This paper investigates the global race in industrial policy and its intersection with national economic security strategies, examining how the Republic of Korea (ROK) can establish its strategic direction to mitigate risks from policy competition while maximizing its national interests. Driven by isolationist motives, a new trend in industrial policy has emerged, leading to the fragmentation of global value chains and, even worse, toward “deglobalization.” This trend threatens not only the international free trade system but also potentially undermines the ROK’s economic security interests. To address these challenges, we draw upon empirical and model evidence to propose strategic positioning for the ROK through clearly defined industrial policies.

Chapter 2 analyzes historical trends in industrial policies across the United States, the European Union, and China, emphasizing government interventions in the semiconductor industry, secondary battery sector, and critical mineral supply chains. Our analysis reveals that since 2010, industrial policies have become increasingly integrated with national economic security interests. In response to political restrictions and shortcomings in government action, these countries implemented various isolationist measures through their industrial policies. In the U.S., industrial policies reemerged after a long period of institutional hibernation, though the sustainability of their current political and industrial success remains uncertain. The EU developed a horizontal industrial policy framework to coordinate member states’ interests, although their responses to economic security risks have been delayed by substantial coordination costs. China’s industrial policy incorporated state objectives and an “asymmetric decoupling strategy” for strategic sectors, though this commitment to national autonomy ironically requires international cooperation. Isolationist approaches to industrial policy face a fundamental “trilemma” between simultaneously promoting domestic industrial competitiveness, safeguarding national security interests, and maximizing economic profits.

Chapter 3 examines international trade flows, investment patterns, and research and development (R&D) cooperation to assess the impact of government interventions since the 2010s. Using the Global Trade Alert (GTA) data set, we confirm an increasing trend in harmful (“red-alerted”) government interventions, which we use as a proxy for isolationist industrial policy. As countries have diversified their trading partners, China’s share of global trade has declined. However, global dependence on China for energy and critical minerals sector continues to increase. Our findings indicate that harmful industrial policies are contributing to a fragmentation of global trade flows between the global North and South. Using the Orbis Crossborder Investment data set, we observe declining investment flows between the U.S. and China, creating an “investment gap. This gap has been partially filled by countries such as Korea, Japan, and Vietnam, which have either captured China’s previous investment share in the U.S. market or attracted investment capital seeking to detour U.S.-China tensions While China has nearly matched U.S. levels of R&D investment since 2010, bilateral R&D cooperation has declined significantly as tensions between the two nations have escalated. Similar decoupling trends are evident in Life Sciences, Artificial Intelligence, and Secondary Battery research. This growing separation poses significant challenges for addressing global challenges such as climate change and digital transformation.

Chapter 4 investigates the global competition in industrial policies and its associations with the ROK’s semiconductor and secondary battery sectors using data sets from New Industrial Policy Observatory and Korea Customs Service. The data shows that government interventions have been more pronounced among advanced economies compared to developing countries. Across all country groups, policy implementation has focused primarily on dual-use products, advanced technologies, and the low-carbon sector, indicating that global policy competition targets similar strategic sectors for economic security purposes. In the ROK’s semiconductor and secondary battery industries, exports of final products and machinery to the U.S. have increased while the same exports to China have declined. In contrast, imports of materials and equipment from China have shown significant growth in both sectors. To quantify the direct effects of global policy competition, we build a Bayesian Network Model incorporating government interventions and global uncertainty. Our counterfactual analysis illustrates that the benefits of participating in the policy race are minimal, resulting in an export trade-off between the US and China. These findings imply that the ROK needs a balanced strategy of cooperation with both the U.S. and China, rather than exclusively aligning with either nation, to retain the benefits of international trade.

In the final chapter, we propose a strategic framework to guide the ROK’s industrial policy development. Best practice in industrial policy requires clear targets, well-defined national priorities, effective policy instruments and robust governance structure, all informed by comprehensive private sector feedbacks. However, the ROK’s current industrial policy tends to imitate global policy trends without establishing distinct domestic directions and objectives. To address this, we introduce the “CORE” framework to reshape the philosophical foundation of the ROK’s industrial policy. “C” represents cooperative and coexistent approaches, “O” emphasizes openness, “R” stands for resilience, and “E” encompasses efficient and eco-friendly values. Following these CORE principles, we recommend that the ROK position itself as a “Green Premium Supplier” within global value chains. Moreover, we propose that the ROK’s bilateral cooperation strategy should emphasize how its supply chain capabilities can address its trading partners’ critical needs. We also recommend establishing an "Economic Security Conflict Dialogue" to reduce policy uncertainty and foster international cooperation. To implement these recommendations effectively, the ROK government should develop a decentralized network governance system supported by a coordinator program. These government-appointed coordinators would serve as intermediaries, gathering insights from private sector stakeholders and facilitating communication channels to strengthen public-private cooperation.

The three North American countries have traditionally been an economic region with active supply chain linkages. If the three countries of North America were considered a single nation, by 2020, for every dollar of exports generated within North America, $0.94 of the added value would by added within the region itself, demonstrating a high degree of self-sufficiency. The North American Free Trade Agreement (NAFTA), a free trade agreement among the three nations that came into effect in 1994, has evolved into the United States-Mexico-Canada Agreement (USMCA) with the aim of strengthening regional supply chain contributions. The Biden administration, through the Inflation Reduction Act, introduced requirements such as conducting final assembly of electric vehicles in North America and sourcing battery components and critical minerals from North America or specific countries to qualify for green vehicle subsidies. In addition, the revivedNorth American Leaders’ Summit under the Biden administration has sought to advance cooperation by focusing on key issues such as a trilateral semiconductor forum, identifying investment opportunities through supply chain mapping, and critical minerals exploration.

Although a potential second Trump administration is expected to pursue policies with a degree of international isolationism under the banner of “America First,” a significant reduction in North American cooperation seems unlikely. Ironically, the unilateral trade policies of Trump’s first administration, particularly with China, have increased the US dependence on Canada and Mexico. This is because it remains difficult to establish fully self-contained supply chains within the US, especially in key industries like semiconductors and batteries, remains challenging. If the U.S. were to raise trade barriers against China, it would be difficult to quickly replace Chinese imports with domestic production.

In this context, this paper examines the supply chain policies and collaborative efforts of the three North American countries and seeks to identify implications for South Korea.

In Chapter 2, various policies of the three North American countries are reviewed. Beyond the trilateral leaders’ summits, there are numerous bilateral consultative bodies in place to promote trade and investment. The USMCA, as previously mentioned, enhances regional trade and cooperation among the three countries. In particular, the USMCA improves rules of origin for automobiles and other products, increasing the proportion of value added within North America to reinforce trade and supply chains centered on the region. However, the agreement also includes new provisions, such as labor-related requirements, that are not present in NAFTA and that align the USMCA more closely with U.S. interests.

As noted earlier, the U.S. pursues a supply chain strengthening strategy centered on North America through policies such as the Inflation Reduction Act. In addition, industrial policies like the CHIPS and Science Act include large investments to strengthen manufacturing capacity, which also influence organic policy shifts in Canada and Mexico. The newly inaugurated Sheinbaum administration in October 2024 is expected to continue most of the policies pursued by the Obrador government, suggesting little change in the overall framework. Mexico is likely to maintain policies aimed at promoting nearshoring and strengthening domestic control over critical minerals. A key example is the “Tax Credit Decree for Promoting Nearshoring,” announced in October 2023, which applies to investments made between the date of enforcement and December 31, 2024. Items eligible for tax credits include agricultural products like food, feed, and pesticides, as well as pharmaceuticals, medical equipment, batteries, and various automobile and transportation components. Two criteria must be met for the tax credits: investment must be made in the production, processing, or manufacturing phase of the eligible items, and over 50% of the revenues generated by the investing enterprise’s Mexican operations must come from exports.

As the U.S. promotes tax incentives and subsidies to secure raw materials and advanced industries domestically, Canada and Mexico are wellpositioned to become major beneficiaries of supply chain restructuring. For example, electric vehicles manufactured in Canada that meet a 75% regional value content (RVC) threshold qualify for USMCA preferential tariffs. Canada also serves as an option for meeting the North American final assembly requirement under the Inflation Reduction Act’s electric vehicle subsidy criteria. Amid these changes, the Canadian government unveiled a comprehensive plan in March 2023 to accelerate supply chain restructuring under the “Made in Canada” initiative. This initiative aims to maintain Canada’s competitive edge in the global market and address two fundamental challenges: the need for significant long-term investment to create a sustainable framework for supply chain restructuring and a net-zero future, and the mitigation of competitive disadvantages resulting from the U.S. Inflation Reduction Act. To address these issues, the Canadian government is focusing on sectors such as green energy, electric vehicles, batteries, and critical minerals, supported by various strategies and policies.

Chapter 3 examines the current state of the supply chain for semiconductors, batteries, and critical minerals in North America is examined. In semiconductors, as of 2022, the U.S. held a 48% share of the global semiconductor market, with particular strengths in upstream supply chain areas like design, design tools, materials, and equipment. Leveraging these strengths, the U.S.-centric North American semiconductor supply chain is well-established. Canada is a leader in AI research, notably through institutions like the University of Toronto, Alberta, and Waterloo, whose graduates fuelresearch in U.S. AI companies and drive downstream semiconductor demand. Additionally, Canadian strengths in design and AI research have attracted companies like Synopsys and NVIDIA to establish R&D centers there. On the midstream side of semiconductor manufacturing, Canada hosts companies like Teledyne DALSA and facilities for U.S. firms such as ON Semiconductor. Mexico, meanwhile, has attracted investments in mid-to-downstream semiconductor production, with companies like Vishay, Skyworks, Infineon, Texas Instruments, and NXP setting up production facilities.

