Policy Reference
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Policy Reference
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The Impact of Trade Liberalization on Consumer Welfare: A Focus on Quality Diversity
This study investigates the impact of domestic price changes due to external shocks such as trade liberalization or global inflation on quality diversity and consumer welfare. Free trade agreements (FTAs) can reduce the prices of ..
Chul Chung et al. Date 2023.05.25
Trade policy, Free tradeDownloadContentSummary<This study investigates the impact of domestic price changes due to external shocks such as trade liberalization or global inflation on quality diversity and consumer welfare. Free trade agreements (FTAs) can reduce the prices of imported goods through tariff elimination or reduction, making it crucial to evaluate academically and in terms of policy how this price reduction affects consumer welfare. In contrast to prior literature on trade liberalization, this study emphasizes the role of quality diversity in explaining its impact on consumer welfare. We focus on how consumers’ qualitative responses to price changes, such as selecting high-quality products when prices decrease due to tariff reductions or responding to price increases due to tobacco taxes by adjusting the quality of their purchases, can influence consumer welfare. This study also provides policy implications regarding the impact of trade liberalization on consumer welfare.Using time-series data on wine and cigarettes in South Korea, this research estimated price elasticities and separated them into consumers’ quantitative and qualitative responses to price changes. The results indicate that the qualitative margin accounts for as much as 40% of the total, demonstrating that consumers’ qualitative responses to price changes are quite significant. We also found a statistically significant consumer behavior mechanism of quality shading in response to price increases for both wine and cigarette consumption, suggesting that consumers’ qualitative responses are as important as their quantitative responses. Moreover, we found that price reductions not only increase the consumption quantity of the same product but also lead to a shift to higher quality products, further enhancing consumers’ welfare. For the first time in the literature, we analyzed qualitative margins by income level and found that the price elasticity is higher for lower-income consumers, and most of it can be attributed to qualitative responses. These empirical findings suggest that consumers can adjust their spending on a particular good through qualitative adjustments while maintaining their overall consumption, particularly in response to rapid inflation. This response mechanism is particularly more effective for low-income households.Similarly, this study confirmed the existence of consumer quality adjustment responses to income changes through income elasticity analysis, with the size being larger among low-income households. Qualitative responses to income changes demonstrate that consumers can adjust their expenditure by maintaining the consumption level of staple goods such as rice or pork while reducing the expenditure amount, particularly in situations of declining real income during economic crisis. As with the analysis of price changes, our results suggest that this consumer behavioral mechanism in response to income changes can be also more effective for low-income households.The findings of this study indicate that trade liberalization’s expansion of quality diversity has a positive impact on consumer welfare by strengthening consumer mechanisms, particularly in response to inflation, drastic price changes, and real income declines during economic crises. These results provide a novel perspective on trade liberalization’s contribution to consumer welfare, with the analyzed quality diversity effect distinct from the product diversity described in traditional trade literature, thus representing a new source of gains from trade. Consequently, when assessing trade liberalization’s economic impacts, the quality diversity factor should also be considered. In addition, this study demonstrated that quality diversity expansion for consumers can be achieved for agricultural products through not only agricultural production policies but also trade liberalization. The resulting policy implications are significant for both average consumers and low-income groups in terms of welfare.However, the qualitative response of consumers to price changes may not always improve policy efficacy, particularly for certain types of goods, such as harmful goods taxes, where product quality diversity may not necessarily have a positive impact and can even have a negative one. For instance, if consumers switch to low-quality cigarettes in response to an increase in cigarette taxes, the quality-downgrading response may ultimately have adverse effects on health indicators related to cigarette taxes. Furthermore, when discussing harmful goods taxes, such as soda taxes and fast-food taxes, to combat obesity problems, the expansion of quality diversity can have the opposite effect, increasing the supply of unhealthy low-quality carbonated drinks or fast food. These discussions hold significant policy implications, indicating that to achieve health policy objectives through harmful goods taxes, it is necessary to prevent low-quality goods from entering the market, which could pose greater health risks. Finally, empirical research follow-up is needed for staple goods such as rice or pork, with future studies needing to consider consumers’ qualitative responses when using price elasticity. -
The Taiwan Issue and Korea's Economic Security in the Era of U.S.-China Strategic Competition
During the Cold War, the United States and China began visible efforts to normalize relations in 1972, with the strategic intent of jointly responding to the common threat posed by the Soviet Union, and finally established diploma..
