This study investigates the background and causes of the major changes in the labor market environment in Southeast Asia, while also identifying the characteristics of the labor market. In particular, the increase in foreign direct investment (FDI) in Southeast Asian countries serves as a starting point for this analysis, because the flow of FDI, we believe, is the most important cause of changing conditions in the labor market. In addition, we have explored whether the investment decisions of Korean firms are affected by the changes in the labor markets in the area, through both empirical analysis and a corporate survey on their strategies to respond to the changes. We find that Korean firms, particularly, small and medium sized enterprises, mainly focus on localization at the management level. Furthermore, based on the findings, we have proposed better ways to support the Korean firms operating in Southeast Asian markets.
In chapter 2, we have listed the causes of labor market changes in Southeast Asia. First, as increases in income made workers in the region to devote greater attention to democracy and human rights, the government could not ignore the workers' demands for higher pay and better working conditions. Second, the governments in the region have recognized that high external dependence may hinder sustainable development after the global financial crisis. Since the governments are aware of the necessities of expansion of domestic markets to avoid the risk, they have become noticeably pro-worker in terms of their labor policies. In addition, populist political activities also led to pro-worker policies. Since the changes in the labor market environment can reflect the needs of both the governments and their workers, in sum, we conclude that changes in the labor market environments will continue to occur for some time.
In chapter 3, we analyze the characteristics of the labor market structure in Southeast Asia as to labor supply and demand aspects. The features of labor supply in the region can be summarized as follows. First, this area exhibits a relatively high population growth rate as well as a high proportion of youth among the entire population. Second, the quality of human resources is expected to improve. In Vietnam, Indonesia, and Cambodia, where Korean corporations have been relatively active expanding their business compared to other countries, we have observed a rapid increase in the enrollment rate in tertiary education. Third, if the ASEAN Economic Community succeeds in its plan, skilled workers can migrate more freely within the region. The characteristics of labor demand can be summarized in the following two sentences. First, the structure of labor demand is becoming diversified in Southeast Asia. Second, we find that economic growth creates a number of jobs in the area through the elasticity of employment. In addition, comparing the wages of white-collar and blue-collar workers, we find that the white collar workers receive more wages than blue-collar workers across all countries. However, we could not confirm whether these wage differences are attributable to individual capabilities, due to limitations in the data.
In chapter 4, two analyses were carried out. First, we empirically analyze the Korean enterprises' determinants of foreign direct investment in Southeast Asia. Moreover, we investigate how they respond to the current changes in labor market environments through a corporate survey. According to the results of our empirical analysis, Korean firms continue to choose these areas as bases for labor intensive production process, despite the increase of local production costs such as labor cost. This result accords with survey results that the firms already working in these areas will not move, either back to Korea or to other countries. Interestingly, 57.3% of the companies responding to the survey answered that they overcame the recent wage increase through increase in productivity. Furthermore, where the labor market conditions are worsening, 73.3% of firms chose a localization strategy, such as productivity increases, to surmount the difficulties, rather than moving to other countries. The reason for these interesting results can be shown in the following two sentences. Firstly, the increase in variable costs currently being experienced is less than the increase in the fixed cost of relocation of production facilities. Secondly, countries that are generally considered as alternative locations, such as Myanmar, have also experienced similar changes in labor market environments.
Based on the above discussion, we believe that Southeast Asia still has potential for the inflow of FDI from Korean firms. Ongoing changes in labor market conditions in Southeast Asia are likely to have an adverse impact on Korean firms operating there, though the extent of the impact will differ across industries and technology levels. In chapter 5, therefore, we suggest that business support policies in overseas markets should widen the scope of their application, because current support policies tend to focus on supporting only the initial advances. Hence, for firms already operating in Southeast Asia to successfully expand their markets, the Korean government should provide additional support measures for localization of these firms. Of course, since the companies located abroad do not use the domestic production process, the additional support of the firms located abroad may reduce the creation of domestic jobs. However, given the existence of previous research indicating that Korean firms' OFDI can positively affect domestic productivity and employment, the Korean government should identify the impact of additional support by industry.