In the battery sector, the U.S., Canada, and Mexico are competitively attracting leading global companies. This has boosted intra-regional trade, with notable exports of cathode materials from the U.S. to Canada and Mexico and significant reliance on Canadian imports of natural graphite for anode production.

Regarding critical minerals, the U.S. remains highly dependent on imports, with a notable concentration on a few countries. In 2023, the U.S. was 100% dependent on imports for 12 critical minerals and had over 50% dependency for 29 minerals. Mexico’s mineral exports to the U.S. exceeded 50% of its total mineral trade in 2023, reflecting its strong U.S.-centric orientation. Canada updated its critical minerals list in June 2024 to include 34 minerals, largely imported from the U.S., with iron and copper imports predominantly sourced from Mexico. However, policies in North American countries aim to enhance domestic value-added for critical minerals, with greater national control as a key strategy. Mexico revised its mining law in April 2022 to strengthen national control over lithium, a critical mineral for EV batteries and energy storage, creating a state-owned company, Litio para México (LitioMX), under the Ministry of Energy to oversee exploration, mining, use, and value chain management. Similarly, under the Biden administration, the U.S. has sought to boost domestic value-added for critical minerals, using mechanisms like Title III of the Defense Production Act (DPA). For instance, in March 2022, President Biden designated sustainable domestic mining, beneficiation, and processing of strategic materials for large-capacity batteries in the automotive and stationary storage sectors as critical to national defense, supporting domestic activities through various measures. Canada’s Critical Minerals Strategy, announced in December 2022, emphasizes locating critical mineral value chains within the country in partnership with allies. To achieve this, Canada implements tax credits such as the Critical Mineral Exploration Tax Credit (CMETC) and Clean Technology Manufacturing Investment Tax Credit.

In Chapter 4, the economic impacts of strengthened North American supply chain integration are analyzed from three perspectives. Section 4.1 examines the impact of North American supply chain integration on Korea’s forward and backward industries. To this end, the study devised a North American supply chain integration index using the international input-output table. Usingthe international input-output table, the value added contributed within North America for every unit of export within the region was measured, subtracting the added value contributed by the U.S., Canada, and Mexico to their respective exports. This approach aimed to assess the value added purely generated within North America through the activation of trade among the U.S., Canada, and Mexico.

Using this supply chain integration index, various trends have been observed. Notably, the index has shown a gradual upward trend since 2016. Given that the Trump administration began in 2017, it is noteworthy that North American supply chain integration has strengthened overall despite the “America First” policies of the Trump administration. This phenomenon remains consistent even when limited to the manufacturing sector and is particularly pronounced in industries such as automobiles, coke and petroleum refining, electrical equipment, and computers, electronics, and optical products. The supply chain integration index also shows a statistically significant positive (+) correlation with Korea’s total exports and value-added exports. A one-unit increase in the North American supply chain integration index (a $1 increase in the value-added contribution from North American trade) increases Korea’s value-added exports by about 10.5–12.7% ($0.105–$0.127). Furthermore, when North American supply chain integration occurs in one industry, it significantly contributes to Korea’s value-added exports in other industries as well. A closer examination by individual industries reveals that Korea’s retail trade, electrical equipment (batteries), and chemical industries benefit from North American supply chain integration within the same industries. In contrast, Korea’s value-added exports in coke and petroleum refining and computers, electronics, and optical products, increase more significantly when North American supply chain integration occurs in other industries. Section 4.2 analyzes the impact of policies aimed at strengthening North American trade and supply chains, such as the USMCA and the IRA, on Korea’s exports to the U.S. The quantitative analysis shows that these policies are associated with an increase in Korea’s exports to the U.S. Notably, after the IRA went into effect, monthly U.S. imports of Korean EV batteries more than doubled, driven by increased U.S.-directed investment by Korean battery manufacturers and the corresponding surge in exports of these items to the U.S.

Section 4.3 uses an event study approach to analyze the impact of the U.S.’s Section 301 tariffs on China on U.S. imports from Canada and Mexico. Tracking the long-term effects over 36 months revealed that the U.S. tariffs on China significantly and statistically increased imports from both Canada and Mexico in the long run. By industry, the effect was particularly pronounced in intermediate goods for Canada and capital goods for Mexico during the mid-term. With the expectation that the Trump administration’s second term will continue to increase U.S. efforts to contain China, these policies are likely to have positive effects on trade between the U.S. and its North American partners, Canada and Mexico.

Considering the preceding analysis, the Trump administration’s second term is expected to bring both obstacles and opportunities for North American supply chain cooperation. Potential obstacles include the possible suspension of government-led channels such as trilateral summits among the three North American countries. If the USMCA is amended again in favor of U.S. interests, tariff benefits may decrease, leading to a potential decline in North American trade. Additionally, Trump has expressed his intention to impose additional tariffs on Canada and Mexico, citing issues such as immigration and fentanyl, which could reduce U.S. imports from these countries. On the other hand, strengthened measures to contain China are likely to increase U.S. dependence on Canada and Mexico. Moreover, if universal tariffs are imposed globally rather than specifically targeting Canada and Mexico, the relative impact on these two countries could be mitigated. Overall, considering the already advanced level of integration among the three North American countries, significant disruptions to supply chain cooperation are unlikely.

Based on this outlook, the following implications are presented:
Given the high likelihood of USMCA revisions, it is necessary to review the current state of North American supply chain integration in major export sectors such as automobiles, which are central to Korea’s exports to the U.S., and prepare for a possible tightening of regional rules of origin. Since Korean automobiles enjoy stable exports driven by strong U.S. demand, it is worth considering a gradual expansion of local production volumes not only in the U.S. but also in Mexican production facilities. Additionally, in the semiconductor sector, Korea should actively pursue supply chain integration with USMCA member countries, including the U.S.

Although the three North American countries form a large economic bloc, they cannot achieve supply chain completeness on their own. Therefore, Korea should consistently develop cooperative strategies leveraging its complementarity with the North American countries. The findings from Chapter 4 suggest that industries such as retailing, electrical equipment (batteries), and chemicals, as well as semiconductors included in computers, electronics, and optical products, are closely related to Korea’s value-added exports when North American integration strengthens. Therefore, cooperative strategies can be developed, focusing on forward and backward linkages in these sectors.

Furthermore, to continuously identify agendas, it is essential to activate regular diplomatic channels such as summits between Korea and the three North American countries. By leveraging Korea’s manufacturing strengths in sectors such as semiconductors, critical minerals, and batteries—key areas of focus for the North American countries—Korea can create sustained demand for cooperation. While organizing trilateral North American summits may not be a priority for the Trump administration’s second term, if pursued, efforts should be made to align these summits with Korea-North America meetings. Even if such trilateral summits do not occur, Korea should upgrade its U.S.-focused cooperation strategy to a broader North America-focused approach through various government communication channels.

This research rigorously analyzes structural changes in Central Asia’s global value chains following the Russia-Ukraine war and proposes new directions for economic cooperation between Korea and Central Asia. Given the high likelihood of prolonged Western economic sanctions against Russia, which have been sustained at unprecedented levels since the war, it is essential to examine the structural impact of these sanctions on Central Asia’s global value chains. In particular, as Central Asian countries have exerted national efforts to enhance export competitiveness to achieve stable economic growth, this study identifies the effects of the sanctions on Central Asia’s trade structure, primarily from the perspective of exports. Moreover, amid the deepening fragmentation of the global trade environment, it is necessary to explore new directions for economic cooperation that reflect the impact of the sanctions on Central Asia’s global value chains to enhance the quality of Korea-Central Asia economic cooperation. Based on the analysis of Central Asia’s global value chains, this research presents future directions for economic cooperation between Korea and Central Asia. In Chapter 2, we analyze the foreign value-added in the exports of Central Asian countries. Specifically, using Eora’s MRIO data, we decompose the value-added of Central Asian exports from 2014 to 2022 to quantitatively identify which countries’ value-added was utilized and in which industries. There are commonalities and differences among the five Central Asian countries in terms of the share of foreign value-added in total exports, the industry-specific share of foreign value-added in exports, and changes in foreign value-added in total exports over time. Since the 2014 Crimea crisis, the share of foreign value-added in exports increased in Kazakhstan and Uzbekistan, while it declined in all other Central Asian countries. In terms of industry-specific trends, Kazakhstan and Uzbekistan primarily utilized foreign value-added in manufacturing exports, while Kyrgyzstan and Tajikistan relied more on foreign value-added in service exports. Notably, the share of foreign value-added in manufacturing exports for Kazakhstan and Uzbekistan also declined after the Crimea crisis, similar to the trends observed in the other three Central Asian countries. The relative importance of Russia as a major supplier of export value-added for all five Central Asian countries weakened after 2016. These findings suggest that the 2014 Crimea crisis has served as an external shock, triggering structural changes in the export trend of Central Asia. If the 2014 Crimea crisis has acted as an external shock that caused structural changes in Central Asia’s exports, the Western sanctions against Russia introduced after 2014 could represent those economic effects. Based on this intuition, Chapter 3 analyzes the impact of Western sanctions on Russia on the export structure of Central Asia. To this end, this research uses bilateral trade data for 190 trading partners in 26 industry categories from 2011 to 2022. Total export volumes are divided into intermediate goods and final goods exports to separately identify effects of sanctions against Russia on Central Asia’s exports of intermediate and final goods, respectively. Additionally, exports to 35 sanction-participating countries and 155 non-participating countries are distinguished to examine how sanctions against Russia influence Central Asia’s integration into global value chains. The sanctions imposed after the 2014 Crimea crisis led to a decline in intermediate goods exports from Central Asia until 2016. However, a sharp increase followed until 2018, after which the growth slowed. In contrast, final goods exports did not experience significant declines around 2014 but steadily increased after 2015, with growth moderating slightly after 2019. These findings suggest that the sanctions have heterogeneous effects on intermediate and final goods exports from Central Asia. Also, significant differences were observed in intermediate goods exports to sanction-participating and non-participating countries. After 2015, exports to sanction-participating countries continued to decline, while exports to non-participating countries recovered rapidly. This indicates a possible shift in Central Asia’s global value chain participation after the 2014 Crimea crisis, suggesting that intermediate goods exports initially directed to sanction-participating countries were redirected to non-participating countries. Notably, in the manufacturing sector, exports to non-participating countries began to concentrate more rapidly after 2014, indicating a deepening of export concentration patterns in manufacturing intermediate goods. Finally, the sanctions significantly reduced Central Asia’s intermediate goods exports, excluding those to Russia and Ukraine. Additional sanctions against Russia are estimated to have decreased manufacturing intermediate goods exports from the five Central Asian countries by 10–20%. This raises concerns that economic sanctions against Russia could limit the participation of Central Asia’s manufacturing sector in global value chains.