Jaichul Heo Date 2023.03.09
경제안보, Chinese politicsDownloadContentSummary<During the Cold War, the United States and China began visible efforts to normalize relations in 1972, with the strategic intent of jointly responding to the common threat posed by the Soviet Union, and finally established diplomatic relations in 1979. In this process, the Taiwan issue was one of the biggest obstacles to normalizing bilateral relations. Nevertheless, the two countries succeeded in establishing diplomatic relations by agreeing on the “One China” principle (policy) and recognition of non-governmental exchanges between the U.S. and Taiwan, and have managed the Taiwan issue based on three joint statements made by the two countries. However, the Taiwan issue has been brought to the forefront again, mainly due to great transformation in the international order and strategic competition between the U.S. and China, created by the rise of China and the response of the U.S. to contain it. Of course, even after the establishment of diplomatic relations between the U.S. and China, friction between the U.S. and China over the Taiwan issue and confrontation between both sides of the Taiwan Straits (i.e. Chinese mainland and Taiwan) have continued. However, the recent U.S.-China strategic competition has further increased the risk and uncertainty of the Taiwan issue. In addition, with the outbreak of the Russia-Ukraine War, the international community's concern about the Taiwan Strait has grown, and the strategic value of Taiwan is rising even more in the era of the Fourth Industrial Revolution, as an important actor in the global semiconductor supply chain. Against this background, this study analyzes the impact of U.S.-China strategic competition on the Taiwan issue and considers the implications for Korea in terms of supply chain stability, industrial competitiveness, and economic statecraft, which are important elements of economic security.First, the supply chain instability that can result from an emergency in the Taiwan Strait will mainly occur along the maritime transportation route, which accounts for an overwhelming portion of Korea's import and export volume. The maritime transportation routes passing through or near the Taiwan Strait account for 33.27% of Korea's maritime transportation, and if an issue arises along this route, it is calculated that an economic loss of KRW 445.2 billion per day would result even when only accounting for major resources and products. According to a wargame scenario of an emergency situation in the Taiwan Strait, fierce battles are expected to take place between seven days and 70 days, which could cause up to 31 trillion won in economic losses during the period of active engagement alone. In addition, the expected amount of economic damage is expected to increase further when including other resources, products, and air transportation routes in the analysis.Meanwhile, military skirmishes between South Korea and China or between the two Koreas, that may occur as a result of a military clash between the U.S. and China in the Taiwan Strait, can be expected to destabilize the Korean Peninsula and have a major negative impact on the Korean economy. In other words, the instability of the Taiwan Strait can be added as an element of the so-called “Korea discount.” In addition, if South Korea intervenes in the Taiwan issue in any way, China is expected to use its own economic power to deploy economic statecraft toward sanction measures against South Korea. Judging from various circumstances, China may impose more high-strength economic sanctions in relation to the Taiwan issue than those seen during the THAAD issue. Accordingly, as in the case of the THAAD issue, we can expect suspension of various economic cooperation projects, the promotion of boycotts, restrictions on tourism, strengthening of sanctions against Korean companies in China, and restrictions on imports of Korean products, as well as more systematic and sophisticated forms of economic statecraft implemented in accordance with the Export Control Law of the People’s Republic of China (中华人民共和国出口管制法) and the Law of the People’s Republic of China on Countering Foreign Sanctions (中华人民共和国反外国制裁法), which came into effect in 2021.In order to prepare for risks and uncertainties caused by U.S.-China strategic competition and cooling cross-strait relations, Taiwan, which has a high economic dependence on China like Korea, is pushing for diversification of its supply chain and imports/exports, stronger competitiveness in key industries such as semiconductors, and closer economic cooperation with allies. Such strategic measures by Taiwan, conducted to ensure its survival, present not only opportunities but also challenges for the Korean economy. In fact, Taiwan's New Southbound Policy (新南向政策), the Moon Jae In government's New Southern Policy (NSP), and the Yoon Suk Yeol government's Strategy for a Free, Peaceful, and Prosperous Indo-Pacific Region all aim at competing over the ASEAN market and fierce competition to gain the upper hand in the semiconductor industry.As such, in a situation where tensions over the Taiwan issue escalate as U.S.-China strategic competition intensifies, Korea must make thorough preparations to cope with the direct and indirect impacts this will have on Korea's economic security.From the perspective of Korea’s economic security, the worst case scenario regarding the Taiwan issue is a situation where military conflict breaks out in the Taiwan Strait and Korea is drawn into this conflict. It will be necessary to consider such a situation as Korea carefully assesses the benefits and risks associated with the U.S. Army deploying a Multi-Domain Task Force (MDTF) to the Korean Peninsula, or transition of the mission assigned to the USFK, focusing on national interests.In addition, more attention and measures are needed at the national level to ensure the safety of major maritime traffic routes, including the Taiwan Strait. This is because strengthening maritime power is essential not only in terms of traditional security, but also in terms of economic security, as examined in this study.And, from the perspective of tensions on the Taiwan Strait and economic security, another important factor will be to improve inter-Korean relations. This is because even should a military conflict occur in the Taiwan Strait, efforts to improve inter-Korean relations could minimize the destabilizing effect this has on the security of the Korean Peninsula. If inter-Korean relations are not managed stably and left in a confrontational state, military clashes in the Taiwan Strait could directly escalate into security instability on the Korean Peninsula, for instance in the form of military provocation by North Korea.Meanwhile, as seen with Taiwan's New Southbound Policy, the Korean government needs to establish a more detailed foreign policy focused on ASEAN and South Asia to promote stability in the supply chain and diversify its import sources and export markets. The Strategy for a Free, Peaceful, and Prosperous Indo-Pacific Region announced by the current government of Korea presents the direction of these efforts, and further steps should be taken to establish detailed policies.In addition, just as Taiwan is striving to strengthen its competitiveness in the semiconductor industry as a survival strategy amid U.S.-China strategic competition, Korea should implement more active policies to strengthen its competitiveness and improve the conditions for corporate investment in the area of system semiconductors. More active support will be necessary at the national level to maintain or widen the existing technology gap Korea currently enjoys in the memory semiconductor field, and to gain competitiveness in the areas of system semiconductors, materials, and equipment.Lastly, the Korean government must carry out active measures and increase its policy focus on trust-building efforts with other stakeholders in the region, another key element of economic security. While it is very important to de-escalate potential threats by building trust with other parties for economic security, as well as to secure a material and institutional basis, interest and efforts in this area appear to be relatively lacking. We should reduce the uncertainty of economic sanctions by building trust with China and actively seek a constructive role as a middle power country to restore trust between the U.S. and China. -
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The Linkage between International Trade and Labour Standards: Current Status and Implications
Through the evolution of international trade agreements, the conceptual boundaries of ‘trade’ have expanded beyond the simple movement of goods across national borders to a matter of common economic governance among countries. I..
