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A Study on the Cooperation between Mekong Subregion and RoK to Build Stable Supply Chains in Southeast Asia economic security, economic cooperation

Author Sungil Kwak, Jaewan Cheong, Mingeum Shin, and Jegook Kim Series 22-22 Language Korean Date 2022.12.30

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The Mekong subregion emerged as the core of the global value chain (GVC) with the influx of foreign direct investment. This is because the Mekong subregion’s economy is growing rapidly and is a strategic point in the face of the U.S.-China hegemony competition. Korea is also recognizing the importance of the Mekong subregion and carrying out cooperative activities. This study examines whether Korea’s supply chain can be diversified through the Mekong subregion. Considering the development situation and infrastructure conditions of the Mekong subregion, it will be difficult for the Mekong subregion to function as a target for Korea’s supply chain diversification in a short period of time, but we will preemptively explore Korea-Mekong cooperation measures to explore the feasibility.  

To this end, Chapter 2 examines the GVC policies promoted by major developed countries such as the U.S., China, and Japan and the Mekong countries’ own GVC policies. The United States, China, and Japan are promoting various cooperative strategies and initiatives for the Mekong subregion. First of all, the United States, promoting the “Mekong-U.S. Partnership,” is paying attention to economic integration, human resource development, and non-traditional security in the Mekong subregion. China is also promoting Mekong cooperation with interest in linking the Mekong subregion and the southwestern part of China mainland through the Lancang-Mekong Cooperation (LMC) initiative. Meanwhile, China revised the FTA with ASEAN in 2016 and was active in entering into force of RCEP. After the global financial crisis, Japan has established a Comprehensive Asian Development Plan (CADP) that encompasses the Mekong subregion and India and supports the incorporation of global networks in these regions by maintaining wide-area infrastructure and creating industrial complexes. Meanwhile, Japan began to disperse production bases in Asia in 2012 and launched its “China+1” strategy in earnest. In addition, Japan has established “AJIF” in 2022 to foster ASEAN, including the Mekong region, as a hub for the global supply chain. It is also expanding support for Japanese firms to diversify their overseas supply chains.

The five Mekong countries seem to be taking part in the Global Value Chain (GVC) and the ASEAN Regional Value Chain (RVC) as key measures of economic growth. Each country in the Mekong subregion has different strategies and methods for participating in GVC and RVC. The GVC strategy of Mekong countries can be summarized as the followings; one is to encourage GVC participation directly, and the other is to upgrade the industrial structure indirectly. As in the case of Vietnam and Thailand, the policy to encourage GVC participation appears to be pressure for FDI firms to expand transactions with their own local firms. The indirect strategy to expand GVC participation is to make GVC production length longer through product advancement and expand international division of labor for production. To this end, Mekong countries are implementing the industrial policies to upgrade their economic structure. 

Chapter 3 explored the inflow of FDI to five countries in the Mekong subregion. Japan, Korea, the United States, and China invested heavily in the Mekong region. They mainly invest the energy, construction, and information and communication, and electronics sectors. In Cambodia, Korea’s FDI went mainly to a finance and insurance industries. Electricity, gas, steam, and air conditioning supplies in Laos, mining in Myanmar, and manufacturing in Thailand and Vietnam are the main sectors on that Korea’s FDI has focused. As a result of analyzing the effect of foreign direct investment on export value-added based on the gravity model proposed by Tinbergen (1962), the main variables of interest in the study, FDI inflow and value-added exports, generally provided an significant evidence to have a positive relationship. In addition, the estimated coefficient of FTA on export added value was mainly estimated to be negative, and PTA, a preferential measure provided by relative developed countries to relative developing countries, was mainly estimated to be positive.

In addition, Vietnam has quickly participated in GVC, but participation in ASEAN RVC progressed slowly. Thailand was slowly expanding both GVC and RVC participation. Cambodia, on the other hand, was quickly participating in GVC by 2020, and Laos was more actively participating in RVC than GVC. Meanwhile, in the 2021 data, the RVC participation rate in all four Mekong countries increased significantly. The reason is understood to be that firms located in the ASEAN region recognized the importance of supply chain stability and diversification of their procurement sources. Meanwhile, the proportion of using domestic value added in total exports was different for each country in the Mekong subregion. Laos used the largest proportion of domestic value added among the Mekong countries in value-added exports, while Vietnam’s share of domestic value added in total exports was gradually decreasing. In addition, the four Mekong countries had a lower utilization rate of own intermediate goods in the low- and medium-high-tech manufacturing industries. This result suggests that the demand for technology transfer in the manufacturing sector of Mekong countries may increase further in the near future.

Chapter 4 surveyed Korean firms that entered the Mekong subregion to diversify their supply chains. The survey investigated the current status and changes in procurement and production structure, and explored the demand for supporting policies for Korean firms working in the Mekong subregion. According to a survey of difficulties in building value chains between local firms and Korean firms, Korean firms reported a lack of quality and technology competitiveness, poor logistics infrastructure in the Mekong subregion, and lack of local raw materials and parts. More than 40% of all respondents answered that the U.S.-China hegemony competition and protectionism negatively affect the value chains (supply chains) of Korean firms working in the Mekong subregion. In addition, respondents predicted that it would have a more negative impact after two to three years. According to the survey, only 62% of all the respondents were aware of the RCEP settlement. There is still a lack of publicity of it for the firms. Meanwhile, firms responded that they need more supports such as providing non-face-to-face FTA consulting, issuing certificates of origin, resolving difficulties in overseas customs, and responding to non-tariff measures.

