International Comparison and Trade Effects of Digital Innovation According to Various Scenarios
The fourth industrial revolution is the next generation industrial revolution driven by intelligence information technology. Specifically, the digital innovations related to artificial intelligence, big data analysis, cloud..
Nakgyoon Choi et al. Date 2018.12.28Trade structure, Trade policySummary
The fourth industrial revolution is the next generation industrial revolution driven by intelligence information technology. Specifically, the digital innovations related to artificial intelligence, big data analysis, cloud computing, and the internet of things have driven hyper-connection between all products and services through global networks, thereby advancing the data-driven economy.
This study describes the trend of digital innovations in the wake of the fourth industrial revolution, discussing the changes in the economic paradigm and international trade patterns in the future. This study also compares industry-level digital innovation by country using the data on patents reported to the US Patent and Trademark Office (USPTO), as well as the dataset provided by the OECD and the International Federation of Robotics. We simulate the effect of digital innovation on trade according to various scenarios, setting up the theoretical model for counter-factual analysis using data from World Input-Output Table released in 2016. In order to quantify the trade effects from digital innovation, we add fundamental productivity into a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity.
According to the results of the analysis, the significant improvement in the world’s digital innovation, led by the US and Japan, shows an increasing step curve during the years of 1998 and 2010. The quantitative and the qualitative level of Korea’s digital innovation is steadily rising, and the latest data rank it at a high level. However, Korea’s level of digital innovation is still relatively low compared to the US and Japan. When considering the recent drop in Korea’s H index with an increase in the level of digital innovation in China and India, Korea may experience a similar decline as the EU.
Overall, industrial robots are showing an increase in the level of digital utilization. Around 72% of the world’s industrial robots are installed and operated in the US, Japan, Korea, China and Germany. Korea is the third largest robot installation station, and the fourth largest robot operator country which uses industrial robots actively. In particular, the number of robots that are operated per 10,000 workers in Korea is 631, the largest rate in 2016. As for the other indicators of digital utilization, despite the nation’s high usage rate of high-speed internet at enterprises (99.3%) and households (99.5%), the usage of ICT at enterprises is not that high in Korea, with the exception of the RFID utilization rate.
For the simulations, this study considers ten different scenarios depending on productivity shocks from sector-level and country-level. At a bottom line, counterfactual analysis based on a variant of the Ricardian model shows that digital innovation is beneficial to international trade. In other words, if digital innovation boosts fundamental productivity, it triggers growth in international trade at both sector-level and country-level. If countries/sectors have higher productivity due to digital innovation, those become much more competitive in producing goods or services, affecting trade share, price, expenditure, and many others within the model.
As fundamental productivity induced by digital innovation becomes higher and the number of countries that experience enhanced productivity grows larger, the model predicts that world trade volumes will become larger accordingly. However, the growth in trade volumes are uneven. Although digital innovation contributes to growth in world trade volumes, increases in world trade are concentrated in certain countries and/or sectors that lead digital innovations.
The above-mentioned results of this study indicate that the Korean government must step up wide-ranging deregulation measures to facilitate digital innovations. In addition, trade rules such as Technical Barriers to Trade (TBT), Intellectual Property Rights (IPR), Telecommunication Agreements, and Electronic Commerce need to be urgently revised through the WTO negotiations. Policy governance also needs to be set up to systematically support digital innovation in private sectors.
South Korea-North Korea-Russia Trilateral Cooperation for Peace and Prosperity on the Korean Peninsula
North Korea’s nuclear development plans and missile tests led to a state of acute tension in 2017, escalating the risk of war. The tense situation took a sharp turn following the 2018 Pyeongchang Winter Olympic Games, foll..