Cheon-Kee Lee Date 2022.12.30
Labor market, Barrier to tradeDownloadContentSummary<Through the evolution of international trade agreements, the conceptual boundaries of ‘trade’ have expanded beyond the simple movement of goods across national borders to a matter of common economic governance among countries. In particular labor standards have long been a controversial issue in international trade. The linkage between trade and labor standards is expected to emerge as an important trade issue in the future. Internationally recognized labor standards such as those adopted by the International Labor Organization (ILO) have been incorporated into FTAs, and the level of protection of labour rights has been enhanced significantly with respect to both substantive and procedural FTA provisions. Further, there have been a couple of cases where a Party’s failure of FTA labour obligations was referred to judicial review under FTA dispute settlement procedures.This study examines the trade-labour linkage in three main aspects. Firstly, the most traditional approach of linking trade and labour standard has been to improve labour standards in trading partners through bilateral and plurilateral trade agreements including FTAs. This trend is in line with the recent increase in litigation between countries under a FTA dispute settlement procedure. Since 2018, there have been a total of 18 cases where Parties invoked FTA dispute settlement provisions, four of which were labour- or environment-related disputes. It is also worth noting that two out of these four cases were complaints filed against Korea.The main components of FTA labour standards include (ⅰ) incorporation of ILO international labour standards (ⅱ) non-derogation (ⅲ) effective implementation of labour obligations (ⅳ) labour cooperation, and (ⅴ) corporate social responsibility (CSR). More recent FTAs also cover issues such as gender equality, protection of migrant workers' labour rights, and import prohibition on products made by forced labour. With respect to enforceability and dispute settlement, one should pay particular attention to the Facility-Specific Rapid-Response Labor Mechanism or “RRM”, which was introduced by the United States for the first time in USMCA. Under the RRM, the Parties can address settle labour-related matters more quickly and effectively than the traditional ‘state-to-state’ dispute settlement system, by directly targeting ‘facilities’ responsible for alleged infringements of freedom of association or the right to collective bargaining.Further, the Panel of Experts ruling made on January 20, 2021 under the Trade and Sustainable Development (“TSD”) Chapter of the Korea-EU FTA would likely have an important implication in future negotiations, interpretation and application of FTA labour standards. In that case the Panel held that government measures that address labour rights, irrespective of whether such measures were actually targeted at industries, companies or workers engaged in international trade, can essentially be ‘trade-related’ measures under the Korea-EU FTA. According to the Panel, trade and fundamental labour rights are intrinsically linked.Secondly, more recently a series of attempts have been made to introduce a new trade-labour linkage model that can be distinguished from the previous FTA labour standards, as witnessed in the ongoing IPEF negotiations. Labour issues are being dealt with as a core agenda in Pillar 1 led by the United States. Theoretically, the IPEF Pillar I labour standards could be (ⅰ) USMCA or USMCA plus level, (ⅱ) U.S. FTA level prior to USMCA, or (ⅲ) based on ILO international labour standards. For instance, in the negotiation the United States might try to link the issue of forced labour to supply chain issues to match the USMCA level. It is also important to note that without the obligation to prohibit imports made by forced labour, a certain level of leverage can be made against forced labour-issues within IPEF Parties’ domestic law and policies, via the incorporation clause of the ILO Declaration on Fundamental Principles and Rights at Work. The same declaration refers to the principle of 'elimination of forced labour' as a fundamental labour right. Thus for IPEF Parties it would likely be an important task to make eliminate use of fource labour economy-wide. It would be wise to start from sectors and industries where concerns have been raised related to the possible use of forced labour. The Trafficking in Persons Report of July 2022 and the Report on Human Trafficking in the Seafood Supply Chain of 2020 by the U.S. Department of State can be a starting point.Thirdly, in addition to the trade-labour linkages at the international level, the linkage at domestic level appears to be in full swing. In particular, import restrictions on products made by forced labour during product production process are becoming visible, especially in the U.S. and EU. The Uyghur Forced Labor Prevention Act or “UFLPA”, which went into effect on June 21, 2022 in the U.S., is the most obvious example. The UFLPA provides for (ⅰ) import prohibition of goods made by forced labour and (ⅱ) sanctions against individuals and businesses related to the use of forced labour in Xinjiang Uyghur Autonomous Region (XUAR), China. Under the rebuttable presumption under the UFLPA, it has been reported that a considerable amount of imports from XUAR have currently been withheld because importers could not demonstrate that the product at hand was not produced in XUAR nor otherwise using forced labour. According to the UFLPA Enforcement Strategy published on June 17, 2022, polysilicon, cotton, tomatoes, and apparel products were designated as 'high-priority sectors for enforcement' and are receiving the most strict import restrictions. Further, since its implementation, a number of enforcement cases have been confirmed on other sectors including electronics, agricultural products (other than tomatoes and tomatoe products), pharmaceuticals, and base metals. It is expected that CBP will continue to expand UFLPA enforcement and eventually require supply chain tracking