This report examines how EU’s ‘open strategic autonomy’ has been developed and realized facing recent changes in the global trade landscape, especially in areas such as supply chain, energy transition, immigration, and security integration. In response to the fragmentation and blocization of the global economy, which manifested in the US-China strategic competition, the COVID-19 pandemic, and the Russia-Ukraine war, the EU has sought to strengthen the competitiveness of its own high-tech and strategic industries and reduce its dependence on foreign countries (strategic autonomy). At the same time, it seeks to continue cooperation with like-minded countries with shared values and interests to address challenges that require global effort (openness).

 Chapter 2 defines open strategic autonomy in more detail and investigates how it has been implemented in the supply chain sector. The industrial and trade policies that have been published since the inauguration of the current EU Presidency in 2019 embody the concept of open strategic autonomy, which is defined as “strengthening competitiveness Executive Summary in the region to defend EU interests without relying on other countries, while continuing to cooperate with partners who share the values and interests.” After the Russia-Ukraine War, the EU continued its efforts to identify areas of weakness in the EU’s competitiveness and to localize and diversify its supply chains. This strategic shift was reflected in a series of supply chain legislation such as the European Chips Act, Critical Raw Materials Act, Net-Zero Industrial Act, and Corporate Sustainability Due Diligence Directive. The EU sets targets for the share of home-produced goods and provides various support measures such as subsidies, tax benefits, R&D investment, and workforce training. In addition, the legislation emphasizes bilateral and multilateral strategic partnerships, reflecting the open strategic autonomy of the region to continue cooperation with like-minded countries.

Chapter 3 investigates energy policies of the EU and EU Member States. The energy crisis brought on by the Russia-Ukraine war illustrated how overdependence on a single country can have a profound impact on the EU economy. In response to the energy crisis, the EU sought to phase out or suspend energy imports from Russia, diversify its energy import sources, increase the production of renewable energy, and promote energy efficiency. The energy policies of Germany, France, Finland, and Poland are then examined as case studies. Germany’s recent energy policy has been characterized by an increased use of renewable energy sources, the closure of all nuclear power plants, and an increase in hydropower generation. France, on the other hand, has maintained a high reliance on nuclear power, while persistently investing in renewable energy to achieve climate neutrality by 2050. Finland is a low-carbon country with a high share of renewable energy, and has been importing energy from neighboring countries such as Norway and Estonia after the outbreak of the Russia-Ukraine war. Poland is the most fossil fuel-dependent country in the EU, and as such, it is expected to face the Executive Summary • 259 most difficulties in implementing EU-wide green transition policies. Therefore, Poland aims to overcome this limitation by starting a nuclear power project. It is common to all four countries that they are trying to expand renewable energy while developing alternative energy sources such as nuclear and hydrogen power. Increasing energy independence through the development of alternative energy sources is expected to increase the EU’s strategic autonomy in the energy sector.

 Chapter 4 analyzes the trend of Ukrainian refugee influx to European countries and their impact on the labor markets, through literature review, fieldwork and statistical analysis. Immediately after the outbreak of the Russia-Ukraine war, there was a large influx of Ukrainian refugees to European countries, and EU member states actively accepted refugees by invoking the Temporary Protection Directive. The refugee influx to Europe is characterized by a high proportion of women and children and a high number of highly educated and skilled workers. The empirical analysis in this chapter, using microdata from UNHCR, shows that access to language training is significantly and positively associated with a refugee’s probability of employment. While the impact of refugee flows on the labor markets of host countries still needs further studies, an increase in the labor force with no significant impact on labor market conditions is observed so far. While Europe has been welcoming Ukrainian refugees, it showed a very different attitude towards migrants and refugees from the Middle East and North Africa, including Syria. This could be explained by an attempt to overcome the security threats posed by the war through solidarity with Ukraine, a country with a similar position. This illustrates one aspect of the EU’s tendency to selectively accept migrants and refugees to defend its interests and provides evidence that the EU’s commitment to open strategic autonomy is also observed in the area of immigrant acceptance.

Chapter 5 focuses on the changing concept of strategic autonomy in the EU’s security sector after the war. While the need to strengthen the EU’s defense capabilities in response to the immediate security threats of war has intensified, Europe’s strategic autonomy has remained an elusive goal, even as its security dependence on the United States has increased dramatically. The accession of traditionally neutral countries such as Sweden and Finland to the US-led NATO alliance signals a growing preference for increased US-dependent defense capabilities. However, the EU has pursued a strategy of strengthening its own security and defense capabilities independent of NATO. The provision of arms and munitions to Ukraine and the implementation of training missions to Ukraine’s armed forces are examples of such moves. The EU’s efforts to establish a common market for defence procurement have also been partially realized with the passage of the European Defence Industry Reinforcement through Common Procurement Act. The EU’s strategic autonomy in the security field will be determined by its progress in establishing relations with the United States and NATO, building a regional defence industry ecosystem, supporting Ukraine’s post-war defence build-up, and security cooperation with Indo-Pacific countries.