Edited by Lee Jae-Young Date 2018.09.06Economic relations, Economic cooperationContent
Political Changes on the Korean Peninsula and the Significance of Trilateral Cooperation between South Korea, North Korea, Russia
President, Korea Institute for International Economic Policy (KIEP)
❙Korean and Russian Perspectives on Trilateral Cooperation between South Korea, North Korea, Russia❙
Korean Perspectives ❚
01 New Opportunities for and Approaches to the Trilateral Cooperation between the ROK, DPRK and the Russian Federation
Kim Seok Hwan
Visiting Research Fellow, KIEP
Director General, New Northern Policy Department, KIEP
02 Key Challenges of the Trilateral Cooperation and its Action Plan
Kim Seok Hwan
Visiting Research Fellow, KIEP
Director General, New Northern Policy Department, KIEP
Russian Perspectives ❚
03 North Korea-Russia Relations and Overview of the Prospect of Trilateral Cooperation by Areas
Pavel A. Minakir
Director emeritus, Economic Research Institute, Far Eastern Branch of the Russian Academy of Sciences
04 Interrelation between the North Korea-Russia Cooperation and the Trilateral Cooperation
Vasily V. Mikheev
Vice President, Institute of World Economy and International Relations (IMEMO)
05 New Developments in the North Korean Nuclear Issue and the Trilateral Cooperation between the ROK, DPRK and the Russian Federation
Sergey A. Karaganov
Dean, Faculty of World Economics and International Relations, National
Research University-Higher School of Economics
Associate Professor, School of Asian Studies, National Research
University-Higher School of Economics
Policy Recommendations to Promote TrilateralCooperation between the Two Koreas and Russia
President, Korea Institute for International Economic Policy (KIEP)
Developments related to Trilateral Cooperation between the Two Koreas and RussiaSummary
North Korea’s nuclear development plans and missile tests led to a state of acute tension in 2017, escalating the risk of war. The tense situation took a sharp turn following the 2018 Pyeongchang Winter Olympic Games, followed by two inter-Korean summit meetings and the first in history meeting between the leaders of North Korea and the United States. These developments have improved relations between the two Koreas and are leading to substantial talks toward the denuclearization of North Korea.
On April 27, 2018, the leaders of the two Koreas met for the first summit talks in 11 years, culminating in the Panmunjom Declaration in which they agreed on the dramatic improvement and development of inter-Korean relations, elimination of military tension and mutual non-aggression, and complete denuclearization and establishment of a peace regime on the Korean Peninsula. In the second inter-Korean summit of the year held on May 27, 2018, the two leaders reached a consensus to work closely toward denuclearization of the Korean Peninsula and the establishment of a permanent peace regime. he South and North held inter-Korean high-level talks on June 1, in which it was agreed to establish a joint liaison office in Gaeseong, North Korea, and practical measures to implement the Panmumjom Declaration were discussed. South Korea becoming a full member of the Organization for Cooperation of Railways (OSJD) on June 7, 2018, was an important development as well. Despite seeking full membership to the Organization since 2015, the South had hitherto been blocked by North Korea’s veto votes.
The virtuous cycle that began with these improvements in inter-Korean relations was continued with the first U.S.-North Korea summit in history. The leaders of North Korea and the U.S. met on June 12, 2018, in Singapore, releasing a joint statement agreeing to establish a new bilateral relationship, build a lasting and stable peace regime on the Korean Peninsula, and to make joint efforts toward the complete denuclearization of the Korean Peninsula. Chairman Kim Jong Un reconfirmed his commitment to the agreements made within the Panmunjom Declaration and pledged to work toward the complete denuclearization of the Korean Peninsula. The historic summit between the two leaders was followed by subsequent measures on the part of North Korea – such as the release of three U.S. citizens, repatriation of U.S. soldiers’ remains, and the closure of its Punggye-ri nuclear test site and dismantlement of the Sohae engine missile testing site in Tongchang-ri – in return for which it called on the U.S. to lift North Korean sanctions and formally end the Korean War. The U.S., on the other hand, is maintaining its position that North Korea must first begin substantial measures toward complete denuclearization, and that the lifting of sanctions can only be considered after major progress has been seen toward denuclearization. The U.S. is particularly keen on securing a list from North Korea outlining its nuclear arsenal, and is yet to make its position clear on the issue of an end-of-war declaration, instead focusing on both talks and pressure tactics toward North Korea.