Until the mid to late 2000s, the process of trade liberalization has been driven forward through ongoing efforts of world economies at the WTO level. At the same time, regional processes such as Free Trade Agreements (FTAs) have made greater liberalization possible, lowering tariff barriers significantly. With the world currently in recession, the global financial crisis has intensified competition. These difficulties therefore require practical efforts of countries to maintain the present pace of trade liberalization. In this regard, there is much debate as to the role of trade remedies in the process of recovery from the global financial crisis. Some countries tend to utilize trade remedies to protect the country’s declining domestic industries or vulnerable domestic industries. Korea launches anti-dumping investigations against imports originating from foreign countries, but at the same time Korean exporters have also been subject to the largest number of anti-dumping investigations in the United States, China and India. Accordingly, it is necessary to examine the economic effects of trade remedies from both the perspective of being subject to import regulations and the perspective of imposing import regulations. The frequent use of trade remedies has come under criticism due to the fact that the positive effects of trade liberalization could be negated. This study aims to draw implications and propose countermeasures for the efficient operation of the Korean trade remedies system, by analyzing the impact of trade remedies on imports and exports, and by conducting comprehensive analysis of operational issues regarding trade remedies. The trade remedy system is often established to correct unfair trade practices such as dumping and subsidies, or to provide temporary remedies to importing countries for emergencies or for exceptional circumstances such as safeguards. In a broader sense, the trade remedy system often includes unfair trade practice investigation. This study limits the scope of the trade remedy system to anti-dumping investigations, as the cases of countervailing duties or a definitive safeguard measure imposed by Korea on imports (subject merchandise) are extremely rare. While most of the previous studies that analyzed the effect of anti-dumping measures were focused on cases involving the United States, this study contributes to the literature on anti-dumping investigation by collecting data on anti-dumping investigation in China and India, in addition to the United States. Comparisons of the anti-dumping investigations in Korea and the United States, China, India during 1995-2014 led to the following results: the United States had less number of cases terminated by impositions of measures as a percentage of all the cases initiated, while China and India were subject to a relatively long period of anti-dumping investigation. One thing the anti-dumping investigations in the United States, China, and India have in common is that the exporters of subject merchandise and the exporting country subject to investigation are quite diverse. Related practices in Korea are developing fast, and it is comparable to those of the United States practice, showing a higher-level anti-dumping system than China and India. The United States has the most specific provisions relating to the non-market economy (NME) and the use of cumulative assessment of injury; the United States makes active use of these provisions. As for China, it strictly enforces price undertaking agreements. However, there is room for improvement regarding administrative review systems in China along with India. This study empirically investigates the existence of a chilling effect on imports and exports, and the impact of anti-dumping measures on imports and exports, identifying separate effects for each. The impact of anti-dumping measures on imports and exports were felt differently depending on the country's institutional characteristics, practices, and the industry subject to investigation. The results show that the Korean anti-dumping measures caused a reduction in the import volume at the HS-6 digit category of subject merchandises, a phenomenon found to be common across industries. Mere initiation of an anti-dumping investigation against Korea by the United States caused a substantial decrease in the total export volume of HS-6 digit products. The duration of the chilling effect depended on industry characteristics. China's anti-dumping investigation against Korea was focused on the chemical industry. The chilling effect on exports occurred, but only appeared for a short period. Similarly, India’s anti-dumping investigation against Korea caused a chilling effect on exports, which again disappeared in a short period of time. A cross-country comparison of the anti-dumping investigation leads to a following conclusion: a confirmation of the existence of the chilling effect, induced simply by initiating anti-dumping investigation. The empirical results of this study suggests that the impacts of anti-dumping measures on imports and exports - whether an anti-dumping duty levied on the subject merchandise would cause a decrease in the import volume, and how long the effects would last - depend on numerous country- and industry- specific features. Therefore, it is necessary to propose implications against the United States, China, and India for the efficient operation of Korea’s anti-dumping system, by considering comprehensive analysis of operational issues. The criteria for selecting the vulnerable domestic industries is based upon the anti-dumping investigation frequency, the number of cases terminated by impositions of measures as a percentage of all the cases initiated, the shares of product volume imported (exported), and the growth rate of imports (exports) of products. The proposed country- and industry- specific implications are expected to contribute to developing Korea’s strategy against the use of anti-dumping measures by the United States, China, and India.

Global imbalance has been widening on a large scale from the start of the 21st century and was received notice as a critical risk factor for the future of the world economy. Global imbalance was maintained by the inflow of the dollar from the surplus countries (China) to the deficit countries (U.S). Many economists worried that if profitability and stability of dollar assets became questionable because of decreasing credibility of the U.S economy, the risk of hard landing of the world economy would become a reality through volatile exchange rates and hikes in U.S interest rates. Fortunately, global imbalance was reduced considerably since the year 2007 and therefore the economists had less cause for worry about the possibility of hard landing due to global imbalance.
This study discusses the trend of global imbalance since the 1970’s, focusing on the U.S-Japan imbalance in the 1980’s and the U.S-China imbalance in the 2000’s. Then we analyze the adjustment process of global imbalance and its causes during the last few years. In doing this, we identified three possible causes– the U.S, China and the exchange rate. We find decreases in private consumption and increase in the savings rate in the U.S., increase in state-led investment and increase in consumption due to rising of income in China and also government policies in China. All of these causes result in narrowing of the savings-investment gap in both countries. Appreciation trend of the Yuan against the dollar also helped in reducing the imbalance.
We try to forecast whether the recent trend, the narrowing of global imbalance, will continue over the medium and long term horizon. To do this, we empirically investigate the determinants of the current account employing the national panel data. The results of the empirical study show that it is difficult to judge conclusively the continuity of adjustment of global imbalance, because there exists a mixture of positive and negative elements in the results. Reduction of government deficit of the U.S and more flexible exchange rate policy in China are the key factors that will determine whether the trend will continue.
We also try to draw implications of the adjustment of global imbalance for the structural fine tuning of the world economy. First, the U.S-China currency dispute which was called “the currency war” at the time of G20 of 2010 has been and will be further diminished. The adjustment this time will come not only from exchange rate adjustment but also from increases in U.S savings and China’s consumption, which can result in reduction of the saving-investment gap at the structural level. Second, the macroeconomic structural adjustment of the U.S and Chinese economies; and gradual progress made in the reduction of global imbalance. The U.S. efforts to increase exports, which will require strengthening of the competitiveness of the manufacturing sector, will take considerable period of time because the economy has been heavily dependent on the service industry including the financial sector over the last 30 years. Chinese efforts to rely more on domestic demand will accompany costs such as economic slowdown and workers’ adjustments to new industries. Third, it is necessary for the large surplus countries including Germany and regions like East Asia to participate in the global policy cooperation by increasing their domestic demand and imports, because the adjustment between the U.S and China is not sufficient to maintain and increase the global aggregate demand.