Chapter 6 presents policy implications for Korea based on the above findings. The EU’s expanding support for local industrial competitiveness is likely to pose challenges for Korean exporters, but there are also opportunities for Korea to take advantage of this. European Chips Act, Critical Raw Materials Act, Net-Zero Industrial Act are all concerned about expanding bilateral and multilateral cooperation with trusted partners. In addition, the EU’s recent supply chain legislation is characterized by weak geographical discrimination, so it is expected that Korean companies with a local presence will be able to enjoy similar benefits as EU companies. Taking advantage of the EU’s favorable aspects of its foreign and economic policies will not only benefit our companies, Executive Summary • 261 but will also allow us to make a joint contribution to addressing global challenges that require international cooperation, such as the reshaping of the international order, supply chain pressures, climate change response, and labor supply shortages. To this end, Chapter 6 identifies areas where we can expand our cooperation with the EU in the energy, immigration and security sectors. Finally, the challenges of the changing global trading environment faced by the EU are the same challenges faced by Korea, and we need to learn from the EU’s responses and use them to develop strategies tailored to our own circumstances. While it is beyond the scope of this report to formulate a specific foreign economic and economic security strategy for Korea, the EU case analyzed in this report is expected to serve as an important reference point.

To provide meaningful policy recommendations to achieve the Sustainable Development Goals (SDGs) according to the UN’s 2030 Agenda for Sustainable Development, the report “Assessing Vietnam’s Progress towards Sustainable Development Goals: A Comprehensive Review” provides an overview of Vietnam’s progress in implementing the SDGs. Accordingly, the report reviewed and analyzed legal documents, collected reports and statistical data related to the SDGs to review the process of integrating SDGs into socio-economic development strategies and plans of ministries, branches, and localities in Vietnam. The report also identifies factors affecting the effectiveness of SDGs implementation to point out Vietnam’s difficulties, challenges and opportunities in the process of implementing SDGs at the provincial level. To have a more comprehensive, multi-dimensional view when evaluating the progress of implementing the SDGs, the report chooses Indonesia, Myanmar and Laos for case studies to compare the progress of national SDGs implementation in the ASEAN region compared to Vietnam.

The report uses a flexible approach, including both qualitative research methods and quantitative research methods.The report clarifies difficulties, challenges and opportunities, as well as draws valuable lessons on implementing the SDGs for Vietnam. The report also provides insights into the nationalization of the SDGs, attracting and allocating financial resources, monitoring and evaluation, international coordination and cooperation, raising awareness about the benefits of sustainable development and encourage stakeholders to participate in implementing the SDGs in Vietnam. Thereby, the report proposes recommendations for Vietnam, as well as offers implications for Korea.

Since gaining membership to the WTO, China has expanded its global influence based on its expanded economic power, extending to trade. In response to strategic competition with the United States and efforts by major countries to contain its growing influence, China has increasingly felt the need to establish a global order that it can lead or where it can enhance its influence. Consequently, China is actively pursuing a state-led strategy to strengthen its influence across all dimensions. The expansion of China’s global influence has intensified competition and conflict with advanced countries such as the United States, while also strengthening ties among developing and emerging countries. This situation increases external uncertainties for South Korea, necessitating appropriate responses. Therefore, this study analyzes, evaluates, and forecasts China’s strategies for enhancing its global influence in economic, diplomatic, and security aspects, and explores potential response strategies for South Korea.

In Chapter 2, we examine the changes in and characteristics of China’s global influence index, as analyzed by major global institutions, to assess the degree of change in global influence during the Xi Jinping era. We then analyze the relationship between these changes and China’s national goals and foreign strategy shifts, identifying China’s strategies to expand its influence amidst intensifying conflicts with the United States and stronger economic security initiatives.

Chapters 3 to 5 focus on analyzing and evaluating China’s strategies to enhance its global influence in economic, diplomatic, and security fields during the Xi Jinping era.

Chapter 3 analyzes and evaluates the strategies to strengthen influence in the economic sector, divided into trade and finance. In trade, China’s strategies have led to growth as an exporter of intermediate goods through trade sophistication, securing a supply chain advantage, strengthening trade security through export controls, expanding regional economic cooperation networks such as the RCEP, increasing trade and investment with Belt and Road Initiative partner countries (exporting standards), and securing overseas markets/resources. However, there are also limitations, such as reliance on foreign core technologies, low-level FTAs centered on developing countries, increasing side effects of the Belt and Road Initiative, emerging competing platforms, and stronger actions on the part of advanced countries to contain and counter China’s trade, investment, technology, industry, and international standards activities.

In the finance sector, China’s strategy has shown some achievements in international monetary and financial system reform and role expansion, and in establishing a yuan liquidity supply network through bilateral/multilateral currency and financial cooperation. However, institutions like the AIIB and NDB still require extended periods of time to grow into alternative multilateral institutions that can take the place of established ones like the IMF and ADB. Additionally, efforts such as forming offshore yuan markets, capital account liberalization, and establishing an international payment system have made progress, though China’s capital account liberalization has not yet reached the level of advanced countries. As a result, cross-border yuan capital transactions increased rapidly during the Xi Jinping era. China’s Cross-Border Interbank Payment System (CIPS) is gradually expanding its number of members and transaction volume. Meanwhile, policies such as leading participation in international financial standard-setting and yuan oil transactions have yielded limited success, and the proposal to expand the use of SDR as a reform measure for the international monetary and financial system has not been widely accepted internationally.