Based on the analyses in Chapters 2 and 3, it seems that the 2022 Russia-Ukraine war serves as an external shock that delays the integration of Central Asian exports into global value chains, both upstream and downstream, as long as economic sanctions against Russia persist. In particular, similar to the structural changes following the 2014 Crimea crisis, the 2022 war is likely to have a significant adverse impact on Central Asia’s manufacturing exports. In this backdrop, Chapter 4 explores policies to expand economic cooperation between Korea and Central Asia, focusing on the manufacturing sector. The findings in Chapter 2 reveal that, despite substantial progress in trade volume between Korea and Central Asia, Korea’s relative contribution to the value-added of Central Asian exports remains minimal. Therefore, to effectively enhance bilateral economic cooperation, it is essential to identify new cooperation strategies that reflect the structural changes in Central Asia’s trade environment caused by the Russia-Ukraine war. In particular, to respond to Central Asia’s increasing demand for cooperation aimed at export expansion(enhancing export competitiveness) and manufacturing development after the war, emphasis should be placed on strategies that enhance the value-added of Central Asia’s manufacturing exports. Additionally, with the growing importance of stabilizing supply chains for strategic resources, Central Asian countries are aiming to add higher value and expand exports of their abundant mineral resources. Central Asia is rich in key minerals critical to Korea, such as uranium, copper, anthracite, and nickel, which are also designated as strategic minerals in Korea. Furthermore, Uzbekistan and Kyrgyzstan are actively pursuing lithium development, making it necessary to explore cooperative directions for critical mineral resources as well.

In Chapter 4, an extensive review of the literature examines the development strategies and industrial status of the manufacturing and mining sectors in Central Asia. It identifies opportunities and risks for cooperation in each sector. Based on this analysis, specific directions for collaboration in these areas are proposed. For the manufacturing sector, differentiated cooperation strategies tailored to each country’s economic development stage and industrial structure are necessary. For instance, high-value-added manufacturing sectors, such as automobiles and automobile parts, are promising areas for collaboration with Kazakhstan and Uzbekistan, the more industrially advanced countries in Central Asia, given their established industrial infrastructure, financial industries, institutional frameworks, and manufacturing bases. It is important to note that the impact of sanctions against Russia varies across sectors in Central Asia’s exports. While these sanctions have significantly hindered the region’s exports of intermediate goods, their effect on final goods exports has been relatively small. Thus, cooperation between Korea and Central Asia in the manufacturing of intermediate goods should focus on supporting local production of final goods. Specifically, Korean intermediate goods manufacturers should establish a presence in the region to facilitate the local production and export of final products. Notably, Kazakhstan and Kyrgyzstan, as members of the Eurasian Economic Union (EAEU), utilize tariff benefits when exporting within the union. Additionally, Uzbekistan and Kyrgyzstan benefit from the European Union’s Generalized Scheme of Preferences Plus (GSP+), which allows duty-free exports of over 6,000 items to the EU. Local production of manufactured goods can thus offer advantages in terms of tariff reductions for exports, and the overall trade environment is expected to improve gradually.

In mineral resource cooperation, the key priority is creating high value-added through mineral processing. The five Central Asian countries, all landlocked and facing challenging international logistics conditions, have relatively underdeveloped transportation and logistics infrastructure, rendering value creation an urgent necessity. Local mineral processing not only helps overcome high logistics costs but also aligns with Central Asia’s goals of advancing its mineral processing industries to add value to its resources. In the long term, improving transportation and logistics infrastructure must include efforts such as building roads, railways, and airport facilities, as well as enhancing traffic network management through digital technologies. Since the physical expansion of logistics infrastructure requires active private sector participation, appropriate government measures are essential to encourage such involvement. Many infrastructure projects in Central Asia are currently carried out as public-private partnerships(PPPs), necessitating accurate information sharing and sufficient guarantees to mitigate risks. Additionally, initiatives such as logistics network digitalization can be pursued as part of development assistance (ODA) programs. Meanwhile, corruption poses a critical barrier, especially in the exploration, extraction, and development of natural resources, underscoring the importance of government actions. Similarly to logistics infrastructure, mineral resource cooperation generally involves large-scale, long-term investments. Thus, it is vital to establish and maintain regular intergovernmental communication channels to ensure robust enforcement of contract against corruption and rent-seeking behaviors. Given the significant power wielded by political elites in Central Asia, intergovernmental mediation and resolution efforts are even more critical when issues arise. Furthermore, as with the expansion of transportation and logistics infrastructure, it is necessary to develop policies that induce private companies to participate in mineral resource exploration, extraction, and development with a certain level of government guarantees to help distribute risks effectively.

Global trade uncertainty is exposing vulnerabilities in the supply chain and presenting challenges to international economic cooperation. The U.S.-China competition for economic and technological dominance is reshaping global trade dynamics and influencing foreign economic policies worldwide.

In this context, South Korea is enhancing economic cooperation with Latin America through agreements like the Korea-Central America Free Trade Agreement (FTA), the Korea-Brazil Trade and Investment Promotion Framework (TIPF), and the Korea-Ecuador Strategic Economic Cooperation Agreement (SECA).

Korea faces new challenges in its trade with Latin America due to the reorganization of global supply chains, the formation of economic blocs, increasing protectionism within countries, and upcoming elections in major nations. To address these issues, there is a growing need for Korea to diversify its export markets and establish stable supply chains through collaboration with Latin America. This region is rich in resources, including minerals and energy, making it a vital partner for Korea’s energy and resource security.

Korea’s exports to Latin America have been decreasing for the past decade, while imports from the region have risen. This trend persists despite FTAs with Chile, Peru, and Colombia, highlighting the need to identify the causes behind the decline and explore new export opportunities.

This report analyzes the trade dynamics between Korea and Latin America to pinpoint challenges and opportunities. It provides targeted policy recommendations and long-term trade objectives for the region that have not been previously considered, setting this study apart from existing research.

In Chapter 2, we analyze the trade and investment trends between Korea and Latin America to understand the characteristics of Korea’s exports to and imports from this region. Since 2013, Korea’s exports to Latin America have been on a downward trend, differing from its global export patterns, although its import patterns remain similar. Notably, exports to Mexico and the Dominican Republic did not decline during this period, unlike exports to other Latin American countries. Additionally, even with the implementation of the Korea-Peru FTA and the Korea- Chile FTA, Korea’s exports to Peru and Chile have decreased after some time.

When analyzing Korea’s exports to Latin America by item, it becomes clear that exports to Brazil, Mexico, and El Salvador consist largely of intermediate goods, with these exports exceeding Korea’s overall global proportion of intermediate goods. Conversely, the share of intermediate goods exported to Chile, Peru, Costa Rica, and the Dominican Republic is lower than Korea’s global average. Notably, the intermediate goods in these exports are primarily composed of automobile parts and flat panel displays.

Korean investment in Latin America varies by period and country, influenced by Korea’s investment system, Latin American economic fluctuations, protectionism, and export conditions to the U.S. Investments in Mexico focus on exporting to the U.S. and are less affected by regional economic changes. In contrast, MERCOSUR investments aim to enhance price competitiveness in local markets due to high tariffs and non-tariff barriers. Investment in the Central American Integration System (SICA) is smaller, mainly concentrated in transportation, warehousing, and business services, compared to the Pacific Alliance and MERCOSUR.

Chapter 3 examines the trade, investment, and major issues between China and Japan, which are viewed as competitors of Korea in the global market. It also discusses the United States, which has historically had a significant influence on Latin American economies. China has been enhancing its economic cooperation with Latin America by focusing on expanding trade in high-value-added products, facilitating trade through free trade agreements (FTAs), increasing investment in the manufacturing sector, and developing resources, energy, and infrastructure in the region. This trend of cooperation is believed to continue to the present day.