  China is pursuing a regional development strategy for its northeast region with the realization that it is an area imperative to China’s future development and that it will function as a powerful engine in securing China’s regional competitiveness. For the successful development of northeast China, however, the issues related to the Korean peninsula must first be resolved. Therefore, it is important to understand how China views the Korean Peninsula, and which strategy it will employ in approaching this problem.
This study uses the ideal model method and global action patterns method to demonstrate that peaceful unification is the most ideal setting for China regarding the Korean Peninsula if China’s goal is to pursue its development strategy in the Northeast region. We conclude that China will choose a policy strategy that supports the unification of the Korean Peninsula in order to implement its own national strategy.
We consider four main scenarios related to the unification of the Korean Peninsula: status quo, military conflict between South and North Korea, North Korea’s pursuit of openness and reform, and peaceful unification. We conclude that China will strategically construct its policy underpinnings vis-à-vis the Korean Peninsula in support of a peaceful unification. Furthermore, China will eschew strategic competition with neighboring powers such as the US or Japan, and instead embrace cooperative co-existence in Northeast Asia. This would also mean that Northeast Asia will soon emerge on the global center stage as a peaceful and cooperative region.
Unification of the Korea Peninsula and economic benefits for China can be considered in three aspects: unification and economic benefits for China’s northeast region resulting from North Korea’s reform and opening up, the ripple effects of inter-Korean economic integration on China’s Eurasian strategy, and the application of the One Belt and One Road Strategy. If a Northeast Asian triangular trade network becomes a reality, China’s northeast region would be the greatest beneficiary in connection with unification of the Korean Peninsula. In particular, economic effects engendered from increased openness of the three provinces of northeast China due to Korean unification will be considerable. Increased openness of the three northeast Chinese provinces by itself is expected to generate economic benefits of about 283.6 billion RMB.
Additionally, when considering the inter-Korean economic integration using the CGE (Computable General Equilibrium) model, while it is true that trade diversion caused by inter-Korean economic integration may impact China negatively in the short term, North Korean economic growth will accelerate and increase import demand, which may increase China’s exports to North Korea and create a positive ripple effect.
Regarding the Eurasian Strategy and the application of the One Belt and One Road Strategy, if President Park’s Eurasia Initiative Strategy is implemented, China’s Northeastern region would experience increased openness and more areas would become open to development, henceforth strengthening its regional competitiveness. This would mean that the Northeast region could become a new engine of growth for the Chinese economy.
Since the beginning of the modern era, all international environmental factors that crucially impacted China’s national interests have stemmed from the Korean Peninsula. Thus, Korean unification and China’s security interests are closely connected.
In China’s perspective, Korean peninsula also represents an extremely important issue to the US and Japan in implementing their respective strategies. As a result, surrounding powers such as the US, China, Russia, and Japan is paying close attention to the constantly changes and standoff politics of inter-Korean relations; naturally, there would be strategic competition among the surrounding major powers who intend to prevent negative outcomes that could hurt them.
Reconciliation of the two Koreas or unification of the Korean Peninsula will induce the surrounding countries to acknowledge that they could lose out on potential economic benefits if they do not actively participate in Northeast Asian regional cooperation. If so, the mood in Northeast Asia will be extremely cooperative, which would provide favorable international conditions for Chinese regional strategy vis-à-vis East Asia.
Sino-Korean strategic cooperation is absolutely necessary in the process of unifying the Korean Peninsula. In the long-term view, South Korea needs to pursue a neutral policy towards the US and China. In the current situation, China also maintains a favorable attitude regarding the ongoing active role of the US forces stationed in Korea. However, the role of the US-Korea alliance must be limited within the Korean Peninsula. Moreover, while North Korea is undergoing top-down reform, a desirable policy for South Korea and China should be to encourage change in North Korean society and help North Korea to open up and initiate reform.s
Especially, if one wishes to see substantial changes in North Korea, one must actively conduct economic exchange with North Korea. Furthermore, regarding economic exchange with North Korea, South Korea and China should be attentive towards the creation of special zones in North Korea.
Finally, in order to realistically resolve the North Korean nuclear problem, the issue at hand must be divided into several steps. Internal politics within North Korea must first be stabilized by achieving economic exchange within set boundaries and at the same time, we must induce North Korea’s integration into the international society. Unified Korean Peninsula will play the role of a hub, located at the crossing point of interests of great territorial and maritime powers. Of course, the benefit will be shared by neighboring countries, as well as China and the Korean Peninsula. In this way, a peaceful unification of the Korean Peninsula will be a bonanza not only to the Korean Peninsula and China, but also to all neighboring countries.