When considering the delicate situation currently unfolding between the three nations following the summit meetings, it is clear that the Moon Jae-in government in South Korea must play a crucial role. However, inter-Korean relations are mired in complications caused by North Korea’s nuclear program and U.S. sanctions against North Korea, making it difficult to realize any substantial progress in economic cooperation projects with the North. As of yet, the New Economic Map of the Korean Peninsula and the New Northern Policy, initiatives announced by the Moon administration, remain at the initial stage of planning. But as President Moon stressed in the August 15 Liberation Day speech, peace is vital to economic development on the Korean Peninsula, and the New Economic Map of the Korean Peninsula and New Northern Policy must be recognized as foundation-building efforts to resolve North Korea’s nuclear issue once and for all. In his Liberation Day speech President Moon emphasized that “establishing peace and forming an economic community on the Korean Peninsula is the actual realization of our liberation,” and that “developing relations between the two Koreas is the true driving force behind denuclearization of the Peninsula.” These sentiments carry the message that inter-Korean economic cooperation is an inevitable and essential means to reconstruct the virtuous cycle between the three parties through the third inter-Korean summit in September 2018, followed by nuclear talks between the U.S. and North Korea, and another North Korea–U.S. summit meeting scheduled to take place. During his speech President Moon also proposed an East Asian railway community, demonstrating how the New Economic Map of the Korean Peninsula will lead to economic cooperation with economies toward the north of Korea, strengthening connectivity with the Eurasian continent.
As such, the New Economic Map for the peace and prosperity of the Korean Peninsula must be accompanied by a recognition for the geopolitical and geoeconomic value of the Russian Far East region. When North Korea begins its process of reform and opening up and economic cooperation projects between the two Koreas resume, the Russian Far East will rise as a key point for economic cooperation between Korea and its neighbors to the north. This would also open up more opportunities for bilateral and multilateral cooperation in hand with Russia’s development strategies in the Far East region, between the two Koreas and Russia. The Russian Far East region is strategically significant in that it connects with the Korean Peninsula, thus serving as a starting point for economic cooperation between Russia and the two Koreas and offering a bridgehead for the Korean economy to extend its growth. The Russian Far East region is also essential for the eastern axis of the New Economic Map for the Korean Peninsula, which involves forming inter-local cooperation in the East Sea region and developing the Northern Sea Route.
There is no doubt that trilateral economic cooperation projects between the two Koreas and Russia will benefit South and North Korea and contribute to South Korea-Russia relations, while driving the denuclearization of the Korean Peninsula in an irreversible direction. Such cooperation projects would also make it possible to realize peace and mutual prosperity on the Korean Peninsula while strengthening connectivity with Eurasian nations. Ultimately, trilateral cooperation projects will add substantial momentum to Korea realizing its future vision of a “bridge country” that connects the ocean and continent, and to Russia gaining a strategic foothold to develop its Far East region and advance into the Asia-Pacific area.
Russia is not a major presence in the ongoing talks between South and North Korea, the U.S. and China for the denuclearization of North Korea. However, when we recognize the limitations of producing a solution to the North Korean nuclear issue only within the framework of diplomatic security talks, it becomes clear that the Russian Far East represents great strategic value, and that trilateral cooperation projects between Russia and the two Koreas deserve much more recognition for their significance. On April 29, 2018, Russian President Putin stated the need for the progress realized through the inter-Korean summits to be continued through trilateral cooperation projects with Russia. President Putin also stressed how connecting Russia’s railways, gas pipes and power supply into Siberia through the Korean Peninsula would contribute to the stability and prosperity of the Peninsula. During his visit to Moscow in June 2018, President Moon reached a consensus with President Putin on how trilateral economic cooperation would create a virtuous cycle of furthering peace on the Korean Peninsula and promoting economic cooperation, and how this must be further developed into a multilateral security regime in Northeast Asia. If cooperation between the two Koreas and Russia could vitalize multilateral cooperation schemes with the U.S., China and Japan, this would add crucial momentum to the mutual prosperity and permanent peace of Northeast Asia.