Japan’s export patterns to Latin America since the 2010s have mirrored those of Korea, making it important to examine Japan’s situation more closely. There is a need for in-depth research on Japan’s cooperation with Latin America moving forward. Since the 2010s, the Japanese government has been actively working to finalize FTAs with Latin American countries and enhance the utilization of existing FTAs. Beginning in 2020, the focus has shifted to eliminating trade barriers and identifying new export opportunities through intergovernmental dialogue.

For example, Japan has been using this dialogue to ease investment barriers, support the growth of new startups, and establish tax and investment agreements. Additionally, in response to rapidly changing global trade conditions, the Japanese government is promoting the establishment of supply chains for crucial minerals. In February 2024, the Japanese Ministry of Foreign Affairs announced the “Latin America Diplomacy Initiative,” aimed at strengthening the supply chain by positioning Latin America as a strategic economic security hub and supporting the expansion of Japanese companies in the region.

While the United States has significantly influenced the economies of Latin America, it is challenging to assert that it has recently adopted a specific trade policy directed at Central America. The U.S. initiated the Americas Partnership for Economic Prosperity (APEP), which emphasizes cooperation and support but lacks normative elements that directly impact trade and investment. However, as China’s presence and cooperation in Central America grow stronger, the United States is likely to seek changes in its trade policy towards the region in the future. This potential shift in policy is particularly relevant in light of the increasing Chinese investment in Mexico, indicating that a comprehensive trade policy for the Central American region could be a plausible scenario.

Chapter 4 presents the results of an analysis examining the reasons behind the sluggish growth of Korean exports to Latin America, along with policy recommendations from previous studies. As the global supply chain has evolved due to de-Sinicization and the rise of ASEAN in the manufacturing sector, Korea’s direct exports to Latin America may have been shifted to exports routed through ASEAN to Latin America. However, empirical analysis of the data indicates that, while the increase in Korean exports to ASEAN has contributed to a rise in ASEAN exports to Latin America, it cannot be concluded that Korean exports to ASEAN have significantly reduced Korean exports to Latin America—at least not until recently.

Another reason for the decline in Korea’s exports to Latin America is the reduction in Korean companies’ investments in the region. The correlation coefficient between Korea’s investment in Latin America and its exports is quite high, indicating that the ongoing decrease in investment since the mid-2010s has directly impacted the decline in exports. Interestingly, the correlation coefficient for Korea is significantly higher than that of Japan. This suggests that Japan’s decline in investment in Latin America has a lesser effect on its exports. Future research on Japan’s investment trends and export patterns in Latin America could yield valuable insights.

Korea’s limited entry into the Latin American market contributes to the sluggishness of its exports to the region. Most of Korea’s outbound foreign direct investment in Latin America is concentrated in the manufacturing and financial sectors. Additionally, investments in the service industry mainly focus on the financial, insurance, and real estate sectors, where purchases from Korea are minimal. As a result, the potential for export expansion through overseas direct investment remains relatively low.

Chronic political and social instability in Latin America, along with issues such as public safety, corruption, and inconsistent policy changes, poses significant challenges for advancing into Latin America. In Chapter 4, public safety concerns were highlighted as a particular issue for Korean companies investing in the region.

A survey conducted on Korean companies highlights several challenges they face when investing in Latin America. These challenges include difficulties in local production and parts procurement due to protectionist policies, price competition with Chinese products, challenges in gathering relevant information, excessive administrative burdens, competition with local construction firms, stringent environmental standards, and fluctuations in exchange rates.

These issues may cause companies to hesitate in making new or expanding existing investments in Latin America. However, it is important to note that it may be difficult for the government to address these challenges directly. Competition with Chinese products is a common hurdle for all global companies, not just those operating in Latin America. Similarly, the strict environmental regulations, competition with local businesses, excessive administrative work, and currency fluctuations are inherent costs associated with doing business in the region, which leaves little room for direct government intervention.

Moreover, the rise of protectionism seen today is part of a broader trend in global trade. As such, the Korean government should develop a trade strategy that takes these factors into account. However, this area is also one where direct government involvement may be limited.

Therefore, most of the difficulties presented by our companies are in areas that are difficult for the government to resolve, and rather than expecting the government to resolve them, companies should accept them and devise strategies utilizing Latin America. The beginning of devising strategies is to analyze why many multinational companies have invested in Latin America and what their strategic goals are, based on this, it is necessary to consider how advancing into Latin America can increase corporate profits.

In Section 2 of Chapter 4, we assess whether the policy recommendations from previous studies—diversifying export items, expanding exports to new markets, and increasing FTAs with Latin American countries—have been achieved at the current level. Over the past 10 years, Korea’s exports to Latin America have made some progress in diversifying export items. This improvement appears to stem from a higher proportion of intermediate goods being exported, particularly various manufacturing-related products, to many Latin American countries. However, it is challenging to provide a positive evaluation regarding the development of new markets and the expansion of exports, as Korea’s exports to this region still lag significantly behind the import scales and potential of each Latin American country.

The expansion of FTAs with Latin American countries is generally viewed positively, particularly regarding external growth. This is evident in the conclusion and implementation of the Korea-Central America FTA, following the enforcement of the Korea-Colombia FTA, as well as the completion of negotiations for the SECA agreement with Ecuador. Additionally, Korea has experienced significant short-term trade benefits from FTAs with Chile, Peru, and Colombia. However, the increase in exports that these agreements promote does not persist in the long term; instead, it gradually declines after the agreements are put into effect. Therefore, future responses and adjustments are necessary.

Based on the content of Chapters 2 to 4, policy goals and tasks have been proposed as recommendations for Korea’s trade policies toward Latin America, organized by period and target country, and detailed in a table in Section 2 of Chapter 6. In the short term, a key trade policy goal is to establish and activate a cooperation channel between Latin America. This can be achieved by focusing on countries where consultative bodies, such as the Resource Cooperation Committee, Senior Policy Council, and Joint Economic Committee, are already in place. This approach is expected to be more cost-effective compared to pursuing other goals.

The proposal for the trade policy toward Latin America includes the ‘Expansion of exports to Latin America’ as a mid-term goal. This goal requires more time to achieve than the previously mentioned goal of ‘Establishment and Activation of Collaboration Channels for Latin America,’ as it involves the collective efforts of both the government and companies. To achieve the ‘Expansion of exports to Latin America,’ several tasks have been identified, including the ‘Expansion of investment in Latin America’ and the ‘Increase in the proportion of intermediate goods exports.’ Additional mid-term tasks for the trade policy include the ‘Diversification of export items’ and the ‘Exploration of exports aimed at the domestic market’ to help alleviate uncertainty in the trade environment in Latin America. As a long-term task, the proposal to “prepare for the possibility of economic integration between the United States and Latin America” aims to “ease uncertainty in the trade environment” within the region. Given the likelihood that tensions between the US and China will persist, enhancing economic integration between Latin America and the US could benefit Korea by mitigating some of the trade uncertainties faced by Mexico.

However, the policy experiments detailed in Section 2 of Chapter 5 indicate that in certain industries where Korea is competitive, deteriorating trade conditions—specifically a worsening trade balance—could adversely affect Korea’s welfare. Therefore, it has been suggested that a localization strategy should be developed for these specific industries.

Additionally, while expanding economic integration between the US and Latin America presents challenges for Korea to directly influence, it necessitates both economic and diplomatic efforts. As such, achieving this goal is likely to be difficult in the short or medium term, which is why it has been framed as a long-term objective.

The global economy experienced disinflation from 1980 up until the pandemic of 2020. After reaching a peak of 39.1% in 1993, global inflation stabilized at 4.9% by 2000 and remained stable for about 20 years, recording 3.2% in 2020. During the same period, inflation in G7 advanced economies peaked at 12.4% in 1980, quickly stabilized at 4.8% by 1983, and continued to stay below 5% before declining to 0.8% in 2020. This phenomenon of global disinflation is often attributed to the following factors: reduced production costs and heightened price competition due to globalization; and advancements in macroeconomic policies.

However, the COVID-19 pandemic in 2020 disrupted global supply chains, which, combined with a rapid recovery in demand, rising commodity prices due to the Russia-Ukraine war, and massive liquidity injections during the pandemic, led to sharp inflation in the global economy between 2021 and 2022. Inflation in the G7 countries rose by 2.5 percentage points from 0.8% in 2020 to 3.3% in 2021, then surged by another 4 percentage points to reach 7.3% in 2022. The inflation rate rose particularly sharply in the European Union, which was heavily affected by the Russia-Ukraine war, climbing from 0.7% in 2020 to 2.9% in 2021, and then to 9.3% in 2022. Global inflation also hit a high of 8.7% in 2022―the highest in 26 years since 1996.

In view of these significant shifts in the global economy, this study analyzes how global inflation affects domestic prices and other macroeconomic variables in the Republic of Korea.

First, in Chapter 2, we provide an overview of post-2020 global inflation trends and examine regional differences and the underlying factors based on a literature review. Immediately following the pandemic outbreak, inflation decreased due to economic recession caused by lockdowns. However, after the pandemic began to subside in 2021, inflation increased sharply across regions and countries. Demand-side factors were found to contribute more significantly to this period's inflation decline and rebound. Comparing different regions, Europe experienced higher inflation than the United States, which is attributed to European countries' relatively higher dependence on external factors for consumer goods. The return of elevated inflation to steady-state levels occurred smoothly when wage rigidity was low or inflation expectations were stable. Labor market matching efficiency also influenced inflation. Post-pandemic matching inefficiencies caused a sluggish normalization of inflation in the United States. In contrast, South Korea's quick recovery in matching efficiency helped contain increases in wages and inflation rates.