  A peaceful and market-oriented unification of South and North Korea is likely to give rise to a large investment boom in the unified Korea. An increase in domestic absorption in the unified Korea will also be necessary to achieve rapid economic development in the north and to reduce the huge migration pressure from north to south that would follow unification. This boom in demand is likely to substantially increase GDP and employment in Korea’s trade partners (Japan, the United States, etc.), most of which are currently suffering from a serious lack of demand. To realize this optimistic scenario, Korea and its trade partners need to collaborate to finance the temporary current account deficit Korea will experience after the unification. We examine these issues using a neoclassical growth model, an open macroeconomics perspective, the World Input- Output Database (WIOD), and other statistics.
The economic impact of unification on trade partners will crucially depend on how economic development proceeds in the unified Korea. Many preceding studies on the economic costs of unification, such as Song (2013) and Kang, Lee, Pyun and Hyun (2014), assume a gradual unification. However, if we assume a democratic unification process, it will be difficult to restrict migration (Wolf 1998) and the south will face strong pressure of immigration. To reduce this pressure, the unified Korea will need to try to achieve rapid economic growth in the north through large investment and income transfers. Since the present north-south population ratio is much larger than the east-west population ratio in Germany in 1989 and the present per capita GDP gap between the north and the south is much larger than that in the case of the German re-unification, Korean unification will cause a greater increase in domestic absorption than was observed in Germany.
In our analysis, we assume that the unified Korea will meet the supply shortage implied by the current account deficit through a proportionate increase in goods imports from its trade partners. Using the 2011 WIOD, we analyze the economic impact on Japan, China, the United States, and Russia by sector and by year. We take account of indirect effects (i.e., effects through changes in intermediate inputs). We conduct a standard Leontief-type analysis with the assumption of supply constraints in the unified Korea.
The analysis shows that Korea’s major trade partners will experience a substantial increase in GDP and employment. China will enjoy the largest benefits. If we sum up the increases in Japan’s GDP for the period 2015-25, the total will be US$234.5 billion. Job creation in Japan will be mainly concentrated in the machinery and leasing industries.
Korean unification also means the country’s position as a rival to Japan in the East Asian division of labor will be boosted. Empirical studies show that countries that are neighbors, countries with ethnic ties, and countries with FDI in each other tend to trade more (Felbermayr 2009, Fukao and Okubo 2011). Therefore, after unification, China-Korea trade may increase significantly. We examine how other countries will be affected if they are left behind by the deepening of trading ties between China and Korea. For this analysis, we assume that the total amount of Korea’s exports to China doubles for each good and service, but that China’s total imports of each good and service do not change. This means that other countries are crowded out by Korea from the Chinese market. Similarly, we assume that the total amount of China’s exports to Korea doubles for each good and service, but that Korea’s total imports of each good and service do not change. This means that other countries are crowded out by China from the Korean market. To focus on the crowding out effect, in this analysis we assume that Korea has sufficient production capacity to increase exports to China.
This analysis shows that the deepening of trading ties between China and Korea will have a larger negative impact on Japan than on the United States. The reason is that Korea, China, and Japan specialize in similar products. Job losses in Japan will be concentrated in a small number of sectors such as electrical and optical equipment, basic metals and fabricated metal, and leasing.
Infrastructure development is a necessary engine for regional development, and government should play an important role in such development and financing infrastructure projects. According to our simulation in the previous section, however, the domestic savings in Unified Korea are insufficient to finance this massive infrastructure investment. Therefore, Unified Korea should seek a way to procure the necessary funds from abroad.
Vast domestic savings in China and Japan should play a key role for financing North Korean infrastructure projects. Current availability of economic and social infrastructure in North Korea is highly limited. For example, the amount of electricity generated in North Korea in 2012 was only 5 % of that in South Korea. According to our estimation, the North Korea region will need to invest on average 2.9 billion US dollars per year between 2015 and 2025. Both the Japanese and Chinese governments hold a large amount of foreign currency reserves, and they might consider utilizing some portion of their reserves for investments to the North Korea region’s infrastructure funds. The funds would also be able to provide the guarantee against political, economic, and financial risks associated with the projects.
Japanese private firms may consider that participation in the Unified Korean infrastructure projects is a big business opportunity if the associated risk for the business is reduced by the international fund institution’s guarantee. Japanese firms continue to keep the international competitiveness in the participation in the overseas energy related infrastructure investment projects, especially power generation construction and managements.