Chapter 4 analyzes China’s strategies to enhance its influence in diplomacy, focusing on global partnerships, international development cooperation, and climate change negotiation responses. In global partnerships, China is expanding its influence through bilateral, small/multilateral cooperation systems, and public diplomacy. A notable feature is the global partnership strengthening strategy targeting Taiwan, with a focus on cooperation with developing countries and neighboring Asian countries, and the pursuit of public diplomacy leveraging strengthened economic power and rich cultural assets, though the effects have been minimal.

In development cooperation, China’s strategy has achieved significant results in expanding the provision of public goods to recipient countries, utilizing the Belt and Road Initiative platform, and leveraging regional cooperation mechanisms. A significant proportion of recipient countries have positively assessed these policies, noting contributions to trade and investment growth, infrastructure gap reduction, and economic/technological development, as well as improved political relations. As China advances the development goals of recipient countries and achieves sustainable development goals, its influence in international development cooperation governance and related international standards fields is growing.

In the field of climate change response, China has strengthened communication with developing countries through BASIC and LMDC groups within global climate governance, consolidating developing countries’ positions and enhancing negotiation power to assert their interests. However, strengthening China’s influence in climate governance requires China to expand its active responsibility for carbon neutrality.

Chapter 5 analyzes China’s strategies to enhance influence in the security sector, divided into resource security and maritime security. In resource security, China’s strategy has generally been successful in securing a supply chain for key minerals through the development and control of owned minerals and active overseas mineral investment. According to our evaluation, China is enhancing its own resource security in direct response to U.S. sanctions, strengthening cooperation with third countries other than the U.S., and promoting technological independence.

In maritime security, China is building a strong navy capable of far-seas operations, expanding maritime security activities, and constructing naval bases at strategic high-value locations. Domestically, it is strengthening maritime jurisdiction, law enforcement capabilities of the coast guard, and enhancing its ability to comply with international law in maritime disputes, thereby strengthening its legal warfare capabilities. The use of maritime militia as a grey zone strategy disrupts the actions of conflict countries, and stronger law enforcement measures by its coast guard have strengthened China’s influence in the South China Sea.

Chapter 6 comprehensively summarizes the contents of this study and presents implications for policy. Based on a comprehensive analysis of the characteristics, evaluation, and prospects of China’s global influence strengthening strategy, the study summarizes impacts and prospects by field, and examines the responses of major countries to China’s strategy to strengthen its influence in each field, suggesting response strategies for the Korean government.

This report examines the impact of external shocks on cross-border capital flows and major macroeconomic variables, and analyzed the effects of economic stabilization policies on economic conditions. An open economy with free cross-border capital flows has achieved faster economic growth than a closed economy with similar resource endowments, thanks to a more sophisticated financial system and robust macroeconomic institutions and policies. However, it is well known that building a sophisticated financial system by opening capital markets has the advantage of promoting economic growth, but it also increases the risk of economic crises. Kaminsky and Reinhart(1999) confirmed that in 18 out of 26 banking crisis episodes that occurred from 1970 to 2000, the financial markets of the respective countries had been opened within five years prior to the onset of the crisis. As the freedom of cross-border capital movement increases, large-scale capital flows into fast -growing countries in pursuit of higher investment returns, leading to an increase in asset prices and triggering credit expansion.

Ultimately, large capital inflows can lead to the overvaluation of a country's currency, increase the current account deficit, and increase the likelihood of a “sudden stop” economic crisis. Reinhart (2012) reports that the precursors of financial crises are large capital inflows accompanied by rapid increases in stock prices, surges in real estate prices, -shaped economic growth rates, and a sharp increases in debt levels. In other words, excessive capital inflows stimulate lending, boost asset prices, and increase debt in both the private and public sectors. Therefore, cross-border capital flows play a positive role in activating investment for economic growth but, at the same time, can transmit shocks in the external economy, causing spillovers and increasing macroeconomic volatility.