Then, in Chapter 3, we examine the impact of global inflation (foreign inflation) on domestic inflation in major countries through linear regression analysis. This can be considered a focused preliminary examination of foreign inflation effects before conducting a more systematic analysis in Chapter 4 of factors affecting domestic inflation using a structural model. We select 39 countries including Korea depending on data availability and use for each of the countries a weighted average of the inflation rates of the foreign 38 countries as the measure of foreign inflation (weights based on import shares) while controlling for exchange rate fluctuations. More specifically, domestic inflation is examined using import price inflation, producer price inflation, and consumer price inflation, while in calculating foreign inflation, producer price inflation is used in all cases.

The results show that, in most of the countries analyzed, including Korea, foreign inflation was statistically significantly transmitted to domestic inflation. In particular, in Korea, a 1 percentage point increase in foreign inflation led to a 0.42 percentage point rise in the domestic consumer price inflation (commodities) in the short term and a 0.52 percentage point increase in the long term (cumulative over two years). While countries like Canada and New Zealand did not show statistically significant pass-through effects of foreign inflation, the effect was generally significant elsewhere. For example, in the United States, a 1 percentage point increase in foreign inflation resulted in a 1.14 percentage point increase in the domestic consumer price inflation (commodities) in the short term and a 1.17 percentage point increase in the long term. These findings contribute to both academic research and policy discussions by statistically validating the pass-through effect of foreign inflation and quantifying its magnitude.

Finally, in Chapter 4, we systematically examine the domestic spillover effects of global inflation using the structural model known as the Integrated Policy Framework (IPF) by Chen et al. (2023). The IPF is a Dynamic Stochastic General Equilibrium (DSGE) model assuming one small open economy and one large closed economy, and we assign Korea to the former and the United States to the latter. In particular, we estimate the parameters of the model using Bayesian methods and then analyze the effects of 16 exogenous shocks, including foreign price fluctuations, on domestic inflation. The results show that the main factors driving domestic inflation (core PCE inflation) fluctuations were wages, domestic costs, import costs, and import demand, suggesting relatively modest spillover effects of global inflation.

However, as observed in Chapter 3, the effect of global inflation on domestic inflation is statistically and economically significant in absolute terms. The aforementioned figures (a 1 percentage point increase in global inflation leading to a 0.42 percentage point increase in Korea’s domestic consumer price inflation (commodities) in the short term and a 0.52 percentage point increase in the long term) are not small compared to those of Italy, which has an economy similar in size to Korea (0.06 percentage points short-term, 0.34 percentage points long-term). Moreover, these spillover effects are even larger for Korea’s short-term import price inflation (1.27 percentage points). Therefore, in designing and implementing relevant policies, it is necessary in the short term to strengthen monitoring of international commodity market trends, while in the medium to long term, efforts are needed to diversify import sources; expand domestic production bases and seek substitutes to alleviate dependence on raw material imports; and enhance the efficiency of import-export logistics systems. Additionally, the IPF in Chapter 4 is a comprehensive model encompassing demand, supply, international financial markets, and monetary and fiscal policies, allowing us to analyze broader business cycle fluctuations—including GDP, imports and exports, interest rates, and exchange rates—beyond just inflation. This study is the first to apply the IPF to Korean data, and as such it provides a foundation for more diverse and in-depth policy research in the future.

This report examines recent EU industrial and trade policy in relation to Net-Zero strategic technologies and analyzes their impact on the global supply chains. The introduction section places the recent return of industrial policy in historical context and emphasizes the importance of EU policies as a major player in global supply chains. Against this background, this report introduces the recent status of EU policies in Chapter 2, analyzes and compares supply chains of Net-Zero strategic industries in Korea and the EU in Chapter 3, conducts an empirical analysis of policy effects in Chapter 4, and finally draws implications for Korea in Chapter 5.

Chapter 2 introduces the EU's industrial and trade policies related to Net-Zero strategic technologies and compares them with those pursued in major countries. As the EU seeks to transform its entire socio-economic structure to achieve climate neutrality by 2050, it is seeking to strengthen the competitiveness of related industries within the EU while reducing offshore dependence through the Green Deal Industrial Plan. To this end, the government has put forward policies to (1) foster domestic companies such as the Net-Zero Industry Act (NZIA), Critical Raw Materials Act, and temporary subsidy deregulation, and (2) regulate overseas supply chains such as the Carbon Border Adjustment Mechanism, Foreign Subsidy Regulation, and Corporate Sustainability Due Diligence Directive. Among these, the Net-Zero Industry Act designated Net-Zero strategic technologies in 19 fields, including renewable energy, batteries, hydrogen, and carbon capture, and set local production targets for designated technologies. To achieve this, it provides support measures such as simplifying regulations, creating industry clusters, and fostering human resources. Also, regulating policies require companies to meet the EU’s environmental, labor, human rights, and competition standards before they can trade or partner with EU companies. Similar policies are in place in other major countries around the world, including the United States, China, and Japan, making the measures to combat climate change a trade barrier for other countries.

Chapter 3 then analyzes import and export data by production stage to compare the current status of supply chains in the EU and Korea. We selected 499 items directly or indirectly related to the EU’s Net-Zero strategic technologies and analyzed the overall status of imports and exports, export competitiveness, and import supply chains for each item. While the EU remains competitive in the capital goods sector, it is highly dependent on raw materials and intermediate goods, and the shift in dependence from other countries to China over the past decade has been pronounced. Korea’s supply chain of climate-neutral strategic technology imports is also highly dependent on China, which exposes supply chain vulnerabilities. In particular, the concentration of imports in intermediate and capital goods is getting worse, and the dependence on China for key raw materials for batteries is very high. For both the EU and South Korea, reducing import dependence on specific countries for climate-neutral strategic technologies has emerged as a key challenge.

Chapter 4 utilizes a gravity model to identify the impact of EU policies on bilateral imports and exports of climate neutral strategic technologies. Due to data limitations, the analysis is limited to the period from 2008 to 2021 and does not include the effects of the more recent policies reviewed in Chapter 2. Nevertheless, the results show that the EU’s subsidies, import and export controls, trade defense measures, and government procurement regulations promote intra- EU trade and reduce extra-EU trade. This effect is particularly pronounced in ICT and strategic industries. The above analysis suggests that the EU’s upcoming climate neutrality policies are likely to strengthen intra-EU trade and weaken extra-EU trade. This means that South Korea, a country outside the EU, could also be affected by the EU’s climate neutrality policy.

Finally, Chapter 5 draws policy implications based on the above analysis. While developing countermeasures to minimize the impact of major countries’ industrial and trade policies on the Korean economy, Korea should select and focus on key domestic industries to maintain competitiveness in the global market. In addition, Korea should take full advantage of cooperation opportunities with like-minded countries to build stable supply chains. Specifically, the report suggests policy alternatives such as (1) establishing a control tower led by the Prime Minister to establish an inter-ministerial coordination system; (2) establishing a high-level industrial and trade strategy that encompasses core industries, trade policies, and supply chains; (3) setting targets for local production and diversification of domestic companies and providing support policies; (4) establishing policies for training and exchanging experts in the strategic industry; and (5) cooperating with international allies through bilateral channels. As a mid-sized country, Korea needs both insight into the big picture of global economic flows and wisdom in formulating detailed policies to maintain stable economic growth. We hope that this report will be utilized as a reference for the development of Korean industrial policies.

Both North and South Korea have long maintained the “One Korea Policy.” Under the Inter-Korean Basic Agreement signed in 1991, inter-Korean relations were defined as a “special interim relationship” tentatively formed during the process of unification, rather than state-to-state relations. North Korea appeared to show a stronger inclination for the “One Korea Policy” even with regard to its terminology, with its usage of phrases like “Pyongyang leaders’ reunion” and “North-South top leadership meeting” to refer to the Inter-Korean Summits.

However, in late 2023, North Korea began re-framing inter-Korean ties as relations between “two belligerent states.” The North went as far as declaring South Korea a “thoroughly foreign entity” and “primary foe,” even hinting at the possibility of nuclear war. It has prohibited the North Korean populace from using expressions like “unification” and “kinship” in their daily lives, even amending its Constitution to clearly designate the ROK as a “hostile state.”

The “two Koreas” rhetoric marks a profound shift from North Korea’s perception over the past eight decades and could fundamentally reshape the basis of inter-Korean relations. It is, therefore, essential to examine the key elements of the North’s “two Koreas” assertion, understand its underlying motives, and discuss the implications for Korean unification Equally important is the need to explore strategies to effectively promote a unification policy aligned with the perceptions of the four major powers involved in Korean Peninsula affairs.

In this study, Chapter II traces the evolution of the unification policy of the Republic of Korea, offering insights into the policies of the 1950s and 1960s spanning the Rhee Syngman, Chang Myon, and early years of the Park Chung-hee governments; as well as policies of the 1970s and 1980s, encompassing the latter years of the Park Chung-hee government and the Chun Doo-hwan and Roh Tae-woo governments. It details the core philosophy, principles, and unification processes envisioned in the “National Community Unification Formula” announced in 1994 under then President Kim Young-sam’s leadership. The chapter then outlines the unification policies of the Kim Dae-jung government, which continued the tradition of the “National Community Unification Formula,” and each subsequent government up to the Yoon Suk-yeol government.