 

I. Introduction                                                                           

II. Stages or Degrees of Integration

III. General Equilibrium Calibration of Unification
1. Constraints on International Trade                                       ·
2. Technical Change                                               
3. The  "Obsolescence Shock"                                                      
4. Military Demobilization                                                         
5. Integration Scenarios                                                 

IV. Implications for the United States from the Gravity Model

V. Policy Issues
1. US Economic Diplomacy toward North Korea: The Trade Dimension
2. US Economic Diplomacy toward North Korea: The Financial Dimension           
3. US Policy  under Alternative Unification Scenarios 
4. The  Peace Dividend
5. US Contributions to Financing Unification

VI. Conclusion

References

The United States has a strong economic and political interest in seeing the Korea unified as a democratic capitalist state. The specifics of US interests and involvement in unification are partly contingent on scenario: excluding the horrific possibility of war, the main two scenarios come down to a protracted, consensual process in which North Korea maintains sovereignty for a significant transitional period and an abrupt collapse and absorption scenario along the lines of the German experience. In contrast to the fundamentally benign German experience, one variant on the collapse and absorption scenario could involve an extended period of violent political opposition to South Korean rulefollowing state collapse. This might involve a quarantine, or resemble the situation that has developed between Israel and Palestine, and would impede economic revitalization and dampen the benefits documented in this paper.
Which of these two basic scenarios―prolonged consensual unification or abrupt collapse and absorption― prevails revolves around whether North Korea successfully addresses its economic, political, and diplomatic challenges and survives permanently as an independent political entity, or whether the multiple stresses that the regime confronts prove unmanageable and it experiences abrupt change, culminating in its absorption by South Korea. Ultimately the key determinant is the capacities of the North Korean leadership. While the rest of the world can influence incentives at the margin, we should not exaggerate how much influence we have on these internal developments.From the standpoint of US policy the distinction between these alternative scenarios is critical, however. 
This paper begins by reviewing some general equilibrium model (CGE) results for Korean unification which are used to benchmark the magnitude of the “unification shock.” This work is complemented by gravity modeling of bilateral merchandise trade. The modeling work presented in this paper indicates that the thoroughness and rapidity of economic reform in the North matters noticeably in the calculation of the economic impacts on the US. The more traumatic collapse scenario followed by successful rehabilitation of the economy in the northern part of the peninsula generates a larger impact on the US. In such a scenario, conservatively estimated, US merchandise trade with North Korea might expand from virtually nothing to approximately $1 billion, with a possible additional $300-425 million in services trade.  The actual expansion of two-way trade could be much higher: if North Korea simply exhibited the same propensity to trade with the US as does South Korea, a decade after unification bilateral trade could be as high as $20 billion.
The goods trade would likely consist mainly of North Korean exports of light manufactures in return for American capital goods and agricultural products. Other products of North Korea such as metals used in the electronics industry would be imported by the assembly operations of US firms outside the US, and might be considered “indirect” exports to the US. The US would export business and professional services to North Korea and import travel and tourism services.  US firms would also invest in North Korea, but under a protracted, consensual unification scenario, labor standards issues could pose a constraint.
Similarly, US economic interaction with North Korea is constrained by a dense web of sanctions and other measures, some in the form of Congressional legislation, others in the form of Executive orders that discourage economic integration between the two countries. In a consensual unification scenario, these sanctions will impede economic integration between the US and North Korea. There is no guarantee that either the President or the Congress will act even if relations improve between North and South Korea.  The removal of these constraints would actually be easier in a collapse and absorption scenario in which the North Korean state would disappear, rendering most if not all of these measures moot, and economic exchange would occur on the basis of the relatively liberal set of rules and practices observed between South Korea and the US. A modest peace dividend, perhaps boosting bilateral trade by $50 million, could obtain under this scenario.
Under either scenario, the binational commission created in Annex 22-B of the KORUS agreement could be used to rapidly liberalize trade if circumstances warranted. Depending on scenario and sequencing treatment of the northern part of the peninsula under agreements such as the Trans-Pacific Partnership (TPP) could be either relatively straightforward or problematic.
Unification is likely to be very expensive. There is a role for the US public to play both bilaterally and through the international financial institutions (IFIs). The capacity of the US government to contribute directly will be partly a function of its own fiscal situation which is highly uncertain. But contributions to unification finance should not be thought of strictly as a public sector activity. The private sector will have a critical role to play as well. Indeed, the ultimate economic contribution of the US to Korean unification is likely to come through the private sector; foreign direct investment constitutes the institutional mechanism for both technology transfer and the links to marketing and distribution networks globally that North Korea currently lacks. Aid should seek to complement and encourage such private flows,not provide a substitute for them.

