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

   First, this study analyzes changes in the trade structure and mutual connections between Korea, China and Japan in the materials, parts and equipment industries, from 2000 to 2018.

   Over the past 20 years, Korea’s materials, parts and equipment industries have grown significantly. During this period, the top industries for Korean exports/imports in the materials, parts and equipment  sectors have been electronic components (1st), chemicals and chemical products (2nd), and primary metal products (3rd) ‒ areas of high competition with Japan and China in the global market. 

   The biggest change in Korea’s materials, parts and equipment industries came in 2018, when the import and export rankings of textile products and non-metallic mineral products sharply declined, and the transportation machinery parts and semiconductor display equipment industries rose in their ranking. These changes reflect the fall in production of general-purpose technology industries in Korea, accompanied by an increase in the proportion of industries requiring advanced technology and specialization in related industries. General purpose technology products have changed to a trend of importing from China or third countries.

   Trade in China’s materials, parts and equipment industries also grew rapidly during the same period, and imports and exports of general-purpose technology products increased significantly. The top trade items of China’s materials, parts and equipment industries are electronic products, electrical equipment parts, chemicals and chemical products. China shows very high competitiveness in textile products, but when compared to other industries in terms of export and import data for 2018, these were found to have declined significantly in terms of size and competitiveness against 2001 levels.

   Japan’s materials, parts and equipment industries are still highly competitive. However, the share of industries related to general-purpose technology has been reduced, and only industries specializing in advanced technology fields remain visibly competitive. The remarkable changes in the Japanese materials, parts and equipment industries over the past 20 years have led to a decline in the stature of the textile industry, and the status of the semiconductor display equipment industry has risen far higher than in the past.

   Meanwhile, the characteristics of imports and exports between Korea and China, Korea and Japan, and Japan and China were identified by classifying the materials, parts, and equipment industries into 231 fields. Trade between Korea and China in the materials, parts and equipment industries is concentrated in 20 items, each accounting for more than 1% of the import and export items. As for Japan’s exports in materials, parts and equipment industries to China, there was no detectable phenomenon of specific items dominating exports. The characteristics of Japanese imports from China are similar to those of Korea, but differed in that no items account for more than 1% of imports from China in the equipment industries.

   Second, the study examined the competitiveness of materials, parts and equipment industries of CJK by comparing the share of imports and exports of materials, parts, and equipment industries, and calculating Revealed Symmetric Comparative Advantage Index (RSCA), Export Similarity Index (ESI), and Trade Specialization Index (TSI) for each country.

   When looking at the share of imports and exports of the materials, parts and equipment industries by CJK in the global market, the rise of China (3.2% in 2001 → 14.4% in 2018) is prominent. On the other hand, Japan’s share of exports declined, while Korea’s increased. A field in which Japan occupies an overwhelming position in the export market of the global materials, parts and equipment industries is the semiconductor display equipment industry. The Korean semiconductor display equipment industry relies on overseas sources for over 90% of its procurement, indicating the need for caution of dependence on Japan in the field.

   When analyzing RSCA, Japan had the highest competitiveness, but the gap with Korea has been narrowing since 2016 after peaking in 2011. China continues to show a large gap with Korea and Japan.

Korea-China, Korea-Japan, and Japan-China ESI has steadily increased over the past 20 years. During the same period, ESI between Korea and China (56.4 → 66.9) increased the most. ESI between Korea and Japan (57.5 → 61.3) and ESI between Japan and China (55.0 → 60.2) also increased.

   When examining TSI data, Korea’s competitiveness in textile products, rubber and plastic products, and semiconductor display equipment has weakened compared to the beginning of 2000. All other 13 fields show improved competitiveness. China has improved its competitiveness in all 16 fields. On the other hand, Japan’s competitiveness in the primary metal products, semiconductor display equipment, and measurement equipment industries has improved, while its competitiveness in the other 13 fields has weakened.

  Third, the study analyzed the changes and characteristics of GVCs in the materials, parts and equipment industries of CJK using the World Input-Output Table.

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

   1) The backward linkage effect of materials, parts and equipment industries in CJK was significantly different in 2018 compared to the year 2000, leading to a significant change in GVC from the perspective of production technology.

   2) It was observed that the level of production-induced effects to partner countries in the materials, parts and equipment industries of CJK has also changed significantly.

   3) The globalization of the economy among CJK is having a significant impact on the GVCs change in the materials, parts and equipment industries. In addition, Korea’s import-dependent GVCs linkage with China and Japan is becoming relatively deeper than that of China and Japan.

   4) All three nations show deeper GVCs linkage of production technology, focusing on key export products such as electrical equipment and electronic parts, primary metals and metal processing products, textile products, general machinery parts and equipment, and transportation machinery parts. Through this, it was confirmed that a horizontal division of labor and competition systems are being established not only in the global market but in partner markets as well.

   5) Measuring the inducement structure of production and trade in the materials, parts and equipment industries of CJK shows that the spillover effects of all three countries increased in each other, indicating the formation of interdependent GVC linkage.

   6) The direction of CJK spillover effect changed from “China → Japan, Japan → China, Korea → Japan” in 2000 to “China → Korea, Japan → China, Korea → China” in 2000, signifying a rise in China’s influence.

   7) When examining the results of direct and indirect decomposition of the spillover effects among the three countries, indirect spillover effects were found to be quite small.

   8) Overall, Japan’s materials, parts and equipment industries are highly concentrated in domestic production and show a relatively low level of production-induced effects for other countries.

   Fourth, GVC linkage was verified through a survey of materials, parts and equipment companies. The survey was conducted on 3,260 materials, parts and equipment companies during January 2021, and 502 valid samples were obtained.

   The importance of China and Japan was once again confirmed as a result of a survey on the need to reorganize the supply chain of the materials, parts and equipment industries in Japan and China caused by COVID-19 and diplomatic issues. The results indicate it will be difficult for a new form of GVCs to replace Japan and China for the time being.

   The importance of Japan and China as trading partners is still high, and there is low possibility of changing sources of procurement from Japan or China. In the end, despite many restrictions due to non-economic issues, Japan and China remain important partners for Korean’s materials, parts and equipment companies. Therefore, the government needs to take this situation into account and actively engage in diplomatic efforts for a win-win approach with China and Japan.

   However, CJK represent one of the most sensitive regions to non-economic shocks such as natural disasters and disputes between the United States and China. Therefore, it is necessary to shift from the existing cost- and efficiency-based global value chains (GVC) management to a rational GVC management based on supply chain stabilization.

   As the trend of strategic weaponization is expected to continue gaining strength in the core materials, parts and equipment industries, it is necessary to move away from monopolistic supply chains and pursue a strategy for multi-polarization of the supply chain, and reasonable decoupling from countries where potential risks exist.

   In addition, domestic self-reliance should be promoted in fields with high foreign dependence, such as the semiconductor display equipment industry. Also, most companies in the materials, parts and equipment industries are small and medium-sized enterprises (SMEs) greatly lacking in terms of  technology development and market dominance, meaning that measures are urgently needed to address this concern.

   Finally, considering the pace of development in China’s materials, parts and equipment industries over the past 20 years, the gap in competitiveness of the materials, parts and equipment industries in CJK will be greatly reduced, and the GVCs of China-centered materials, parts and equipment industries are expected to show significant advances. It will be necessary to prepare countermeasures by the government and companies accordingly.

   The materials, parts and equipment industries in Korea should transition from general-purpose technology to more specialized and advanced technology. Towards this, the policy proposals in this report, based on an analysis of competitiveness and corporate satisfaction with government policies, merit careful consideration.