Chapter III provides a critical examination of North Korea’s approach to unification, beginning with the construction and development of a nationalist narrative and the symbolic emphasis on “kinship” and “nation.” This chapter reviews North Korea’s unification strategies, from the “democratic base theory” of the 1950s, which advocated for armed unification, to its later proposal of a “low stage federation” in the 2000s.

Chapter IV addresses North Korea’s recent adoption of the “two Koreas policy” and its consequences for Korean unification. North Korea had foreshadowed this shift even before explicitly asserting the “two Koreas policy” in late 2023. Signs included proposals for a “federal union system” (2014), the introduction of Pyongyang Standard Time (2015), the launch of the “Our State-First Principle” (2017-2021), revisions in the nationalistic phrase “Kim Il-sung’s nation, Kim Jong-il’s homeland” to “Kim Il-sung and Kim Jong-il’s homeland” (since 2019), the regime’s re-orientation toward a “two-state policy” during the 8th Party Congress (2021-2022), and the use of “Republic of Korea” in official statements from North Korea’s Ministry of Foreign Affairs (2023). The study argues that North Korea’s push for the “two Koreas policy” reflects several key motivations: an ever deepening sense of siege mentality due to strengthened US, ROK, and Japan trilateral cooperation; disillusionment with the ROK government; resistance to unification through absorption; and concerns about internal stability. It also reflects a desire to reshape the North Korean national identity by eliminating notions of “kinship,” as well as the need to consolidate Kim Jong-un’s leadership. The chapter also discusses interpretations of this policy as either a tactical maneuver or a strategic shift and concludes that accepting the “two Koreas policy” is not only unnecessary, but that rejecting it would be significantly more advantageous.

Chapter V examines the perspectives and assessments of the four major powers—the US, Japan, China, and Russia—on the unification of the Korean Peninsula. Specifically, it analyzes official statements from the leaders of these countries, spanning from the Kim Young-sam to Moon Jae-in governments, evaluating each nation’s stance on unification.

Chapter VI re-evaluates the “National Community Unification Plan” and discusses strategies for garnering effective support from neighboring stakeholders. The “National Community Unification Plan” is significant for its vision of a gradual, phased unification process and for highlighting a “national community” based on national consensus. However, the plan faces limitations, such as difficulty adapting to the changing domestic and international situation, ambiguity in the stages it laid out, and a lack of concrete implementation strategies. The “August 15 Unification Doctrine” announced on August 15, 2024, marks a progressive advancement of the plan. It is commendable for its emphasis on universal values, focus on the North Korean populace over the regime, proactive international engagement, and specific action plans. Nonetheless, further refinement is needed, including steps to encourage North Korea’s engagement, assuage concerns over absorption-based unification, increase practical viability of implementation plans, and actively seek international solidarity. A review of past policy outreach revealed that promotional activities have largely been tied to the state of inter-Korean affairs, and have been generally one-dimensional, focusing on unidirectional information dissemination and targeting government authorities, experts, and overseas Koreans. To enhance support from neighboring stakeholders, it would be beneficial to conceptualize unification as a goal that transcends inter-Korean relations; transition from one-directional messaging to multidimensional, interactive approaches that promote active cooperation; and broaden the target audience from a select few to a more diverse and widespread audience.

Economic cooperation between the Gulf region (Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Kuwait, and Oman) and major Asian countries (such as South Korea, China, Japan, and India) has been primarily centered around energy supply chains. With the rise in international oil prices after the oil shock, a large-scale infrastructure construction market has also developed, leading to active collaboration in infrastructure projects between two regions. However, since the early 2010s, the era of low oil prices has prompted a significant push for economic diversification within the Gulf region, resulting in the announcement of national development strategies such as Saudi Vision 2030, UAE Centennial 2071, and Qatar National Vision 2030.

Given the lack of industrial foundations outside the energy sector, Gulf countries have recognized that external collaboration is essential for fostering manufacturing industries. They have been strengthening ties with major Asian countries to adopt industrial development models and to adopt new technology. Particularly after President Obama’s inauguration, Washington shifted its foreign strategy focus from the Middle East to the Indo-Pacific, reducing its involvement in conflicts in the Middle East. Consequently, Gulf countries have expanded cooperation with Asia to lower their dependence on economic collaboration with the U.S. and Europe. This shift has led to the emergence of policies prioritizing Asia, indicating that the relationship between the Gulf and Asia is expected to deepen further.

This study begins with the question of whether there is a policy prioritizing Asia in the Gulf region, in light of the geopolitical changes surrounding the Gulf and the shifts in the foreign cooperation strategies of Gulf countries. It aims to explore the driving factors behind the cooperation between major Gulf countries (Saudi Arabia, UAE) and major Asian countries (South Korea, China, Japan, India), as well as to examine whether there are differences in their cooperation strategies. By addressing these questions, the study seeks to elucidate the implications for South Korea’s cooperation with the Gulf region. The research focuses on energy and advanced industries, centering on the aforementioned major Gulf and Asian countries.

Chapter 2 examines the background behind the emergence of the concept of the “Asia-centric strategy of the Gulf” and the trends in Gulf-Asia cooperation. The concept of an Asia-centric strategy among Gulf countries has arisen due to three main factors: 1) the necessity for Gulf countries to diversify their economies away from being oil-dependent, 2) the need to strengthen partnerships with major Asian countries (South Korea, China, Japan, India) that have achieved rapid industrial development, and 3) the rise of China and Russia amid changes in the geopolitical landscape surrounding the Middle East. As these internal and external environmental changes have been recognized, cooperation between the Gulf region and Asia has expanded. Notably, since the 2010s, Saudi Arabia has increased its diplomatic cooperation with Asia, moving toward a regional balance away from a one-sided diplomatic focus on the U.S. and Europe. In terms of economic cooperation, trade volumes between the Gulf and Asia, particularly with China, have increased, and investments in Asia led by sovereign wealth funds have been on the rise.

This study suggests that rather than explicitly advocating for an Asia-centric policy, Gulf countries have strengthened economic cooperation with Asian countries that have developed industries aligned with their own industrial needs (particularly in energy, advanced industries, and technology), resulting in a perception of prioritizing Asia. Additionally, while it is true that the share of cooperation with Asia has increased in the political and diplomatic context, it can be argued that a diplomatic strategy closer to an Asia-balancing policy has emerged as regional balance has been sought.

Chapter 3 analyzes the demand for Gulf-Asia cooperation. The Gulf region has traditionally been the most developed area for the energy industry, and since major Asian countries are key energy buyers from the Gulf, it is crucial for Gulf countries to maintain partnerships with Asian nations to secure stable exports of oil and natural gas. However, recent developments, such as new demands arising in the energy sector—like the development of gas fields, diversification of energy production through an increase in renewable energy, and the promotion of the petrochemical industry—have led to an increased demand for cooperation between Gulf countries and Asia. Moreover, countries like Saudi Arabia, the UAE, and Oman are leveraging their favorable hydrogen production sites to invest in hydrogen development, aiming to secure stable export markets with Asian nations that have high demand for hydrogen.

From the perspective of advanced technology and industry, Gulf countries have announced strategies to foster industries such as AI, digital transformation, and advanced mobility as part of their economic diversification efforts. Notably, the UAE is leading in the AI sector within the Gulf region, and the Saudi government has committed to significant investments in AI, resulting in competition between Saudi Arabia and the UAE for leadership in this field. In this process, Gulf countries are strengthening cooperation with China, which has advanced AI and digital industries, fostering collaborations not only in industry but also between academia and research institutions. Additionally, with the expansion of smart city construction in the Gulf region, particularly around Saudi Arabia’s NEOM City, there has been a significant increase in demand for digital and mobility industries from Asia. Cooperation demand with South Korea is also rising, leading to discussions about the entry of South Korean digital platform companies into the Gulf region. In the aerospace sector, all six Gulf countries are investing in space, with ongoing efforts to collaborate on technology and space launch vehicles, particularly with four Asian nations.

Chapter 4 focuses on the cooperation demand and distinctiveness of major Asian countries in relation to the Gulf. In terms of cooperation methods, China relies on state-owned enterprises, Japan utilizes trading companies, and India builds industrial networks centered around its diaspora in the Gulf region. Additionally, the entry of startups is actively progressing, particularly in areas like UAE’s Masdar City, where efforts to attract startups are robust. This has led to an increase in demand from Chinese, Japanese, and Indian startups, aligning the interests of both regions. In Japan’s case, there are many areas of ongoing medium- to long-term cooperation, such as education, technical support, and exchanges, which have contributed to a high level of recognition for Japan within the Gulf region, often accompanied by academic collaboration.

In the energy sector, all four countries, including South Korea, have identified a demand for crude oil imports and infrastructure cooperation. However, while South Korea primarily secures infrastructure construction contracts focused on EPC (Engineering, Procurement, and Construction), China is engaged in construction projects that integrate its own equipment procurement and exports of intermediate goods. India is actively utilizing the Gulf Cooperation Council (GCC) as a platform for its initiatives. In the nuclear power sector, South Korea stands out due to the successful completion and operation of four Barakah nuclear power plants in the UAE, showcasing its competitiveness in the Gulf region. In contrast, China is participating in bids for Saudi nuclear power construction. Accordingly, the cooperation between major Asian countries and the Gulf exhibits distinct characteristics by country. China is engaging in simultaneous hardware and software collaboration, with government- led initiatives predominating and leading to large-scale industrial cooperation. This has resulted in active participation of Chinese state-owned enterprises in the Gulf. China is attempting to diversify its global supply chains to avoid technological competition with the U.S., which has led to an increase in the entry of Chinese high-tech companies into the Gulf.