This report aims to reassess the issue of cross-border capital flows in the era of uncertainty, as the global economy faces the aftermath of the COVID-19 pandemic. Since the onset of the COVID-19 crisis in March 2020, the global economy has entered an era of uncertainty. With the pandemic declared and the infectious disease crisis reaching its peak, countries around the world implemented economic lockdowns to curb the spread of the coronavirus, which lacked treatment and vaccines. As a result, the infectious disease crisis translated into an economic crisis, leading to a rapid contraction in economic activity. In response, governments worldwide implemented unprecedented fiscal stimulus measures, and central banks eased financial conditions through interest rate cuts and quantitative easing, providing substantial liquidity to the markets. In April 2020, the United States implemented a $3 trillion stimulus package, and the Federal Reserve cut the benchmark interest rate to 0% in March 2020. The Federal Reserve embarked on an unprecedented asset purchase program (quantitative easing), purchasing not only Treasury bonds but also municipal bonds, corporate bonds, junk bonds, and exchange-traded funds (ETFs). Even Japan, which has the highest government debt-to-GDP ratio, announced a stimulus package of 108 trillion yen, equivalent to 20% of the GDP, in April 2020. Similarly, the European Union has prepared stimulus packages of between 10% and 20% of GDP for its member countries. As a result of these fiscal spending and quantitative easing, massive liquidity flowed into the asset markets of each country. This created an imbalance where asset prices rose, while the real economy stagnated. Moreover, a much larger amount of funds flowed into the asset markets of emerging economies compared to the global financial crisis in 2008 and the taper tantrum in 2013. These financial imbalances deepened the concerns of policymakers regarding global inflation and rising interest rates in 2022, complicating efforts to maintain financial market stability.

Cross-border capital flows are an important channel for the cross-border transmission of international risks. Sudden capital movements under external shocks, trigger systemic risks domestically, increasing the likelihood of a financial crisis. In the current context, trends such as the U.S.-China strategic competition, the Russia-Ukraine situation, the Israel-Hamas conflict, and the strengthening of protectionism and nationalistic tendencies are causing the international regime of trade norms and financial infrastructure to be weaponized as sanction tools. This trend towards deglobalization adds greater uncertainty to the ripple effects of cross-border capital movements between nations. Accordingly, this paper aims to assess the major external shocks and policy responses, as well as the status of cross-border capital flows, in the aftermath of the pandemic crisis. It also seeks to re-examine the impact of uncertainty on cross-border capital movements. Additionally, it aims to derive policy implications using key models from the Integrated Policy Framework currently being implemented by the International Monetary Fund.

This report consists of five chapters, including an introduction in Chapter 1 and a conclusion in Chapter 5. Chapter 2 discusses the major external shocks that occurred after the 2020 pandemic crisis, outlining patterns of capital inflows and outflows and policy issues arising from them. Initially, during the 2020 pandemic crisis, the global economy contracted by -2.8%, indicating a more severe economic downturn than the -0.1% contraction during the global financial crisis in 2009. In 2009, China initiated large-scale infrastructure investment, driving global economic activity and propelling the economic recovery in commodity-exporting countries. India also recorded a strong growth rate of 8.5% in 2009, contributing to the rapid recovery of emerging economies with high trade dependence on China and India. However, in the 2020 pandemic crisis, not only advanced economies but also emerging economies experienced severe economic downturns. During the peak of the COVID-19 crisis in March and April 2020, significant capital outflows occurred in emerging economies, recording a scale more than three times larger than the capital outflows during the tightening period in 2013.

As volatility in cross-border capital flows increased to unprecedented levels, the stability in exchange rates and financial markets in emerging economies became a crucial issue. Emerging economies that adopted a floating exchange rate regimes showed more flexible current account adjustments and a faster economic recovery than those that adopted fixed exchange rates pegged to the U.S. dollar. Despite foreign capital outflows during the pandemic crisis, the U.S. Treasury market maintained its safe haven status, benefiting from the Federal Reserve’s extensive quantitative easing measures.

In contrast, emerging economies faced challenges as their currency values depreciated, and bond yields rose, making it difficult for them to implement quantitative easing measures similar to the United States. In these countries, the issuance of bonds for fiscal spending led to high bond yields due to concerns about sovereign default risks. To lower bond yields, central banks would have to issue new currency to buy bonds, but this process could further depreciate the value of the currency in emerging economies, increasing the potential for inflation and foreign exchange crises.

Therefore, there is a significant difference in policy space between advanced and emerging economies in terms of quantitative easing. Moreover, the large amount of liquidity injected into the market through extensive fiscal spending and quantitative easing, and the resumption of economic activity from the second half of 2020, translated into delayed supply due to disruptions in value chains. This, in turn, resulted in supply delays, increased production costs, and price hikes for production factors and goods, as demand quickly recovered but supply struggled to catch up.

This indicated the deepening global inflation in 2022, eventually serving as the tipping point for a rapid shift in monetary policy toward interest rate hikes. Concerns about the fiscal room for maneuver of countries worldwide increased as public debt sharply rose in the aftermath of the COVID-19 crisis.

Since 2014, there has been a steady decline in government bond yields among major economies, leading to the belief that economic stabilization through government debt would be possible. However, the key question was, to what extent private demand absorbed the government bonds supplied to the market.

In the year 2020, the United States and Canada, where government debt relative to GDP increased the most, saw more than 40% of the government bonds were absorbed by private demand. However, in European countries such as Italy, Spain, Greece, and others, the majority of government debt has been absorbed by central bank quantitative easing. This indicates that the fiscal space for these European countries should be considered limited.

Chapter 3 empirically analyzes the effects of uncertainty shocks on capital flows and macroeconomic variables. Panel regression analysis results show that an increase in the Global Economic Policy Uncertainty Index (GEPU) decreases total capital inflows relative to GDP, but the Country-specific Economic Policy Uncertainty Index (CEPU) did not yield a statistically significant relationship with capital flows. This suggests that fluctuations in capital inflows are more closely related to external factors rather than domestic uncertainty factors.