for a wider range of products.In a similar vein, the European Commission announced on September 14, 2022 the Proposal for a Regulation on prohibiting products made with forced labour on the Union market. The proposal prohibits the placing on the EU market of products made with forced labour as well as their export from the EU. Unlike the UFLPA, the EU proposal does not explicitly refers to XUAR or China, but are designed to be universally applicable to all products regardless of country of origin (even including EU member states within its internal market). It is expected that the U.S, and EU will develop a consistent trend to make stricter labour standard compliance mandatory for the entire supply chain of products.Based on the analysis above, this study advises that the Korean government identify trade and labour-related concerns raised or likely to be raised by other trading partners and rationales behind it, and to assess possibility of such concerns to become a formal trade disputes filed against Korea through FTA dispute settlement mechanisms. It is important to take such assessments into consideration when preparing future negotiation strategies for FTA/IPEF labour standards. Also, clarifying the scope, legal nature, and meaning of each FTA labour standard would be a meaningful task to secure legal stability and predictability, and to prevent trade disputes related to FTA labour obligations.It is also necessary to prepare for the possibility that FTA labour standards may act as regulatory barriers to Korean companies that are established in the third countries and produce and export goods to the U.S. For instance, the IPEF can have significant implications because many ASEAN countries such as Vietnam, Thailand, the Philippines, Indonesia, and Malaysia are participating in the Pillar 1 negotiation.For the IPEF negotiations, since market access is not a subject of negotiation in IPEF, it is necessary to think about what can be presented as a carrot to the stick of strict labour standards. If the IPEF includes an enforcement mechanism, such an enforcement mechanism should largely be based on either incentives or penalties for compliance and breaches of labour standards.Lastly, it is necessary to be take caution in introducing laws and systems for regulatory measures that link labour standards and supply chains, such as measures to prohibit imports made by forced labour. To prepare for labour standards and supply chain-linked regulatory measures and minimize the adverse impacts, this study advises that the Korean government consider establishment of a single response system that can jointly respond at the national level to such regulations. -
Climate Change and its Impact on Bangladesh
Climate change poses one of the greatest threats to humanity and nature, with Bangladesh recognized as one of the most vulnerable countries due to its geographic location. The lives of Bangladeshi residents are directly or indirec..
Yoon Jae Ro et al. Date 2022.12.30
경제안보, Economic cooperation India and South AsiaDownloadContentSummary<Climate change poses one of the greatest threats to humanity and nature, with Bangladesh recognized as one of the most vulnerable countries due to its geographic location. The lives of Bangladeshi residents are directly or indirectly affected by frequent heat waves, droughts, and floods caused by climate change. Various statistics and studies show that Bangladesh’s vulnerability to climate change is not only affected by long-term changes such as a rise in global temperature and precipitation patterns but also by mid- to short-term changes such as sea-level rise and an increase in natural disasters.Bangladesh is considered one of the most vulnerable countries to flooding and rising sea levels, as it has the world’s largest delta area and more than 70% of its total land area is less than one meter above sea level. Extreme climate change and flooding are causing a decline in agricultural production in Bangladesh’s major agricultural areas, making it increasingly difficult to secure sufficient supplies of drinking water. Additionally, urban slumming due to excessive migration to inland cities by coastal residents who have lost their livelihoods is emerging as a new social problem.The Bangladesh government has presented various policy directions to address this situation. It has included climate change response strategies in its long-term economic development policies, such as Delta 2100 and PP2041. Development policies such as 8FYP and ADP focus on flood response capabilities and water resource management. Bangladesh has also established various national plans and initiatives related to climate change mitigation and adaptation to actively respond to the impacts of climate change that threaten the population.Furthermore, Bangladesh, as the chair of the Climate Vulnerable Countries Forum, is a leading voice in the international community for climate-vulnerable countries. In 2010, Bangladesh became the first least-developed country to establish a trust fund for the Climate Vulnerable Countries Forum, encouraging the international community to provide financial support for climate-vulnerable countries.Bangladesh was the world’s second-largest recipient of climate change ODA aid in 2020, but there is still room to improve Korea’s support for the nation. Bangladesh is a core partner country for Korea in ODA activities and presents good prospects for expanding the size of cooperation in the future. With relatively limited resources available, Korea needs to plan and implement projects that meet the needs of the recipient country and Korea’s fields of expertise as efficiently as possible. It will also be necessary to derive cooperation measures in each field in the direction of supporting Bangladesh’s efforts to respond to climate change. -
China’s Green Finance Strategy: the Policy and the Market
China is a leading nation in the area of green finance, deeply recognizing that carbon neutrality should be accompanied with green finance to boost development of the green industry and actively working to develop green financial ..