Japan also sees active intergovernmental cooperation, but its trading companies are playing a crucial role in major industrial sectors, while friendship associations are fostering local networks in Gulf countries. Additionally, Japanese companies primarily enter the UAE, using it as a base to expand into other Gulf nations.

Meanwhile, both China and Japan are maintaining long-term corporate collaborations through joint ventures, which allow them to minimize investment risks while securing operational control of locally established joint enterprises. India is strengthening its economic cooperation with the Gulf region through policies like Look West and Neighborhood Policy, forming networks centered around the Indian diaspora through Indian workers and businesses in the Gulf.

Chapter 5 provides implications for South Korea based on the preceding content. First, there is a need for key entities to lead local cooperation networking in the Gulf, and this study emphasizes the importance of industry associations and KOTRA (Korea Trade- Investment Promotion Agency). Second, the demand for expanded technological cooperation is clearly evident in the Gulf region. To successfully enter this market, South Korean companies should enhance technological cooperation through various channels to foster a skilled workforce that can be employed locally.

Third, considering South Korea’s position in the Gulf region, there is a need for strategic selection and concentration in terms of sectors and countries. Fourth, taking into account that China and Japan are forming value chains and attempting vertical integration by sector, it is necessary to increase the proportion of O&M (Operations and Maintenance) contracts when securing infrastructure projects.

Finally, the technological supremacy competition between the U.S. and China is also unfolding in the Gulf, prompting Gulf countries to diversify their cooperation away from a sole focus on China. South Korea should seize the opportunities arising from this shift. This study proposes several policy recommendations, including the expansion of multilateral cooperation such as Korea-China-Japan + Gulf collaboration, investments to strengthen local networks, enhanced cooperation in joint research and workforce training, activation of entry into special economic zones, and the provision of practical information and corporate matching for private companies. In the energy sector, the study suggests: 1) diversifying contract types beyond EPC procurement, 2) expanding petrochemical cooperation from Saudi Arabia to the UAE, 3) exporting nuclear power in response to the growing demand for nuclear facilities in the Gulf region, and 4) strengthening cooperation in hydrogen technology. In the field of advanced industries and technology, the recommendations include: 1) building digital platforms, 2) expanding R&D cooperation in advanced technologies, and 3) enhancing cooperation in AI technology.

The semiconductor industry is crucial not only for economic growth but also for leading future industries through innovation and technological development. Dominance in this sector is reflected through technological leadership, with leading nations at the forefront of scientific research and technological innovation, substantially contributing to global influence and economic competitiveness. Additionally, the semiconductor industry is vital for national security. Semiconductors are essential components in advanced weapons systems and are fundamental to nearly all modern military equipment and systems, including missiles, drones, radars, and communication devices. Consequently, controlling semiconductor supply chains and strategic technologies is critical for national security. Given the semiconductor industry’s importance, the battle for technological supremacy between the U.S. and China is central to their hegemonic rivalry. The United States has recognized that rapid advancements in China’s semiconductor technology could pose a significant risk to national security and has imposed various export controls, investment sanctions, and financial sanctions targeting China’s semiconductor industry. These U.S. measures impact not only China’s semiconductor industry but also significantly affect global semiconductor firms in Japan, the Netherlands, Taiwan, and South Korea, leading to substantial changes in the global semiconductor supply chain. However, China already plays a significant role as a global hub in semiconductor manufacturing and supply, and there is keen interest in the outcomes of the U.S. sanctions.

This study addresses three critical questions to understand the core of this issue and provides an in-depth analysis:

1. Can China overcome U.S. sanctions and continue to develop its semiconductor industry?

2. What impact will U.S. sanctions on China’s semiconductor industry have on the global semiconductor industry and the current global semiconductor supply chain?

3. How will the U.S.-China semiconductor hegemony competition affect Korean semiconductor industry and economy, and howshould we prepare policy-wise?

The first question explores whether China’s semiconductor industry can overcome U.S. sanctions and enhance its position in the global semiconductor supply chain. This study answers by analyzing the competitiveness of the global semiconductor industry, including China, from 2000 to 2022, and comparing changes in competitiveness over the past two decades. The analysis uses UN Comtrade data to derive various competitiveness indices and also examines semiconductor technology competitiveness by analyzing patent registrations in the semiconductor field over the past 20 years for major countries and the top 10 global semiconductor companies.

The analysis of memory semiconductors showed that South Korea had the highest RSCA (Revealed Symmetric Comparative Advantage) and TSI (Trade Specialization Index) values, indicating strong competitiveness. In contrast, China showed a comparative advantage in production and export for most of the analysis period, asindicated by positive RSCA values, but its TSI values were negative throughout, indicating difficulties in achieving trade surpluses and overall lower competitiveness in the memory semiconductor industry. In the system semiconductor competitiveness analysis, Taiwan showed the highest competitiveness, followed by South Korea, which showed positive RSCA and TSI values. China, on the other hand, showed low competitiveness in the system semiconductor sector, with RSCA and TSI values between -0.5 and 0.

In the semiconductor manufacturing equipment industry, Japan and the U.S. displayed high RSCA and TSI values, indicating strong competitiveness, while China showed very low competitiveness, with both indices close to -0.5 during the analysis period.

The technological competitiveness analysis based on patent registration data for memory semiconductors, system semiconductors, and semiconductor manufacturing equipment calculated indices such as RTA (Revealed Technological Advantage), TS (Technology Strength), CPP (Cites per Patent), and PII (Patent Impact Index). The results for China were similar to the trade data-based competitivenessanalysis, indicating a challenging situation for China to overcome U.S. sanctions in the short term. U.S. sanctions are expected to strictly limit China’s advanced chip production capabilities for the foreseeable future. Especially, the analysis based on semiconductor patent technology showed that global semiconductor manufacturers heavily rely on core technologies from the U.S., making it difficult for these companies to circumvent U.S. sanctions. However, the biggest problem the U.S. faces is securing active cooperation from global semiconductor companies and allies. There are significant conflicts between the U.S. and European countries over specific policies like the Inflation Reduction Act (IRA) and related subsidies. Global semiconductor companies are also likely to face substantial losses due to the sanctions, and there is considerable resistance to the U.S. administration’s policies, especially from EU countries, regarding how actively they will cooperate with U.S. policies against China. Additionally, active support from the Chinese government could greatly aid in enhancing the competitiveness of its semiconductor industry. Ironically, U.S. sanctions might actually accelerate innovation and self-reliance in China’s semiconductor sector, posing a short-term obstacle but unlikely to hinder the industry’s long-term development.

To answer the second question, this study analyzed the roles and positions of the countries in the global semiconductor supply chain through network analysis using trade data and firm-level supply-demand relations, focusing on global rankings and market shares in various semiconductor sectors. The analysis showed that China is already playing a significant role as a global hub in the semiconductor and semiconductor manufacturing equipment sectors, making it very difficult to quickly exclude or significantly reduce China’s role in the global semiconductor supply chain. In particular, the analysis of inter-firm cooperation and technology transfer relationships using Factset data showed that U.S. companies are major suppliers across the semiconductor industry, and applying a 0% de minimis rule would have a significant impact on the global semiconductor supply chain, making it impossible for most companies to evade these sanctions.

Despite these sanctions, it has been revealed that Chinese tech companies are importing and using advanced chips banned for export by the U.S. administration, and U.S. companies like NVIDIA are also circumventing sanctions by exporting modified semiconductor stargeted at the Chinese market. These incidents are occurring frequently, and the effectiveness of U.S. sanctions against China’s semiconductor industry depends on how much support the U.S. can secure from its allies. The U.S. is expected to transition to a multilateral export control system like the ‘Wassenaar Arrangement’ to fill the gaps in these sanctions.

Regarding the restructuring of the global semiconductor supply chain, it is expected to bifurcate due to U.S. sanctions. Advanced semiconductor production is likely to shift to a supply chain system centered around the U.S. and its allies, while the supply chain system for general-purpose semiconductors is expected to strengthen around China. In particular, no country can produce general-purpose semiconductors as cheaply and competitively as China, which is expected to increase its global market share in this sector. Additionally, developing countries like India, Vietnam, and Thailand import the most semiconductor manufacturing equipment from China, and the establishment of a supply chain system for low-cost general-purpose semiconductor production between China and these countries is also an issue worth watching.

In addressing the third question, the study examined the impact of U.S. semiconductor sanctions on the Korean semiconductor industry through three scenarios: the control of exports for semiconductor manufacturing equipment, the control of exports for AI semiconductors, and the imposition of increased tariffs on China.

The first scenario involves export control of semiconductor manufacturing equipment, where South Korea experienced a significant decline in semiconductor equipment exports compared to other countries following the U.S. semiconductor equipment sanctions in October 2022. China’s imports of semiconductor manufacturing equipment sharply decreased from October 2022, when U.S. sanctions began, to February 2023, but increased significantly from August 2023, eight months after the sanctions started. The U.S. initially saw a decrease in exports to China, but these later increased, and the Netherlands was not affected by the sanctions, with exports to China increasing. Even after controlling for variables such as the recent semiconductor business climate, South Korea’s imports of semiconductor manufacturing equipment have significantly decreased, and this trend does not appear to be following any particular trend. Also, South Korean manufacturing equipment is almost not included in the U.S. sanction items, while the U.S., the Netherlands, and Japan have many items essential in the semiconductor manufacturing process, which Chinese companies would likely prioritize purchasing with their current capital.