Subsequently, a panel VAR analysis was conducted on three external shocks: global uncertainty, US policy interest rates, and international oil prices. The results showed that a one-unit increase in economic policy uncertainty led to a 0.1 percentage point rise in short-term interest rates, a 0.08 percentage point decrease in stock market indices lasting over 7 months, and a 0.1 percentage point decrease in fund inflows relative to quarterly GDP, recovering after 3 months.

When US interest rates increased by one unit, individual countries’ short-term interest rates rose by 0.1 percentage points, with a lasting effect. Stock market indices fell by 0.013 percentage points in the short term, and capital inflows decreased by 0.03 percentage points relative to quarterly GDP. Oil price shocks had a very limited impact on capital flows compared to other external shocks.

Analyzing the effects of global economic policy uncertainty (GEPU) shocks separately for developed and emerging countries revealed that interest rates slightly decreased in developed countries in response to uncertainty shocks, while no statistically significant results were found for emerging countries. In the short term, developed countries' stock market indices fell by 0.1 percentage points, and fund inflows decreased by 0.3 percentage points relative to quarterly GDP.

High-debt countries showed a statistically significant decline in industrial production in response to global economic policy uncertainty shocks, and relatively larger decreases in stock market indices and nominal currency values. Lastly, countries with higher degrees of financial openness experienced greater capital outflows following global uncertainty shocks.

In Chapter 4, we investigated the economic fluctuations resulting from the overseas interest rate hike shock through the integrated policy framework of the IMF and compared the effects of economic stabilization policies. The impact of the overseas interest rate hike on economic fluctuations differed significantly between emerging small open economies and advanced small open economies, especially in terms of inflation volatility. While in advanced countries inflation remained stable even in the presence of external shocks, significant inflation occurred in emerging economies. Thus, in advanced countries, the decline in overseas export demand led to a reduction in output, prompting a policy rate cut for economic stimulus. In contrast, in emerging economies, it was observed that, to achieve price stability rather than counteracting output decline, interest rates were increased. Furthermore, when foreign exchange market interventions and capital flow management policies were combined with monetary policy, the stabilizing effects on the economy were more pronounced in emerging countries. Particularly, it was found that foreign exchange market intervention policies, when limiting the rise of the real exchange rate to the same extent as capital flow management policies, enhanced macroeconomic stability more than capital flow management policies alone.

Countries with positive net external assets experienced a relatively limited appreciation of the exchange rate in response to the interest rate hike abroad. Consequently, the cost of imported intermediate goods did not increase significantly, resulting in a smaller output contraction than in countries with a balanced external asset position. The results of the policy experiment indicate that in the case of countries with positive net external assets, when foreign exchange market interventions and capital flow management policies were combined with monetary policy, the volatility of output stabilized. However, there was an observed increase in the volatility of consumption and trade balances. It was noted that, with exchange rate stability, the price fluctuations of imported intermediate goods were reduced, which consequently reduced the amplitude of output fluctuations. Nevertheless, the increased volatility of consumption and trade balances is attributed to the direct impact of financial transactions in the international financial markets. This impact is influenced by foreign exchange market interventions and capital flow management, ultimately leading to a higher amplitude of economic fluctuations.

Discussions to establish common rules for digital trade and to enhance cooperation in the digital economy are taking place on various platforms. At the multilateral level, WTO e-commerce negotiations are in progress, and at the bilateral level, e-commerce chapters of regional trade agreements are being revised. South Korea is also expanding its digital trade network by promoting a number of digital trade agreements. Digital trade rules introduced by digital trade agreements are expected to have an economic impact via multiple channels. Digital trade rules have the potential to facilitate digital trade by reducing trade barriers, leading to overall trade expansion. Expanding trade not only boosts production through increased imports and exports, but can also increase productivity through the spillover of new technologies and increased competition. As the digital trade network expands, the need to analyze the economic impact of digital trade agreements also grows. In recognition of these developments, this study quantitatively analyzes the economic effects of digital trade agreements through a general equilibrium model. We first identify the key digital trade rules in digital trade agreements and estimate how much they reduce trade barriers. Then we build a general equilibrium model that includes the characteristics of the digital economy to analyze the macroeconomic impacts of introducing digital trade rules.

This study largely consists of five parts. In Chapter 2, we explore digital trade barriers, such as policy restrictions and technology barriers that can limit digital trade between countries and review the key provisions in digital trade agreements in order to mitigate the barriers. While there are still no explicit rules at the multilateral level such as the WTO, except for a moratorium on customs duties on electronic transmissions, digital trade rules in RTAs have become more comprehensive over time and the level of liberalization is increasing. In addition, Digital Economy Agreements have emerged that contain provisions for cooperation in areas such as SMEs, AI, and fintech.