This volume contains the results of joint research conducted by Korean and Russian experts, focusing on the following objectives. First, we wish to illustrate the need for trilateral economic cooperation within the changing political situation on the Korean Peninsula and the Northeast Asian region, through which it will become possible to pursue mutual prosperity within the region and establish a foundation for permanent peace. Our second goal is to perform an in-depth study of the perceptions and situations on each side in regard to South Korea–North Korea–Russia cooperation, through which we can identify the basic directions, tasks and strategies to promote cooperation between the three parties. This approach is particularly timely and significant on an academic level when it comes to identifying strategic connections between Korea’s New Northern Policy and Russia’s New Eastern Policy, and to realize qualitative development in South Korea–Russia relations. Finally, we wish to offer important policy implications for the Korean government as it implements its New Northern Policy and the New Economic Map for the Korean Peninsula, and help produce measures to expand economic cooperation between Korea and Russia in the Russian Far East.
Sources of Comparative Advantage in Services: Institution vs. Social Capital
Previous studies that have identified the impacts of institutions or cultural traits on comparative advantage focused on goods trade, but not services trade. In contrast to the rapid increase in trade in services, empirical examin..
Nakgyoon Choi and Soonchan Park Date 2018.12.14Trade structure, Trade policyContent
2. Value Added Exports (VAX) in Services
2-1. Value Added in Exports of Service Sectors
2-2. Contribution of Service Sectors to Value Added in Exports of Manufacturing Sectors
2-3. Comparative Advantage of Service Sectors
3. Empirical Model and Data
3-1. Comparative Advantage in Services
3-2. Institution and Social Capital as Sources of Comparative Advantage
4. Estimation Results
4-1. Relative Labor Productivity and Comparative Advantage
4-2. Sources of Comparative Advantage
4-3. Robustness Check
5. Summary and Conclusion
1. Country and Industry Classification
2. Derivation of Value Added in Exports (VAX)Summary
Previous studies that have identified the impacts of institutions or cultural traits on comparative advantage focused on goods trade, but not services trade. In contrast to the rapid increase in trade in services, empirical examina-tion on sources of comparative advantage in services trade remains limited. This paper attempts to fill this gap by investigating empirically the impacts of institution as well as social capital on comparative advantage in services trade. Services are exposed to relatively more pre-choice risks than goods, because it is difficult to obtain information on the quality of services before the con-sumer decides to purchase. In addition, trade in services involved in global value chains possibly takes on the risks of contract breach by other firms along the same value chains. As a result, the transaction risks for trade in ser-vices are higher than for trade in goods. Using the World Input Output Da-tabase, we estimate the importance of social capital for comparative ad-vantage in services. We find that countries with more social capital tend to specialize in the production of contract-intensive services. We also find that social capital rather than institution matters for comparative advantage in ser-vices.
Keywords: Services Trade, Comparative Advantage, Institution, Social Capital
JEL Classification: F11, F14
A Study on the Dynamics of Foreign Trade and the Issues of Regional Economic Integration in Central Asia
At the current stage of globalization, Central Asia (CA) is becoming a focal point for the political and economic interests of global forces because of its rich natural resources and critical strategic position. From this p..
Kodirjon Maxamadaminovich Umarkulov Date 2018.11.12Economic integrationContent
2. A Retrospective Analysis of the Processes of Regional Economic Integration in CA
3. Dynamics of Foreign Trade of CA Countries
3-1. General Foreign Trade
3-2. Mutual Trade
4. The Role of CA Countries in International Organizations
At the current stage of globalization, Central Asia (CA) is becoming a focal point for the political and economic interests of global forces because of its rich natural resources and critical strategic position. From this point of view, the CA countries need to form a joint development strategy for solving regional problems and a strong mechanism for countering the main political and economic conflicts in the region. At the same time, the countries of the region need to choose the path of joint development in order to increase the efficiency of their internal capacities and resources, adapt the domestic social and economic infrastructure to modern requirements and improve the living standards of the population.