The second scenario involves AI semiconductor export control, which assumes the worst-case scenario affecting DRAM production. In this scenario, the supply of DRAM for AI semiconductors is assumed to be delivered by TSMC after final assembly through Taiwan’s export of HBM. This scenario also showed a significant negative impact on the Korean economy.

The third scenario involves an increase in U.S. tariffs on Chinese semiconductors under Section 301 of the U.S. Trade Act, which imposes high tariffs. In this scenario, exports of semiconductors produced in China to the U.S. decreased, while South Korea’s exports to the U.S. increased long-term due to trade diversion effects.

In conclusion, only the increase in U.S. tariffs on Chinese semiconductors is expected to have a positive impact on us due to trade diversion effects, while the export reduction of semiconductor manufacturing equipment and AI semiconductors such as HBM chips due to U.S. sanctions is expected to negatively affect us.

The U.S.-China semiconductor hegemony competition is already significantly limiting the business activities of our companies, and the negative impacts are likely to grow in the future. The U.S. is already responding to the potential impacts of this hegemony competition. The U.S. is relying on advanced semiconductor manufacturing by companies like Samsung and TSMC while fostering its domestic semiconductor companies like Intel and enhancing the backend chip post-processing capability through government subsidies to increase the resilience of the semiconductor supply chain.

In contrast, China, as previously discussed, is increasing its global market share centered on current legacy chips. In particular, the backend chip post-processing sector, which is technically less demanding and has a lower barrier to entry, could become an area where China can intentionally control the global supply chain based on its manufacturing capability and high market share. Therefore, such hegemonic disputes using this leverage are likely to continue between the U.S. and China, and the Korean government and companies need to prepare for this.

Korean companies have limitations in upgrading semiconductor manufacturing processes invested in China due to current U.S. sanctions on China. Therefore, in the medium to long term, advanced semiconductors are likely to be produced only in domestic or allied countries including the U.S. Ultimately, although production in China has been an optimal strategy for companies in terms of cost and market aspects, the U.S.-China hegemony competition makes it inevitable to relocate production bases for advanced semiconductor production. However, our current domestic semiconductor ecosystem is not more competitive than the ecosystem established in China.

This study recommends a series of policy measures aimed at bolstering the domestic semiconductor industry. These include strengthening the semiconductor manufacturing base and ecosystem, enhancing the added value of the industry, ensuring supply chain stability, and managing semiconductor operations in China effectively. It also suggests fortifying supply chain cooperation within the Korea-U.S.-Japan economic security alliance, controlling technology leaks, preventing talent outflow, and fostering a competitive innovation ecosystem. Additionally, the study advises managing supply chain risks, developing both short- and long-term production strategies, and promoting open trade policies and international cooperation.

Executive Summary

I. Introduction: Motivation

II. Possible Reasons for Falling Birth Rates

III. Data and Methodology

IV. Per Capita GDP and Fertility

V. Labor Market Considerations

VI. Did APEC Contribute to Falling Fertility?

VII. Policy Implications and Conclusion

References

Appendix

In the last ten years, fertility rates for advanced and developing economies have been falling faster than expected. Korea has been leading the decline, but almost all advanced and developing economies have experienced accelerated decline in birth rates. Some researchers now expect the world to start experiencing falling global population as quickly as in 2030s.

Even more surprising is that fertility rates for APEC economies have been falling even faster. APEC economies with the highest fertility rates are only slightly above the replacement rate of 2.1; with most economies, even developing members, in the 1% range. This paper is intended to be an exploratory dip into looking at correlations between birth rates and various economic data. We try to examine some of the popular reasons behind the falling birth rates, to see whether they have validity based on data, and see whether APEC economies are special in the sense that the birth rates are falling faster for APEC economies. The paper looks at economic data using panel data regressions to see why birth rates are falling overall, and why they are falling faster for APEC economies. We will concentrate more on trying to find correlations between variables in the data than coming up with theoretical reasons, which will require a much richer data set.

In Section II, the paper lists some of the popular reasons often cited for declining birth rates; Section III is a short general discussion on the data used. Sections IV and V examines whether the data backs some of these popular reasons for the decline. Section IV looks at the relationship between some basic economic growth variables and fertility rates, and serves as a base for further analysis. Section V looks at the relationship between employment data and fertility rates, Given the faster fertility decline for APEC economies, Section VI looks at whether the formation of APEC had a role in the faster decline of fertility rates. Appendix A looks at the relationship between gender education disparities and fertility rates, and Appendix B is a short exploration on whether there is a case to be made that gender disparities in housework is a factor in lower fertility rates.

In this paper, we used panel data of more than 180 economies to examine some factors affecting fertility rates. The factors examined included economic growth factors such as per capita GDP and GDP growth rates; gender based labor and employment factors such as male and female labor participation rate, and the ratio of male and female workers working in various industries. We also considered how some gender based disparities in education, and time spent doing housework for men and women affected fertility rates, though the results are less definite for these cases due to irregular nature of data available. We ran regressions on the global data set, and then for some regressions, only on data for APEC member economies.

Where we used global panel data, we re-confirmed some results that researchers had found before – namely, the higher the per-capita GDP, the lower the fertility rate; the higher the growth rate, the lower the fertility rate. So more income is not always the answer for fostering fertility rates. However, we did find that current growth variables predicted fertility rates better than past growth rate variables, showing perhaps that the trend of falling fertility rates is a more powerful force than a good economic environment fostering more births. These regressions also showed that APEC economies are qualitatively similar to the global group, but with a faster decline. Given similar situations, APEC economies experience a lower fertility rate than global group as a whole.

Using the economic growth variables as controls, we added labor market data to the regressions, and we found that, for the global group, increases in male and female labor participation increased fertility rates. However, perhaps somewhat against expectations, the effect of male labor participation rate had greater effect than female labor participation. Again, given similar situations APEC economies had lower fertility rates. When we used only APEC economy data, female labor force participation had no significant effect on fertility rates. Only the male labor force participation mattered, and higher the male participation rate, higher the fertility rate.

Then we used the shares of male and female labor force on agriculture, industry (manufacturing) and service industries. For the global data set regressions, as expected, a rise of the share working in agriculture would raise the fertility rate, and a rise of the share working in industry would lower fertility rate, as expected. Service industry participation came in between – the effect on fertility rate higher than industry and likely a positive effect, but lower than the effect from agricultural industry participation. The results were same for males and females.

However, when we used only APEC economy data, the qualitative results were significantly different. Male labor force industry share behaved the same as the global group, but for females, share of workers in services had a higher positive effect on fertility rate than agriculture. Industry, as expected had the lowest and negative effect. The effect of female workers participation in different industries on fertility rates seems to be significantly different for APEC economies compared to global group as a whole. Which may be the reason why APEC economy fertility rates fell faster than the global group, but it may also imply that if APEC economies give more flexibility to female workers in service industries, fertility rates may pick up. Further and deeper studies should be taken to see whether the pattern of female employment in APEC economies differ significantly compared to other economies, especially the possible differences between developing APEC economies and other developing economies.

Analysis looking at gender disparities in education for primary and secondary education showed that it is the disparities in secondary education which may be the key to differences in fertility rates, but the results should be taken carefully, since the data for gender disparity in education was available irregularly, so an unbalanced panel data was used, and gender disparities for primary and secondary education seems to be highly correlated. Also, the time disparity between men and women doing housework was also examined, but there were no results that led us to believe that the disparity in doing housework affected fertility rates, contrary to many popular media reports in Korea and elsewhere. But again, data was only available irregularly, so an unbalanced panel data was used, so results may not be as credible as regressions using labor force variables. For these regressions, a separate APEC economy regressions were not attempted due to paucity of data.

These regression results show that declining fertility rate is a strong trend based on rising wealth and growth rates; but the trend may be partially reversed if appropriate labor market adjustments can occur. For APEC economies, encouraging women to go into the services sector which perhaps offer an urban living coupled with flexible labor time schedule may partially offset the declining fertility rates.

Drawing some policy implications from the analyses, while Korea and other APEC economies may be able to keep fertility rates from falling “too low,” it will not be able to raise the rates to the replacement rate of 2.1. Thus, when designing welfare policies, the policymakers must keep the declining population and demographic implications in mind. Over-promising benefits for post-retirement public pension will become a critical problem, and governments should encourage private measures to the public to get them ready for post-retirement.

Second, for would-be mothers, encouraging employment in the service sector may alleviate some of the rapid decline in the fertility rates. Encouraging employment in the services sector, making services job for women available in small and large cities may do better in raising fertility for APEC economies. Women who work for the public sector tend to have more children, in part due to more flexible schedules and consideration for pregnant mothers.

Also, for fertility rates, male employment seems to be as important or perhaps more important than female employment. So, while more flexible time scheduling may be warranted for the would-be mother, any income implications should be approached from the point of view of the entire household.

While the Korean media often cites complaints that men do not do enough housework, as a contributor to low fertility, using global data, this study did not find any particular evidence for that explanation. While the complaint may be valid for Korea, there seems to be little reason to believe that it is a major reason globally, but because of data deficiency, the results may not be clear cut.

Of course, more research is needed. During the modernization and development process, the economic position of husband and wife in the family seems to change from being complementary to more of substitutes – where in the olden days, women specialized in housework aspect of the household and men specialized in wage earning or outside work, now men and women have similar work characteristics, and the global group regressions in this study did not consider such changes in characteristics about husband and wives; but the results that we have derived may be showing the effects of such changes.