In Chapter 3, we analyze the impact of digital trade rules on trade costs and trade barriers. In particular, we examine the impact on trade barriers, an exogenous variable, instead of the impact on trade, an endogenous variable. This choice was valid because this study analyzes the impact of digital trade rules through a general equilibrium model in the next chapter. We analyze the impact of digital trade rules on importer trade cost as well as bilateral trade cost because digital trade rules may have non-discriminatory effects on all trading partners through changes in domestic law and institutions. Our analysis shows that provisions such as consumer protection, data flow, and data localization measures have a significant negative impact on trade costs. In particular, provisions about data flow reduce trade costs in most service industries. However, it is possible that effects that would have been observed if the data were more disaggregated by country or industry are estimated to be statistically insignificant. For the sake of consistency with the general equilibrium analysis, this analysis uses ADB MRIO data, which contains only 35 industries in 60 countries/regions. In particular, ADB MRIO mainly contains data in major countries which have multiple agreements, making it difficult to estimate the impact of specific provisions of the digital trade agreement with statistical significance.

In Chapter 4, we build a theoretical model as a framework for analyzing the macroeconomic impact of digital trade rules. Based on Caliendo and Parro (2015) and Antras and Chor (2018), we model multi-country, multi-industry production and trade in the same way as previous literature, but with household decision-making reflecting the characteristics of the data economy. In the model, data is generated from the household's consumption, and as more data is generated, households experience disutility due to concerns about data leakage and abuse. Household decisions are made considering data generation and externalities. Then we simulate the impact of WTO e-commerce negotiation with this model and the estimation results in Chapter 3. The analysis scenarios are as follows: i) a low level agreement that includes only e-commerce facilitation and consumer protection-related provisions; ii) a high level agreement that includes privacy, source code, and data-related provisions as well; and iii) a separate high level agreement between only a few countries, including South Korea, given that the withdrawal of the U.S. proposal has made high-level agreements under the WTO more difficult. If the WTO e-commerce negotiations are concluded at a low level, our results show positive trade effects and welfare effects for the participating countries. On the other hand, non-participating countries lose both exports and imports, reducing their share of world trade. Trade and welfare effects in scenario 2 are greater than those in scenario 1. It is worth noting that non-participating countries also experience minor increases in exports, imports, and welfare. This is likely due to the fact that digital trade rules lower trade costs for all trading partners through improvements in domestic laws and institutions. In the case of a separate agreement between countries that support the adoption of high-level digital trade rules, the difference in economic impact between the participating and non-participating countries is clear, as in scenario 1.

In Chapter 5, we build a growth model of the dynamic data economy and analyze the economic effects on growth from a general equilibrium perspective when domestic data regulations are improved by the introduction of digital trade rules. We consider the impact on companies utilizing data in final goods, intermediate goods, and R&D sectors as well as on consumers due to privacy violations and abuse of data in the long run. The changes in domestic data regulation due to the digital trade rule are assumed to affect stock and accessibility of raw data. Domestic regulatory changes that increase data volumes or improve data accessibility due to the adoption of digital trade rules - coupled with changes in the share of labor in the final goods, intermediate goods, and R&D sectors, as well as changes in the growth rates of industrial and R&D data - will lead to higher economic (and technological) growth through increased data utilization. The model shows that even in the absence of regulatory changes that increase data volumes sufficiently, if the digital trade rule leads to regulatory changes that improve data accessibility, consumer welfare will increase.

In Chapter 6, we explore the application of the methodology proposed above in policy formulation and implementation. The analytical methodology presented in this report is expected to contribute to improving the ex ante and ex post evaluation of digital trade agreements. A wider range of scenarios can be considered when ex ante assessing digital trade agreements using the estimation results in Chapter 3. More rigorous analyses and comprehensive assessments of domestic economy-wide impacts could also be conducted, after negotiations have been concluded. Once it is determined which provisions are included in the agreement, a quantitative analysis can be conducted by considering how much trade cost will be reduced due to each provision. Finally, we also analyze the economic impact of different types of digital trade agreements with different countries, or groups of countries, to identify potential negotiating partners for a digital trade agreement.

The Ukrainian War has dealt a severe blow to the global order, which has yet to recover from the shock of the COVID-19 pandemic, and the resulting changes are becoming irreversible. Changes that were already underway before the war are accelerating in an amplified form during the conflict. The Ukrainian War marks the end of the 30-year post-Cold War, post- globalization era . Over the next 3 to 5 years, the results of the restructuring of the global order will reveal its true nature. It is predicted that rather than a recovery of the old order or the emergence and solidification of a new order, it will be difficult to establish a single global order, and various orders will coexist, inevitably leading to ongoing power struggles. In other words, the global order will essentially evolve into a world of multiple orders.

The competition between the superpowers over the security and military sector is expected to be a fundamental factor in determining the nature of the order after the end of the post-Cold War order. A fierce confrontation is expected in the security sector as a whole after the Ukrainian War. The basis of the Biden administration’s China strategy is to strengthen international solidarity for the defense of the rules and norms order through the recovery of international leadership. The responses of adversaries to this US-led framework, such as Russia and China, are also strong. The Ukrainian War is likely to cause significant changes in the global military order and poses a multifaceted threat to the nuclear non-proliferation order. The Ukrainian War will also intensify traditional arms race among the superpowers and increase military tensions.