Finally, the survey asks the Korean firms to evalate Korean government’s supporting measures. Korea firms showed a weak correlation between recognition and utilization of supporting measures. In other words, it was found that some Korean firms are not aware of the existence of the measures just before they utilize it. Or, other firms arbitrarily utilize them when they needed. Meanwhile, among the supporting measures, there were many cases where the two supporting measures were selected at the same time by Korean firms. Policy efficiency can be improved if these supporting measures are packaged rather than provided separately. 

The respondents evaluate the importance and urgency of the Korean government’s supporting measures. Respondents reported that expanding logistics infrastructure using ODA is the most urgent and important to expand the value chains into the Mekong subregion. This suggests that when expanding their value chains to the Mekong subregion, Korean firms consider the capabilities of the local firms as well as the quality of socio-economic infrastructure in that region. 

Based on the above research results, this study proposes the cooperation directions between Korea and the Mekong subregion to stabilize the Korea-ASEAN value chain. First, it is important to promote cooperation policies consistently to build trust. “The Han River-Mekong River Declaration,” announced in 2019, also emphasized inclusiveness, prosperity through experience sharing, and peace, while the “Korea-ASEAN Solidarity Initiative”, announced in 2022, also mentions inclusiveness, trust, and reciprocity as cooperation principles. Second, it is necessary to strengthen comprehensive cooperation across all sectors rather than focusing only on the economic sector. In a market economy, it is also important to seek common interests by promoting regional order and to seek peace from traditional and non-traditional security threats. In addition, it is necessary to strengthen socio-cultural exchanges in order to increase mutual understanding between the two regions. Third, it is necessary to prepare a cooperative plan that reflects the demand of the Mekong subregion. Fourth, it should be expanded to support for the establishment of economic and social infrastructure in the Mekong subregion. 

Finally, this study proposes seven ways to cooperate between Korea and the Mekong subregion based on the directions of the cooperation. As confirmed in Chapter 3, except for Vietnam and Thailand, Mekong countries have not yet had industrial capacity to build stable value chains. Therefore, in order for the Mekong subregion to become the partner of stable supply chain, Korean firms must increase the volume of trade with the multinational forms or local firms located in the Mekong subregion. 

First, using ODA funds, it is necessary to establish ‘a risk response manual’ for each country in the Mekong subregion and to enable Korean firms to use it under the sudden crisis such as infectious disease, climate disaster, and economic crisis, It should be considered that not only are the Mekong countries themselves vulnerable to crises, but also that most of the Korean firms that have recently entered the region are small and medium sized firms. 

Second, it is possible to establish a think tank dedicated to the Mekong subregion by Korean government. Until now, most information related to the Mekong subregion has been obtained from data from leading regional cooperation countries such as Japan, the United States, and China. The limitations of information on the Mekong subregion worked as difficulties in finding how to link value chain effectively between Korea and the Mekong subregion. To compensate for this, we may consider the establishment of a Korean-led think tank in the Mekong subregion. 

Third, it is possible to consider the installation of the ‘Mekong-Korea Society.’ We have to foster it as an international organization that plays the similar role as the Korea-ASEAN Center in cooperation with Korea and the Mekong subregion. In particular, if all stakeholders, including the governments of both regions, private organizations, public institutions’ representative offices, and local governments, participate in it, the synergy of cooperation can be amplified. It is expected to function as a platform for comprehensive cooperation that encompasses economic, industrial, social and cultural exchanges, and educational and technological cooperation between the two regions. 

Fourth, it is necessary to magnify trade by improving the utilization rate of FTA and RCEP between Korea and the Mekong subregion. As analyzed in Chapter 3, it was confirmed that the FTA settlement was a significant variable along with an increase in FDI inflow in participation in GVC. In particular, the use of preferential trade agreements (PTA) was an important means of increasing trade, given that the Mekong subregion includes underdeveloped countries such as Cambodia and Laos. 

Fifth, it is necessary to support the establishment of institutional infrastructure to respond to the demand for technology transfer. In Chapter 2, it was confirmed that countries in the Mekong subregion are increasing their demands for technology transfer through coercive policies to participate in GVC. In addition, as confirmed in Chapter 3, countries in that region had a low proportion of their own value-added utilization in the manufacturing sector. In response to the technology transfer needs of the Mekong subregion, it should be considered as supporting measures improving intellectual property rights and technology security-related systems in the Mekong subregion. 

Sixth, the effectiveness of supporting measures should be enhanced through packaging and strategic provision of them for stabilizing the value chain. In Chapter 4, it was investigated that when firms utilize the government’s supporting measures, whether to use it or not is determined by its necessity rather than knowing the existence of them in advance. On the other hand, when using government’s supporting measures, firms used specific supporting measures together at the same time. This suggests that packaging supporting measures can increase efficiency. 

Seventh, it is necessary to promote the use of strategic ODA and the development of infrastructure in the Mekong region through solidarity with Mekong-engaged countries such as the United States, Japan, and China. The solidarity with the major Mekong-engaged countries can lead the improvement of connectivity and infrastructure development in this area in an effective way. As seen in the survey in Chapter 4, Korean firms were also hoping to improve infrastructure in the Mekong subregion. Based on Korea’s strengths, such as its reliable infrastructure technology and capabilities of the world’s best e-government infrastructure and service, we will be able to make cooperation with the U.S., Japan, and China.

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