 

  In this study we consider five scenarios for Korean unification: 1) military unification, 2) regime collapse, 3) maintaining the status quo, 4) reconciliation and cooperation, and 5) the optimal scenario of inter-Korean relations, peaceful unification. Comparing these five scenarios with the existing unification scenarios, we can observe shortcomings of past reunification scenarios. First, unification would be achieved under the guidance of South Korea on the basis of the market economy and liberal democracy as the political system. Second, they ignore the positions and interests held by North Korea. Third, they put excessive emphases on economic benefits of Korean unification to neighboring countries. Lastly, they predicted that unification would actually be achieved in near future. This study attempts to correct the shortcomings of previous reunification scenarios and to reflect current realities. Cost-Benefits of each of the five unification scenarios are as follows.
A military unification scenario could be initiated only by the U.S.A or with their approval and support by the ROK. NK does not have the armaments, logistical and human resources to resist after a recent chain of natural disasters, on top of economic problems and being subject to severe international sanctions. The costs of this scenario to Russia would be possible damage to the Russian Far East territory and citizens; tighter security and border control leading to a slowdown in the implementation of development projects in the Russian Far East; possible sanctions from the West; suspension of multilateral projects in Northeast Asia; and the decline in trade and other forms of economic cooperation between Russia and both Koreas. Russia also stands to lose 0.5-1.5 billion USD in transit earnings annually from delays in the railroad project, and additional 3.0 billion USD related to the interruption of the gas project. There will be no benefits for Russia in a military unification scenario.
Regime collapse scenario is unlikely because of the firmness of the NK leadership on key domestic and foreign policy issues, and support from China, which provides food and other necessities to maintain social stability in NK. Russia’s costs under this scenario will be the same as in the case of military unification minus the direct damage to the Russian Far East territory and population. Possible benefits to Russia will be in the indefinite future, mostly from possible elimination of obstacles for implementation of rail, gas and other projects.
The status quo scenario is one of the more probable options. The main danger of the scenario is the unpredictability of NK’s response to the US and its allies’ disregard for Pyongyang’s security concerns. Russia’s costs would include simple continuation of the existing economic relations with both Koreas; postponement of benefits from the geographical location of the peninsula as a “bridge of integration” in East Asia; delays in implementation of the railway, gas and other projects (the same as in previous two scenarios). Russia’s benefits will include maintenance of some stability on the peninsula; savings in defense spending; gradual increase in trade volume and economic cooperation with the two Koreas. By 2020, Russia’s bilateral trade with SK is expected to reach 30 billion USD, with the NK – 1 billion USD.
Reconciliation and cooperation represents a far more profitable scenario since it significantly reduces the risk of large-scale armed conflict on Russia’s borders and increases chances for the realization of multilateral economic projects. Russia’s costs will be related to funds needed for the implementation of those projects, establishment of effective mechanism of trilateral cooperation (Russian Far East-SK-NK) and for assistance to modernize the NK economy. Russia’s benefits may include revenues from the realization of railway and gas projects (up to 5.0 billion USD annually): acquiring a key position in facilitating trade flows from Europe to the Korean Peninsula and back; increases in her trade with SK and NK; more active participation of the two Korean states in economic projects in the Russian Far East region.
The optimal scenario of peaceful inter-Korean relations is a prerequisite for the start of the reunification process, which would meet the interests of both the Korean nation and the international community. Russia’s benefits will stem from creation of a larger market for the export of her energy resources; connection of TSR with TKR; exploitation of gas and electricity transmission lines; increased investment in the Russian Far East, including the development of advanced growth zones; transformation of the peninsula into a transit bridge for Russia’s integration into the APR economy. In general, the implementation of this scenario would bring additional 2-3% increase in the Russian GDP annually. Since this scenario is unlikely to be realized, the most profitable and realistic prospect for Russia remains the development of peaceful relations between SK and NK according to the “Reconciliation and Cooperation” scenario.
Any real progress towards a ultimate goal of Korean reunification can be achieved only when the NK elite will be convinced that the SK, along with the international community, engage in an honest attempt to integrate the North into the existing world.