The United Nations and other international organizations have been criticized for not being able to function effectively due to conflicts between the US, China, and Russia. However, despite the criticism of the weak influence in the international community and the fatal institutional flaw of not being able to effectively respond to agendas where the permanent members are in conflict, the expectation of the UN to respond to global conflicts and crises is still high. In the international economic institutions and systems, there is a competition between the US-led forces and the forces led by China and Russia, but it is difficult to say that one side has the upper hand.

The war in Ukrainian further plunged the international economy, which had not yet overcome the shock of COVID-19, into a recessionary crisis and caused disruptions in the supply of goods and services, including food and energy. The economic interdependence, such as the value chain, which was maintained under the overwhelming economic logic of the post-Cold War era, showssigns of being reorganized into a form of supply network centered on one’s own country or trade and economic bloc formation centered on allies and friendly countries according to the security logic. Of course, this does not mean that the phenomenon of de-globalization, the formation of separated blocs and the fragmentation of the economic order means the complete collapse of globalization and the emergence of a new economic order, but for the time being, the phase where the logic of security is reflected in the overall economic relations between countries and the tendencies of economic protectionism are strengthened is expected to continue.

It is not easy to declare the end of the post-Cold War order in digital governance. This is because digital governance corresponds to a very wide range and layers, and the wide range of these issues makes it difficult to define as one single order. Rather, it can be said that each subfield has different characteristics. Looking at these areas before and after the Ukrainian War, it is difficult to say that there has been a clear change in direction. The Ukrainian War is accelerating various order transitions triggered by the US-China strategic competition, such as the decline of the liberal international order and the rise of the bloc order, the decline of free trade and the rise of protectionism, the rise of nation-centered industrial policy and technological nationalism. At the same time, there are growing concerns about the emergence of an unstable bipolar order and a new Cold-War style order . Moreover, as the two central orders, led by the US and China, are being established, a complex pattern is unfolding in which the center is deviating and multiconnectedness outside the center is strengthening.

Due to the conflict between the US and China before and after the Ukrainian War, the pattern of hegemonic competition is intensifying, and the field of climate change is an area that needs to be addressed through multilateral international cooperation as an issue related to the global commons, so there is a high possibility of deepening confrontation and obstacles to cooperation. Discussions on major cooperation agendas are currently underway as scheduled, but the situation is latent with the possibility of conflict and suspension of cooperation.

The transition to a world of multiple orders poses a major challenge to Korea’s national policy as a whole. Korea needs to meticulously analyze the process of the order reorganization by field and area and find ways to maximize Korea’s national interests. It is necessary to minimize the costs caused by the change of order, seize new opportunities, and establish a status that can guarantee Korea’s national interests not only in the short term but also in the medium and long term. In addition, Korea should not only react to changes in the order, but also actively participate in the reorganization of the order and strive to shape the new order in a way that is compatible with Korea’s national interests.

It is very important to establish a multidimensional framework for analyzing how changes in one area will affect other areas. In the future, policy authorities should be able to respond effectively by comprehensively evaluating and forecasting the direction of changes occurring in different areas. The status secured in one area can have a positive effect on the formation of the order in another area. The bargaining chip in one area should be applied to other areas, and if the conditions unfavorable to Korea must be accepted, compensation should be demanded in other areas.

This report examines the status of U.S. semiconductor export controls and estimates their impact. We focus on two major areas of semiconductor export controls implemented by the Biden Administration: restrictions on certain semiconductor manufacturing facilities and AI chips.

In Chapter 2 reviews the history of U.S. semiconductor export controls, which progressively became stronger and broader in scope during the Obama, Trump, and Biden administrations. In doing so, we confirmed that semiconductor export controls have become more frequent and in an effort to overcome the limitations of existing sanctions. Regarding export controls attempted by the Obama administration, American companies were able to circumvent them by assisting Chinese companies. The Trump and Biden administrations have closed such loopholes by expanding existing sanctions. The scope of the Trump administration’s sanctions against some companies, such as Huawei and SMIC, has been greatly expanded to include export controls targeting all of China under the Biden administration. Additionally, Chapter 2 reviews the concerns of various companies, associations, and organizations regarding these broader export controls and reviews key countries’ responses to the semiconductor supply chain.

In Chapter 3, we conducted an analysis of the semiconductor industry’s supply chain, encompassing equipment, materials, foundry, memory, and design sectors. For each sector, we scrutinized major companies and their relevance to semiconductor export controls, as well as the competitiveness of China’s semiconductor industry. By reviewing various public announcements and company disclosures, we investigated the potential impact of export controls on individual companies, particularly in the areas of semiconductor manufacturing equipment, memory semiconductors, and semiconductor design. It became clear that Chinese semiconductor companies were rapidly improving their technical capabilities with substantial support from the Chinese government in all areas.