This is directly related to the progress of regional economic integration in CA. Through this integration, the economies of the countries in the region could complement each other and ensure a high level of development in mutual trade and industrial development.
However, there are some obstacles and problems hindering the development of economic integration in the region. Most particularly, the weak infrastructure in the region, its economic-geographical isolation from world markets, administrative barriers and political instability hinder trade between the countries of CA.
From this point of view, this study focuses on the problems of general and cross-border trade in CA countries, and the opportunities for economic integration in the region.
Keywords: Foreign Trade, Export, Import, Central Asia, Mutual Trade, Economic Integration
JEL Classification: F50, F63, R11
A Quantitative Trade Model with Unemployment
Over the last decade, quantifying the welfare effects from tariff changes has become one of the main challenges among international trade economists. There are a number of quantitative trade models with micro-foundations wh..
Kyu Yub Lee Date 2018.10.15Labor market, Free tradeContent
2. The Model
2-3. Labor market and production
2-4. International trade
3-1. On the equilibrium
3-2. Changes in equilibrium
3-3. Solution algorithm
4. Counterfactual Analysis Based on the Model
4-1. A revisit to Caliendo and Parro (2015)
4-2. The welfare effect of China’s tariff reductions
Over the last decade, quantifying the welfare effects from tariff changes has become one of the main challenges among international trade economists. There are a number of quantitative trade models with micro-foundations which emphasize demand-side (Anderson and Van Wincoop 2003), supply-side (Eaton and Kortum 2002), Bertrand competition (Bernard et al. 2003), extensive and intensive margin (Chaney 2008), etc, and conclude that trade liberalization with tariff reductions leads an economy to reach a higher level of welfare compared to pre-liberalization (Costinot and Rodriguez-Clare 2014). While elegant, these models inducing gravity equations share the common assumption, a perfect labor market. Quantitative trade models with full-employment developed so far have not taken account of labor market frictions when evaluating the welfare effects from tariff changes. This paper aims to fill the gap in the trade literature by explicitly considering labor market frictions.
I employ search-and-matching to a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity, in order to quantify the welfare effects from tariff changes. The paper shows that labor market frictions can be a source of comparative advantage in the sense that better labor market conditions contribute to lower cost in production. Labor market frictions play a critical role in determining the probability of exporting goods to trading partners, and interact with bilateral trade share, price, expenditures, etc. Unemployment and changes in unemployment rates due to tariff reductions contribute welfare changes across countries, implying that welfare effects based on quantitative trade models with full-employment are likely to be biased. I confirm the biased welfare effects by revisiting Caliendo and Parro (2015), who conduct an analysis of the welfare effects from the NAFTA from 1993 to 2005. I show that the welfare gap between theirs and mine has a positive correlation with changes in observed unemployment rates across countries. With the constructed model, I further conduct counterfactual exercises by asking what would happen if China’s tariffs remain unchanged from 2006 to 2015. It turns out that there are mild welfare effects to trading partners in the world trading system.
Keywords: Quantitative Trade Model, Unemployment, Welfare
JEL Classification: F10, F17, F60
Exchange Rates and Firm Exports: The Role of Foreign Ownership and Subsidiaries
Exchange rates have been changed unusually large these days. From 2011 to 2016, the Euro and the Japanese Yen have depreciated against the US Dollar by more than 25 percent. According to a theory, since competitively valued exchan..
Hyelin Choi and Hyo Sang Kim Date 2018.08.31Business management, Exchange RateContentExecutive Summary1. Introduction2. Data Description2-1. Production Linkages: Foreign Ownership and Foreign Subsidiaries2-2. Global Production Linkages and GVC Integration3. Empirical Evidence3-1. Exchange Rate Elasticity of Firm Exports3-2. Inelastic Export to Exchange Rates: The Role of Foreign-Related Firms3-3. The Role of Production Linkages4. ConclusionsReferencesSummary
Exchange rates have been changed unusually large these days. From 2011 to 2016, the Euro and the Japanese Yen have depreciated against the US Dollar by more than 25 percent. According to a theory, since competitively valued exchange rate helps to boost export growth, we should have observed a sub-stantial increase in export in the EU and Japan. However, the effectiveness of the exchange rates on exports appears to be weak across countries. This anomaly is one of the central puzzles in international macroeconomics: why large movements in the exchange rate have modest effects on the aggregate variables such as import prices, consumer prices, and quantity of exports.