Jiyoung Moon and Hyojin Lee Date 2022.12.30
Financial policy, Capital market ChinaDownloadContentSummary<China is a leading nation in the area of green finance, deeply recognizing that carbon neutrality should be accompanied with green finance to boost development of the green industry and actively working to develop green financial markets. In 2016, China published the “Guidelines for Establishing the Green Financial System,” which provides core guidelines for establishing the domestic green financial market. These guidelines define the concept of green finance in China, namely as providing financial service to support projects such as for environmental protection, renewable energy development, and green infrastructure construction for response to climate change and efficient use of resources in economic activities. Viewing green finance as an important strategic policy tool for China to achieve its carbon neutrality goal, this research explores China‘s green finance strategy in terms of policy establishment and market formation, the tools for supporting domestic green industry development, and global cooperation, while also aiming to provide suggestions for Korea-China cooperation in the green finance field.Chapter 2 studies China’s policy establishment and market status in terms of green loan and bond markets, which are the main components of China’s green finance market. China’s green loan market is largely operated by state-owned banks and some large commercial banks as major players. These provide loans for domestic green projects to boost China’s green economy development. The support provided by these banks has increased the size of China’s green loan market to over 15.9 trillion RMB, making it the largest market in the world in 2021. China’s green bond market, as well, is one of the largest in the world. Its size recorded 1.56 trillion RMB in 2021, and according to the Climate Bond Initiative it is the second largest green bond market in the world after the United States. In China’s green bond market, local governments and corporations act as major suppliers of green bonds. According to the issuance type and purpose of use, China’s green bonds can be classified into various categories including finance bonds, intermediate bills, commercial bills, corporate bonds, and enterprise bonds. Also, there are various management guidelines according to the bond type and entity ownership. These guidelines have different requirements about supervisory authority, requirements of information disclosure, and necessity for evaluation, and are adopted based on the issuing entity. One of the characteristics identified in this study is that China’s green bond market is largely led by state-owned companies. This may because of the government’s differentiated management structure for state-owned companies and local governments, which benefits them more than non-state-owned companies by providing relatively lenient requirements when issuing green bonds.Chapter 3 analyzes China's green finance utilization strategies in terms of supporting green industry development, attracting foreign green investment, and expanding foreign cooperation channels. First, China uses green finance to support green development, especially focusing on clean energy development, renewable vehicles, and green architecture. Various supportive measures are provided, including credit evaluation standards to expand green project financing, encouraging green architecture through local government financial support, and green loans and subsidies to increase the consumption of renewable energy vehicles. Second, in order to boost domestic green economy development, China also implements financial policy support measures to attract foreign investment in green industries. The main method is to enlist emerging green industries in the “Catalogue of Industries for Encouraging Foreign Investment,” which includes areas such as renewable energy; hydrogen power generation; green transportation; carbon capture, utilization, storage (CCUS); environmental protection; and resource circulation. These emerging industries are significant for green economy development but still require massive capital support to solve technology bottlenecks. Therefore, the Chinese government has opened its green economy market to foreign investment not only to promote emerging industries but also to find solutions to technical bottlenecks hindering expansion of the market. Third, China intends to solidify its role as a rule-maker by vitalizing international discussions on green finance on multilateral cooperation platforms. Since 2016, China has continued to expand green finance cooperation on both multilateral and bilateral cooperation platforms with the EU, UK, France, and Germany, among others. These actions convey an image to the global community that China is one of the leading nations in the global discussion on green finance. Also, it provides opportunities for China to expand its influence on the establishment of green finance global standards.Regarding China’s green finance strategy, our study assesses that Korea could leverage various opportunities to cooperate with China in the field of green finance by: 1) expanding Korea-China investment in the green industry, 2) actively participating in international green finance cooperative organizations, and 3) strengthening institutional cooperation between Korea and China in the green finance field.First, Korea and China could cooperate in green industry investment. As both countries have a manufacturing-based economic development structure, they share similar needs for green economy transformation, such as developing renewable energy and green vehicles. Korea could consider investing in cooperation with China in these industries, especially for those areas where China encourages foreign investments such as wind power, solar power, hydrogen energy, and renewable cars. By doing so, Korea could retain its share in related Chinese markets, and could also utilize Chinese market as a test bed to commercialize green technologies.Second, Korea needs to join multilateral cooperation platforms to actively participate in the global discussion on green finance. According to China’s strategy to utilize international cooperation platforms, we analyze that China is participating in these platforms not only to lead the global discussion on green finance and strengthen its global leadership, but also to secure its position as a rule-maker in this field. However, while Korea has joined some of these platforms, the current level of participation is insufficient to assume a leading position on global green finance discussion. Therefore, Korea would benefit from joining multilateral platforms such as the Global Green Finance Leadership Program (GFLP) and International Platforms on Sustainable Finance (IPSF) in order to expand its global leadership and assume a leading position in the establishment of green finance standards in the international community.Third, it is necessary for Korea to cooperate with other countries to establish an international green financial system, regarding which China could be the starting point. In 2021, China announced the Common Ground Taxonomy (CGT) with the EU, a joint classification system for green bond issuance which draws on the EU Taxonomy. This was a significant development because it signifies cooperation with a nation leading development of the green taxonomy in the international community, the EU, thus confirming China as a rule maker of green finance international standards. In this regard, Korea must make efforts to promote institutional advancements in the green finance market. Korea’s announcing its green classification system, the “K-Taxonomy,” in 2020, could be an opportunity to pursue institutional cooperation with China on the Green Bond Taxonomy with China, and further on with the EU.Finally, in order to realize the aforementioned green financial cooperation between Korea and China, it is necessary to establish a cooperative body that can coordinate this during the renegotiation process of the Korea-China FTA. The cooperative body could enable Korea to hold regular discussions on supplementary and improvement plans for green finance cooperation with China.As carbon neutrality and the development of green industries are significant missions for both Korea and China in this era of great green transition, we hope this study can add further momentum to cooperative relations between Korea-China in the field of green finance. -
The Impact of Anti-Russian Sanctions and Implications for the Economy of Central and Eastern Europe
The Russia-Ukraine war and EU sanctions against Russia are having a negative impact not only on Russia but also on the overall EU economy, and these negative effects are expected to continue into 2023 as the war prolongs. Central ..