In Chapter 4, we delved into the repercussions of semiconductor export controls on semiconductor manufacturing equipment and AI chips, the two main targets of export controls. Our analysis showed a statistically significant decline in China’s imports of semiconductor manufacturing equipment. Furthermore, Korea’s exports of semiconductor manufacturing equipment, which serve as a complement to American semiconductor manufacturing equipment, have also declined as a result of the impositionof semiconductor export controls. Additionally, the imposition of export controls on AI semiconductors could potentially lead to a modest decline in demand for high bandwidth memory (HBM). While the baseline estimate indicates a smaller decline in demand due to the export controls compared to the broader memory market, the long-term impact could be significant, depending on the evolution of future export control measures and the expansion of the AI semiconductor market.

In Chapter 5, we projected possible extensions of semiconductor export controls to encompass heterogeneous integration technology and next-generation power semiconductors. Furthermore, we also considered the possibility of broadening the scope of countries involved in semiconductor manufacturing equipment. In addition, this report outlines policy implications, including the need to ensure the competitiveness of semiconductor manufacturing equipment, to establish alternative production facilities to mitigate risk exposure, and to enhance the competitiveness of fabless companies.

In general, negative discussions and impressions regarding outward FDI, such as capital outflows, job losses, leakage of trade secrets, and hollowingout of domestic industries, seem to dominate. The controversy, which focused on greenfield investments in the past, seems to be widely applied to recent mergers and acquisitions (M&As). Against this backdrop, the purposeof this report is twofold: first, to improve the understanding of how the increase in Korean firms’ FDI through M&As and related innovation activities in the U.S. market affects the performance of the investing Korean firms and their domestic affiliates; and second, to provide objective long-term policy directions on outward FDI and firms’ innovation activities based on the results found using firm-level data. The following results and findings in each chapter of this report are presented as follows.

On the theoretical side, based on the theoretical model developed by Akcigit, Ates, and Impullitti (2018), Chapter 2 examines the mechanisms through which FDI can affect the incentives to innovate and the financial performance of investing firms. Market integration through M&As creates a scale effect and a competitive effect. The cost of innovation also plays a role in firms’ innovation incentives and financial performance. A spillover expected from knowledge sharing resulting from access to a new market is an additional channel. Regarding the scale effect, access to large, developed markets is one of the reasons why direct investment is a rational choice for a firm’s innovation. Large markets tend to have more intermediate resources to use and a larger pool of information to share. However, access to a new market through FDI can change the competitive structure that the investing companies face. Direct access to a foreign market creates higher expected profits if an investing firm’s innovation is successful. Still, if it is not, the firm may face stiffer competition or be forced out of the market. The degree of monopoly power is indeed the main factor determining the profits of successful innovations. However, the firm’s current profit only lasts until the next innovation occurs, and if there is no subsequentinnovation that is better than that the competitor’s, the company’s profit will decrease or it will be exited from the market. To survive, companies need to continuously invest and work on innovation. The spillover of technologies and the knowledge embedded in the R&D performed or in the patents filed as part of these efforts are another channel through which companies strive for better quality and innovation.

Based on the theoretical discussion, empirical analyses from two perspectives are conducted using firm-level data such as patent data from the USPTO, M&A data from Eikon, and the financial data of Korean firms from KED: changes in innovation activities (the number of new patent applications, the number of patents cited (backward citation), and the sum of patent applications and patents cited) and financial performance of the investing firms in the U.S. The analyses in Chapter 4 show that the innovation activities of Korean firms have improved statistically significantly after an M&A with a U.S. firm. The results show that the effect of an M&A on the number of backward citations is positive (statistically significant at the 5% level). In other words, the citations of Korean firms to innovations (patents) in the U.S. increased after the M&As compared to firms without successful M&As, confirming that M&As play a positive role in the utilization of innovations generated in the U.S. by Korean firms. We also find short-term improvements in an innovation outcome indicator of patents held by the merged firm after M&As. This suggests that the M&A investment in the U.S. by Korean firms has a positive effect on the innovation activities and innovation quality of the integrated firms.

Chapter 5 examines whether the acquisitions of U.S. patents by Korean firms affected the financial performance of their Korean parent firms (acquirers) and first-tier suppliers. The results show that the financial performance of the parent firms in terms of total sales and operating profits starts to improve two to four years after the U.S. patent acquisition. The longer the period of the patent acquisition, the better the financial performance, in terms of both magnitude and statistical significance. Specifically, an additional unit increase in the number of U.S. patent citations four to six years prior is associated with an average increase of KRW 4.3 billion in sales and KRW 1.5 billion in operating profits for Korean parent firms. It is important to note that most of the significant results come from acquirers in high-tech industries. For high-tech acquirers, U.S. patent quality, as measured by patent citations also improves the financial performance of the acquirer’s domestic first-tier suppliers. However, it appears that it takes an additional one to two years to be reflected in the subcontractors’ financial performance. Specifically, the total sales of a high-tech acquirer’s first-tier subcontractors began to show a significant positive relationship with the acquirer’s U.S. patent citation after three to five years and an even stronger positive relationship with U.S. patent acquisition after four to six years.