In this paper, we examines the role of global production linkages on ex-change rate elasticities by using Korean firm-level data. At firm-level, foreign-owned firms or firms with foreign subsidiaries participated in the Global Value Chains (GVC) play an important role in weakening the effect of ex-change rate movements on firm exports. The empirical results show that the exchange rate elasticity of total export is about -0.64, which implies that 10% appreciation of Korean Won would make a drop in total export by 6.4%. However, the exchange rate elasticities of firms are not the homogeneous across firms. We find that the exchange rate elasticities of firm exports are significant and negative for domestic-owned firms and firms without foreign subsidiary whereas those are insignificant for foreign-owned firms and firms with foreign subsidiaries.
After controlling exports to foreign affiliates, we still find that the estimated exchange rate elasticities of exports are statistically insignificant, but become negative and relatively larger for firms with global production linkages. More-over, firms with higher GVC integration measure or more imported inter-mediate inputs have the significantly lower exchange rate elasticities of firm exports. It suggests that developments of global production linkages via firm ownership, within-industry or within-firm in the last decade play an essential role in alleviating the effect of exchange rate movements on the firm exports.
Keywords: Exchange Rate Elasticity, Firm Export, Production Linkage, Global Value Chains
JEL Classification: F14, F15, F23, F31
The Impact of Cumulative Rules of Origin on Trade Costs: Estimates from FTAs, Economic Effects and Policy Implications
The year 2015 marked the 20th anniversary of the establishment of the World Trade Organization (WTO). Over the past 20 years, notwithstanding certain difficulties in concluding the Doha Development Agenda (DDA) negotiations..
Chul Chung et al. Date 2017.11.30Trade policy, Free tradeSummary
The year 2015 marked the 20th anniversary of the establishment of the World Trade Organization (WTO). Over the past 20 years, notwithstanding certain difficulties in concluding the Doha Development Agenda (DDA) negotiations, the WTO to a certain degree has achieved one of its original missions: promoting trade liberalization through bilateral free trade agreements (FTAs) and regional or plurilateral FTAs. Since the global financial crisis in 2008, however, the growing criticism of globalization based on neo-liberalism has created the need for a new trade paradigm. In particular, Brexit and the election of Donald Trump as the 45th US President in 2016 have fueled the uncertainty hanging over the global economy and rising protectionism, which could eventually provoke trade war. Upon his inauguration, President Trump withdrew from the Trans-Pacific Partnership (TPP) and the United States introduced a new set of trade policy measures that could adversely affect world trade volume and the existing global trade system.
Recent changes in the international trade environment have presented new challenges for policymakers, particularly for those in Korea, which is highly interconnected with the world economy through an extensive network of global value chains (GVCs). Korea has regarded itself as the most benefited member of the WTO multilateral trading system (MTS). By adopting a simultaneous and multiple FTA negotiations strategy, Korea has increased its economic expansion and grown into a global FTA hub. However, it is time for Korea to consider revising its current trade policy centered on the expansion of bilateral FTAs, which may cause a spaghetti-bowl effect where a host of bilateral FTAs increase trade costs due to the complexity and diversity of rules of origin (ROO). As such, plurilateral FTAs have emerged as a viable alternative to the multilateral trading system or bilateral FTAs.