Cheolwon Lee and Cho Rong Kim Date 2022.12.30
Economic cooperation, Overseas Direct Investment Europe Russia EurasiaDownloadContentSummary<The Russia-Ukraine war and EU sanctions against Russia are having a negative impact not only on Russia but also on the overall EU economy, and these negative effects are expected to continue into 2023 as the war prolongs. Central and Eastern European countries, which enjoy relatively strong trade, business and energy-related links with Russia, have been hit particularly hard. Central and Eastern European countries bordering Russia and Ukraine are relatively dependent on Russia for energy, and are expected to suffer the greatest economic damage in terms of trade relations.Policies toward Russia in Central and Eastern Europe have maintained various stances depending on country, ranging from Poland, which consistently maintains an anti-Russian stance, to Hungary, a typical pro-Russian country, or have recently undergone a change in stance. Central and Eastern European countries located on the EU border or those close to Russia and have some legacy of past socialist alliances, regardless of their pro-Russian or anti-Russian ties, generally have close economic ties with Russia. Therefore, after the invasion of Ukraine, the EU’s sanctions on Russia will inevitably have a serious impact on the Central and Eastern European countries in various sectors such as trade, investment, and finance as well as the energy sector, which is expected to suffer a direct short-term impact.In 2004 and 2007, Korean companies entered Central and Eastern Europe in large numbers including the four Visegrad countries (Poland, Czech Republic, Slovakia, Hungary), set production bases in Europe, and then made further investments. The Visegrad V4 countries represent the largest export market for Korea in the EU, accounting for 28.3% of its exports to the EU in 2020. As such, Central and Eastern Europe, where Korea has the most active economic cooperation in Europe, is expected to suffer the most serious and diverse negative impacts from geopolitical crises, including the recent Russia-Ukraine war. We analyze that major countries in Central and Eastern Europe will experience slightly different economic impacts and show disparate policy tendencies toward Russia in the face of geopolitical crises, and accordingly, it will be necessary for Korean companies to prepare differentiated countermeasures. In particular, it is time to review Korean companies’ strategy toward Europe based on an in-depth analysis of the economic impact of the geopolitical crisis on countries in Central and Eastern Europe.The purpose of this study is to analyze the impact of EU sanctions against Russia on Central and Eastern European countries from various angles after the outbreak of war between Russia and Ukraine, and to draw implications for Korea’s economic relationship with Central and Eastern Europe. This study is largely composed of the following three issues. First, it shows how these Central and Eastern European countries have close economic relations with Russia, second, how the geopolitical crisis originating from Russia will affect the Central and Eastern European economy, and finally, third, how Korean companies and governments should respond to economic relations with Central and Eastern Europe. Therefore, following the introduction in Chapter 1, Chapter 2 sheds light on the relationship between Central and Eastern Europe and Russia, including trade, investment, and energy. And in Chapter 3, the EU’s sanctions against Russia and their future trajectory, the impact on the Central and Eastern European economy, and the changes in the local business environment of the companies entering the market were analyzed. Finally, in Chapter 4, based on the above-mentioned analysis and economic relations between Korea and Central and Eastern Europe, implications for Korean companies and governments were derived. -
Challenges and Implications for China’s Economic System Reform in the Third Term of Xi Jinping: Focusing on Establishing a Socialist Market Economy System
The year 2022 marks the 30th anniversary of China's declaration of economic system reform to establish a “socialist market economy system(社会主义市场经济体制)” Over the past 30 years, China has strengthened the role of the market in ..
