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

Preface

Executive Summary

Acknowledgements

GDI: Research Team and Advisors

Chapter 1. Project Introduction and Purpose

Chapter 2. The Nature of Scenario Analyses and Its Use

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

Chapter 3. The Gamut of Economic Risks Facing Korea Today

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

Chapter 4. Mega-trends Influencing Medium-Term Scenarios

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

Chapter 5. A Trade War Scenario

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

Chapter 6. A Troubled China Scenario

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

Chapter 7. A Global Meltdown Scenario

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

Chapter 8. Risk Assessment and Analysis: Vulnerabilities and Resilience

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

Annex

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

References