside world, ISDP violates GATT Principles. As such, ISDP not only produces a negative image concerning Korea's desire for free trade but is also likely to lead to demands for revision. And, in the context of Korea-Japan trade negotiations, Japan can be expected to use Korea's ISDP as a pretext to defend its protectionist policies and practices. Therefore, Korea must formalize its response to such actions by Japan.
In this connection, this study proposes to set forth plans for enhancing ISDP in the future on the basis of a critique of the economic efficiency of the said policy. Specifically, the focus of this study will center on the following questions.
First, what is the actual contribution of ISDP to the import source diversification of designated products and protection of domestic industry?
Second, with respect to major ISDP-designated products, what is their degree of import dependence on Japan and competitiveness status and, problems which can be expected to arise in the event of ISDP's cancellation?
Third, what are clear criteria for inclusion and exclusion within ISDP in order to enhance ISDP?
To answer the above questions, this paper has been structured as follows. The remainder of Part I deals with the purpose and actual status of ISDP, along with Japan's response to it. Part Ⅱ reviews and compares the conversion of import sources and import substitution effects for all products covered by ISDP. Furthermore, for the period 1988 - 1990, changes in import unit prices and export unit prices are examined. PartⅢ, which concentrates on 105 items for which consistent data are available, analyzes the dynamic changes in import and export during ISDP designation and cancellation. In particular, on the basis of the cancellation experience of some items, policy principles of ISDP designation and cancellation are derived. Part Ⅳ summarizes the principal results and offers directions for improvements in the enforcement of the policy in the future.
Finally, with regard to the actual evidece presented in the study, I must point out that the difficulties involved in obtaining consistent data created serious limitations. First of all, the classification of trade data was converted from CCCN(Customs Cooperation Council Nomenclature) to HS(Harmonized Commodity Description and Coding System) in 1988. Also, as the reader might know, the method of classification differs for trade statistics and industry statistics (KSIC: Korean Standard Industrial Classification), limiting the feasibility of a systematic analysis of production and trade effects. Therefore, a direct investigation of the effects of ISDP not only on the relevant products but the entire economy left much to be desired. The issue of general efficiency of ISDP remains a research topic for future.

Contents

I. FORWARD
1. Issues
2. Outline of import source diversification policy
(1) Purpose of ISDP and designation of products to be covered
(2) Actual status
3. Japan's response

II. AN ANALYSIS OF ISDP'S OVERALL EFFECTS
1. Expected effects of ISDP
(1) Positive effects
(2) Negative effects
2. Analysis of actual evidence
(1) Import source diversification effects
(2) Competitiveness enhancing effects

III. ANALYSIS OF THE DYNAMIC EFFECTS OF ISDP
1. Regression analysis and correlation coefficient analysis
(1) Import source diversification effects and competitiveness enhancing effects
(2) Correlation coefficient analysis
2. Effects of ISDP designation
3. Effects of liberalization (exclusion from ISDP)
4. Evaluation and implications

IV. A COMPREHENSIVE EVALUATION AND PROGRAM FOR IMPROVEMENT
1. Comprehensive evaluation
(1) Overall effects and problems
(2) Policy implications
2. Problems and improvement measures associated with the execution of ISDP
(1) Problems with the execution of ISDP
(2) Plans for improving ISDP
3. Tentative plan for prior announcement of ISDP

〈Reference〉

Appendix