Pyoung Seob Yang and Hongwon Kim Date 2022.12.30
Economic reform, Economic developmentDownloadContent
Summary<The year 2022 marks the 30th anniversary of China's declaration of economic system reform to establish a “socialist market economy system(社会主义市场经济体制)” Over the past 30 years, China has strengthened the role of the market in resource allocation and economic operation, and has promoted ownership reform in which both the public – the core of China's socialist economy - and the non-public sectors of the economy develop together. China has continued to build a “basic economic system of socialism(社会主义基本经济制度) with Chinese characteristics”, in other words, an economic system which is based on fundamental socialist institutions but combines market economy mechanisms. At the same time, however, entering his third term Xi Jinping has stressed a Dual Circulation Strategy aimed at common prosperity and domestic consumption (“internal circulation”), leading to forecasts that China may be strengthening the socialist nature of its economic system. Therefore, from the perspective of completing the socialist market economy system that China is pursuing, this study aims to infer changes in China's economic system in the 3rd term of Xi Jinping, specifically by analyzing tasks related to economic system reform included within China's mid- to long-term development strategy and the direction of its promotion.The reformation process of China's economic system following the implementation of reform and opening policy can be understood as one of establishing a basic economic system of socialism with Chinese characteristics. This process can be comprehended as changes in the relationship between the three elements of the basic economic system of socialism: joint development of public and non-public sectors of the economy (ownership relationship); the coexistence of various wealth distribution methods, with labor income as the main body (distribution relationship); and the socialist market economy system (relationship between market and government). In addition to reforming its economic system, China's opening and trade policies to connect the domestic economy and the world economy have played an important role in promoting domestic reform. From this aspect, China has pursued a strategy of linking reform and opening, which means to promote reform through opening. During his official report to the 20th National Congress of the Communist Party of China, Xi Jinping announced the goal of reforming the economic system, while also reaffirming that accomplishing the socialist market economy system lies at the foundation of the “Basic Economic System of Socialism” In addition, reforming current wealth distribution systems for the realization of common prosperity, promoting Dual Circulation as a new development structure, and institutional opening-up with regard to rules, regulations and standards were presented as important tasks for the next five years.This study focuses on analyzing these issues. First of all, the key to completing the socialist market economy system is to complete market-based allocation of production factors. It includes the market supply of land, free labor mobility, and marketization of raising capital, together with marketizing transaction and standardization of new production factors like technology or data. In this study, we identified the areas of land system reform, “hukou(户口)”system reform, interest rate and capital market reform as the most representative tasks related to this goal. Second, as it advances toward a new development structure through dual circulation, China will accelerate reforms to eliminate obstacles blocking the virtuous circle of production, distribution, and consumption. To promote a virtuous circle within the domestic economy, reform tasks have been presented to allocate production factors at the stages of production, distribution, and consumption. Third, achieving common prosperity is a key goal of Chinese modernization pursued by China and thus will be further promoted as an important goal in the 3rd term of Xi Jinping. In order to realize common prosperity, reformation of the wealth distribution system is inevitable. Common prosperity will be pursued in two aspects: strategies to increase the size of the economic “pie,” and those to ensure a fair share for participants. The former is to form an olive-shaped income structure by maintaining a stable income for workers while fostering a middle class, while the latter is to reduce relative wealth inequality through redistribution and tertiary distribution. Fourth, more opening efforts will be made to connect the domestic economy and the international economy, in the form of institutional opening-up that connects rules, regulations, management, and standards related to investment and trade globally. However, there is a need for caution when considering how the strategy links safety and openness in response to risks arising in the opening-up.The Chinese economic reform and opening-up aimed at achieving China's socialist market economy will continue in the third term of Xi Jinping. This study performed an in-depth forecast, based on the criteria of marketization and privatization, on the direction of China's future economic system reform. Marketization reform is expected to be pushed ahead, focused on market-based allocation of production factors, while privatization centered on reformation of mixed ownership is also likely to be gradually advanced. However, while such reform is taking place in the Chinese economy, the possibility of competition between China's socialist market economy system and the Western capitalist economic system continues to escalate amid the strategic competition between the U.S. and China. Under this situation, it will be an important task for a middle power like the Republic of Korea to firmly establish its principles and directions for competition issues as they arise. -
Comparison of ESG Raters and Rating Scores: Focusing on Korean Firms
In response to increasing demand for sustainable management, adopting Environmental, Social, and Governance (ESG) measures is now more important than ever. Firms now must disclose ESG performance to receive investment and meet the..
Jiwon Park and Yerim Lee Date 2022.12.30
Financial system, Business managementDownloadContentSummary<In response to increasing demand for sustainable management, adopting Environmental, Social, and Governance (ESG) measures is now more important than ever. Firms now must disclose ESG performance to receive investment and meet the regulation making ESG disclosure mandatory in many countries and exchanges.With growing intertest in ESG and relating topics, evaluating firms’ ESG performance become necessary. Many regional and global ESG raters exist, focusing on different sets of firms. Regional ESG raters such as Sustinvest and Korea Institute of Corporate Governance and Sustainability (KCGS) in Korea are more knowledgeable in domestic situations and Korea-specific characteristics, and in particular, they can evaluate companies without English ESG and business reports. However, regional raters mostly focus on domestic firms, making it difficult to compare to internatioanl companies. Global raters have an advantage in this regard, however, their coverages in Korea are restricted to very large global companies. Major global raters include Sustainalytics, Moody’s, MSCI, S&P Global, CDP, Refinitiv, Bloomberg, and FTSE.Unlike credit ratings, ESG evaluation is heterogenous across raters as a company’s ESG performance is assessed using non-financial indicators with strong qualitative characteristics. Divergence in ESG evaluation is inevitable due to difference in eveluation objective, standards, categories, measurement, etc. However, if ESG ratings diverge too much, it misleads the investors and researchers by sending confusing signals on ESG performance. This research focuses on the divergence of ESG rating of Korean firms, and by following previous research that decompse ESG rating divergence in scope, measurement, and weighting.Chapter 2 analyzes the major raters’ methodologies, standards, objectives of ESG ratings. We focus on Sustinvest and KCGS for regional raters, and Refinitiv, Moody’s, Sustainalytics, and CDP for global raters. Each rater focuses on heterogeneous factors to produce the final scores and ratings. Except for CDP, the objective of global raters’ ESG rating is to provide information to investors, as a part of their financial service. Korean raters both sum E, S, G scores and subtract controversy scores of each area, similar to Refinitiv. The two agencies have different objective as well; Sustinvest is to provide information to investors, on the other hand, KCGS is a part of Financial Services Commission, rating ESG performance to provide information to evaluated firms and to support sustainable management.In chapter 3, we empirically analyze the divergence in eight ESG ratings of Korean companies. We show that rated companies by the eight raters are not representative firms. The rated firms are disproportionately large and in specific industries, which is more noted in global raters. We also show the correlation coefficients of rater pairs and decompose the divergence into contributions of scope, measurement, and weight. The average correlation coefficient is 0.48; while the coefficient between Sustinvest and KCGS (Korean raters) is 0.7, coefficients between Korean and globla rater are not as large, ranging from 0.03 to 0.641. The average coefficients of each E, S, G score are 0.59, 0.48, and 0.43. In fact, the correlation coefficients of Korean-global raters are vefry small, implying that divergence in G is the greatest. Finally, I redefine each ESG rater’s rating categories into 26 common categories and perform variance decomposition. I find that measurement contributes 37% of the divergence, Scope 77%, and weights -13%.This research is first to conduct a very close analysis of ESG score gap among Korean companies, including domestic evaluators, and it empirically analyzes rater differences to derive policy implications and further contributes academically. -
Korea-Australia Supply Chain Cooperation: Focus on Critical Minerals and Hydrogen
The U.S.-China rivalry and COVID-19 have increased the supply chain's vulnerability and reshaped the global value chain. The weaponization of resources, such as Russia's natural gas export restrictions in response to the war in Uk..