It has been 10 years passed since the first Korea-Chile FTA went into effect. A bilateral FTA has become more widespread, due to lack of progress in WTO DDA negotiations since the 2000s. Korea, being a country highly dependent on trade, has switched the direction of trade policy from multilateralism towards bilateralism in order to respond to changes in the commercial environment.
In this study, we analyzed Korea’s FTAs policy based on the outcome of recent bilateral FTAs from the perspective of achievement of policy objectives. This study focused more on areas where evaluation of the effectuated FTAs was possible, to enable differentiated and in-depth contribution from previous studies. This evaluation has been made in two categories: internal and external issues. The following issues were assessed in connection with internal issues; FTA network, the products, service and investment in bilateral trade; and the assessment of external issues included economic growth, consumer welfare, distribution structure over industry and business scale, and changes in domestic policy.
Korea has consistently pursued its FTA policy based on the FTA roadmap of 2003 that encompassed FTA promotion strategies, selection standards for FTA partners as well as its order of priority. It ultimately emphasizes three strategic principles for FTAs: first, multiple simultaneous approach; second, comprehensive and high-quality coverage; and public consensus-based procedures.
By evaluating the result of a decade of effectuated FTAs, Korea has successfully established a comprehensive and high-quality, multi-FTA network. Starting with the first Korea-Chile FTA in 2004, as of 2014 Korea has effectuated nine FTAs with 46 partners including the US, EU and ASEAN, and concluded three. In the meantime, the number of bilateral FTAs in the East Asian region has gradually increased to 71 FTAs in comparison with 58 FTAs a decade ago. According to Social Network Analysis, the degree to which Korea is connection-centered (the number of FTAs) and betweenness-centered (linkage between nations) was the second highest among East Asian countries after Japan. Nevertheless, Korea preferred to be economic partners with more comprehensive and advanced economies such as the EU.
As for the change in trade volume through bilateral FTAs with Chile and ASEAN, Korea has greater market shares, especially in favorable industries since the FTAs went into effect. However, a first mover advantage was lost due to bilateral FTAs between major competing nations and Chile/ASEAN. In the case of FTAs with the US and EU, although Korea achieved some increases in market share immediately after the effectuation of FTAs, the economic effect of FTAs was smaller than expected because of delays in economic recovery in these countries caused by the global financial crisis. In this context, this study contains a regression analysis using a gravity model, with the amount of imports as dependent variables and each FTA as key explanatory variables. As a result, the concluded FTA has a positive effect on the growth in trade between trading partners.
The number of export items in terms of FTA trading partners has grown by 6.1%p and 1.3%p in Chile and the US respectively, as the diversity of export items has improved. By measuring the concentration of import items, the import concentration is expected to lead to an increase in consumer welfare from improvements in diversity and competitive structural change, but export intensity actually deepened in some countries as to require 'discovery' of various export items. The FTA resulted in positive effects both on the number of export and import items by industrial analysis, whereas the impact on the value of imports and exports has suggested the need for industry-specific measures tailored to the different industries.
Services trade effect due to the FTA has mainly occurred in transportation, telecommunications, insurance, computer services and trade-related businesses. After the effectuation of the FTA, FDI from the US, EU, ASEAN and others has increased but there was no evidence of increased FDI to the FTA partners. Only FDI in manufacturing and service sectors to the US, EU, ASEAN has slightly increased. However, a questionnaire survey of enterprises operating in ASEAN and Central Europe showed that the effect of FTA was very limited since they generally consider variety factors such as market scale and production cost when investing overseas.
While previous studies mainly focused on the impacts of trade within bilateral FTAs, this study will analyze the overall economic impacts of FTAs in terms of growth and welfare as changes in bilateral trade may affect world trading and the overall economy in a variety of ways. Regarding growth effect of FTAs, the results for EU was the highest with 0.9%; growth of 0.43% and 0.11% were seen in ASEAN and Chile respectively. In addition, by comparing the overall growth effect from FTAs to the total economic growth in 2013, the growth effect of FTA accounted for 1.19% of the 3% total economic growth in Korea. It means that an FTA can be considered as having a significant supporting role in Korea's economic growth.
Regarding the result of business performance, the number of domestic export enterprises has increased continuously from 2007 until 2012; the growth rates in numbers of both large and small/medium-sized enterprises increased faster with FTA partners. Despite the fact that most enterprises were inevitably subject to market openness in the time of the launch of the FTA, some enterprises could recover prior profit rates through export; however, domestic companies are likely to experience difficulties due to decreased average profit rates.
The Korean government proposed institutional advancement as one of its important policy measures while promoting additional FTAs with advanced economies. In this study, the amendments into national law instruments based on KORUS FTA were organized and evaluated in terms of their institutional linkages by 6 different categories: ‘regulatory harmonization’ (4 cases), ‘institutional streamlining’ (3 cases), ‘transparency’ (3 cases), ‘value-added services market access’ (5 cases), ‘strengthening the level of protection in intellectual property rights’ (9 cases) and ‘system of transparency’ (1 case). These institutional changes shall ultimately promote competition through trade and investment in order to improve industrial competitiveness, and continue to be monitored as to whether the link is functioning properly.

 This study estimates the effect of economic integration between South and North Korea for the Six-Party Talk members including the U.S., China, Japan, and Russia by way of Recursive Dynamic Computable General Equilibrium model.
This study predicts four types of changes from the integration, and utilizes previous studies to estimate the volume of the changes. First, it predicts the change in production factors such as labor, capital, land, and natural resources from the integration. Second, the unification, along with the TPP, would expand the market size. Third, it considers improved finances from reduction of military expense and subsidies from the South to the North. Last, it expects that South-North integration would lead to relaxation of tensions in Northeast Asia and enhancement of trust at the international level, which would affect the Six-Party Talk members positively.
This study considers the following two scenarios: one involving efforts undertaken solely by the South and North, and the other with added effort from the Six-Party Talk members. Additionally this study estimates the minimum and maximum from the four changes and creates detailed scenarios. Those scenarios were applied to the Recurve Dynamic Models, and the economic effects were estimated. According to the estimations, South Korea’s GDP would rise about 1.7~3 percent and North Korea’s GDP would rise about 4.3~110.6 percent solely as a result of the economic integration between the two Koreas. Moreover, the U.S. and Japan’s GDP would rise due to the integration and the TPP, and possibly in some sense China and Russia may experience positive effects as well. In particular, it is predicted that Japan would be the leading beneficiary among the members.  
This study suggests the following implications. First, previous studies estimate the effects in fragmented fashion and thus overlook the fact that each economic agent who is confronted with the changes may lead the new equilibrium. This may result in overestimation of the benefits from the integration. Second, economic growth in North Korea would bring forth considerable benefits to Japan. Third, we may have to pursue a coordinated unification policy in that abrupt economic growth of the North Korea may actually have negative effects on other countries.

 

According to the “Unification Bonanza” initiative by President Park in early 2014, expectations towards unification are rising alongside the realization that unification requires preparation. Discussions that focus on the benefits of unification may be desirable for eliciting passion for unification and seeking better strategies. However, the problem is with creating arguments for overall comprehension of costs and benefits. Recent trends tend to stress economic costs and benefits of unification too radically. Unification not only represents the emergence of a large-scale community which is a unified Korea, but will also mean fundamental shifts in the geopolitical configuration of Northeast Asia (hereafter NEA).  For this reason, the costs and benefits in terms of international politics must be reviewed in detail. This study seeks to move beyond discussions that center on economic costs and benefits, and instead considers political, social, and diplomatic costs and benefits. By doing so, we emphasize not only the benefits for a unified Korea, but also benefits to the NEA and the world.
While discussions on the benefits, in terms of international relations, maintain the view that Korea will reap huge gains in national power and standing, another line of argument also suggests that a strong unified Korea may benefit the NEA and the international community as well. Hence, now is the time to suggest that neighboring countries and international society can all share in the benefits of Korean unification.
In this respect, the present government’s diverse strategies are achieving meaningful results. The principle of inter-Korean relations is known as the ‘Trust-Building Process on the Korean Peninsula’, which consists of 9 major topics including DMZ World Peace Park and Eurasia Initiative Strategy. Regarding unification, the Korean government has declared the ‘Dresden Manifesto’. In addition to this, NEA Peace and Cooperation Initiative is suggested as a regional policy for NEA and there are also efforts to provide a structure for multilateral cooperation in the NEA region.
Based on diplomacy and security benefit analysis of unification for each country and region, the Korean diplomatic policy for unification must consider the following. Firstly, in the context of unification diplomacy, NEA peace cooperation as part of President Park’s regional strategy must be more subtle and intricate. We must clearly demonstrate to neighboring countries that a unified Korean Peninsula will decrease regional security risks, and may well contribute to creating a new security governance regime that replaces the current unstable structure. In line with the US rebalancing strategy, Chinese expectations, and the Japanese normalization strategy, the national security strategy of the South Korean government must be compelled to expand its limited scope regarding South-North Korean relations. Even when devising inter-Korean relations and policies vis-à-vis North Korea, we ought to include a broad basis for a new NEA architecture, for which it is most urgent to formulate better policies vis-à-vis NEA and suggest more effective ways for unification of the Korean Peninsula.
Second, alongside unification diplomacy at the NEA level, we must not neglect bilateral unification diplomacy. In fact, the benefit calculations that neighboring states conducted regarding the emergence of a unified Korea differ from one other and are sometimes even contradictory. Seeing that the US and China intensify their competition for leadership in East Asia, and that Japan and Russia are increasing involvement in great power politics, South Korea ought to conduct earnest benefit calculations and elicit shrewd measures in response, based on realistic considerations. Furthermore, it also must clarify which strategy unified Korea could make in connection with great power politics in the context of the current power balance, and in forming a multilateral cooperation system
Thirdly, we require a more advanced unification plan, whereby the new plan must correspond to changes in the external environment for unification. For achieving this, the diplomatic policy for the unification of the Korean Peninsula should think past the creation of one nation- state via the re-unification of the two Koreas, but instead should hold up the vision of establishing an exemplary political community in East Asia. From the perspective of building a networked community that exceeds territorial nation-states of modern history, this may contribute to generating a new and future-oriented view of states.