Seung Jin Cho and Minlee Shin Date 2022.12.30
경제안보, Economic cooperationDownloadContent
Summary<The U.S.-China rivalry and COVID-19 have increased the supply chain's vulnerability and reshaped the global value chain. The weaponization of resources, such as Russia's natural gas export restrictions in response to the war in Ukraine, demonstrates that the government must take urgent measures to stabilize the supply chain. Korea relies entirely on critical minerals such as lithium, cobalt, nickel, and rare earths from other countries because these minerals are essential for the electric vehicle and secondary battery industry. Moreover, Korea will increasingly rely on hydrogen imports to achieve carbon neutrality by 2050.Korea and Australia signed a memorandum of understanding on December 2021 for cooperation in the area of critical mineral supply chains, carbon-neutral technology and a clean hydrogen economy. Australia is the world's largest producer of lithium and contains large deposits of other critical minerals such as nickel, of which it has the largest reserves in the world. Australia has a favorable geographical environment for producing hydrogen. Australia also has the advantage of being relatively close to Korea, and is one of the countries expected to become a major hydrogen-exporting country. From Australia’s point of view, Korea offers a stable demand for critical minerals and hydrogen. Therefore, bilateral cooperation to stabilize the supply chain is expected to increase. Accordingly, this study analyzes Australia’s policy on critical minerals and hydrogen, and the current status of international cooperation. Based on this, effective measures to strengthen the supply chain cooperation between Korea and Australia are derived.The Australian government announced its critical minerals strategy in 2019 and 2022. This critical minerals strategy and modern manufacturing initiative were launched to boost the weak indigenous manufacturing sector. The Australian government is also aiming to boost the capacity of downstream industries by leveraging its strengths in the mining sector of critical minerals. This policy is also found in Western Australia’s Future Battery Industry Strategy and Critical Minerals and High-tech Metal Strategy announced by the state government.In addition, the Australian Government has announced the National Hydrogen Strategy in 2019 under the vision of becoming a leading country in the global hydrogen industry by 2030. Also, all Australian states are implementing a hydrogen strategy or plan, and are committed to fostering the green hydrogen sector. They also aim to promote demonstration projects and research assistance to improve efficiency in the hydrogen field, enhance community trust, and improve institutional problems.Regarding Australia’s international cooperation in critical minerals, Australia participates in the multilateral Minerals Security Partnership. Australia and the U.S. plan to build a critical mineral facility in Texas to import critical minerals from Western Australia. Japan has been collaborating closely with Australia since China banned rare earth elements exports in 2010. Australia and Japan signed a critical minerals partnership in October 2022. The Australian state government and companies are also participating in the European Commodity Alliance launched in September 2020. Australia has also developed active research collaborations with India.Australia's international cooperation in the field of hydrogen is focused on producing hydrogen in Australia, especially green hydrogen, and transporting it to partner countries for their own use. Japan can be evaluated as the country with the most progress in cooperation with Australia in the hydrogen field, and cooperation with Korea and Germany is also active. Many pilot projects, feasibility studies, and joint research projects are underway with Japan. Furthermore, exports between Australia and Japan for commercial purpose are expected to begin around 2025.This study recommends four measures to secure the critical minerals supply chain. First, installing a critical minerals control tower will play a significant role in establishing Korea's long-term strategy for critical minerals and reducing investment risks for the private sector. Second, stronger linkage with the Australian industrial development strategy would help develop the secondary industry and Korean companies enter the Australian energy storage system market. Third, developing critical mineral technology through the establishment of a joint fund could improve critical mineral extraction productivity and strengthen competitiveness in the critical mineral processing field, where both Korea and Australia are weak. And the fourth measure is to establish a mini-lateral network that allows Australia, Korea, Indonesia or India to participate. This network would help construct a value chain between the participating countries.This study proposes three methods to stabilize the hydrogen supply chain. First, Korea and Australia should conduct more demonstration projects to evaluate the commercial and technical feasibility of hydrogen cooperation projects, as the formation of the hydrogen supply chain is at an early stage. Second, technical development of hydrogen transportation is required to introduce hydrogen produced in Australia to Korea. This development will facilitate the hydrogen transportation sector and establish the entire hydrogen industry cycle. Third, policy efforts are required to preoccupy global hydrogen technology standards and reflect Korea’s opinions in international standardization organizations through cooperation with Australia.