This study investigates the effect of rules of origin on trade costs. In particular, we examine different types of cumulative rules of origin adopted by various FTAs across the world ‒ how they are arranged and how they work. Existing literature on the effect of ROO on trade costs provides mixed results. Theoretically, allowing cumulation in FTAs should bring trade costs down. Nevertheless, some practical issues in complying with the rules of origin and certification and verification requirements may prevent companies from taking advantage of cumulative rules of origin. Research methods employed by this study include both the conventional way of indirect estimation in calculating trade costs through the trade creation effect, and direct estimation of trade costs which employs the methodology recently made available by Novy (2013). Then we use these estimated trade costs in the computable general equilibrium (CGE) model of the Global Trade Analysis Project (GTAP) to analyze the economic effects of ROO on trade costs. We apply the analysis to mega-FTAs in the Asia Pacific region such as the Regional Comprehensive Economic Partnership (RCEP) and TPP-11 (TPP without the United States), as well as a potential FTA between Korea and Mercosur. Our results show that all three different types of cumulation (bilateral, diagonal, and full) reduce trade costs with the magnitude greatest for full cumulation.
Our empirical and policy simulation results suggest that policymakers should make efforts to simplify and harmonize various ROOs and pursue single ROO with full cumulation in FTA negotiations. In addition to simplification and harmonization of ROOs, institutional support and assistance in the areas of ROO and cumulation are essential for small and medium enterprises (SMEs) to reduce trade costs and fully entertain the benefits of FTAs. Finally it would be desirable for Korea to participate in negotiations of plurilateral FTAs rather than bilateral FTAs.
China-US Current Account Imbalance and the RMB Exchange Rate
This paper examines the current situation of the US-China current account imbalances and the development of trade disputes. This paper also empirically analyzes the short and long-term causal relationship between current ac..
Kotbee Shin et al. Date 2018.08.20Economic relations, Trade structureSummary
This paper examines the current situation of the US-China current account imbalances and the development of trade disputes. This paper also empirically analyzes the short and long-term causal relationship between current account imbalances and real exchange rates and the relationship between the current account persistence and exchange rate regime.
In Chapter two, we study the current account imbalance between China and the U.S. in terms of trade structure. We find that China’s trade surplus with the U.S. is concentrated in a few specific items, including cell phones, automatic data processing machine and monitors and projectors. Looking at the processing stage of the trade between China and the US, China’s trade surplus with the U.S. has mostly come from the final goods. In particular, the surplus in capital goods trade has begun to surpass the surplus in consumer goods trade, in 2016. We also find that the surplus in high-technology manufacture exceeds that in low-technology manufacture. Meanwhile, China has run a deficit in the service trade with the U.S. and the deficit has surged since the global financial crisis.
In Chapter three, we examine the development process of the dispute over the yuan exchange rate and the trade disputes after the Trump administration. Analyzing the existing research results on the misalignment of RMB exchange rate, we find that it is difficult to make a consistent conclusion according to the methodology and analysis period. However, the U.S. Treasury Department maintains its position that the RBM should be appreciated to resolve the trade imbalance. After the launch of the Trump Administration, the government is taking hard-line trade sanctions in addition to exchange rate pressures. In 2017, the Trump Administration increased the number of anti-dumping and countervailing duty investigations for import goods from China by 59% year-on-year, and the US Department of Commerce, for the first time in 26 years, exercised anti-dumping and countervailing duties investigation on Chinese aluminum alloy sheets. In addition, it is considering imposing tariffs based on Articles 201, 232 and 301. In response to these U.S. sanctions, China expressed its strong condemnation through government statements and countered in the same way as the United States.
In Chapter four, we examined the relationship between the current account balance and the exchange rate in two ways. First, we analyzed whether the RBM exchange rates is a significant factor in determining the current account balance between China and the U.S.. In the long term, China’s US current account is affected not only by the real exchange rate but also by the difference in the real GDP growth rate, the difference in the financial account balance of two countries, the financial deeping of China. In the short term, only changes in trade openness have a significant positive effect on the current account. The change of the real exchange rate does not seem to lead to the short-term adjustment of the current account. Second, we study the relationship between the persistence of the current account and the Chinese exchange rate regime. The results implies that current account imbalance between the two countries is adjusted faster after the global financial crisis and China’s exchange rate system reforms contributed to current account adjustment.
The empirical results provide that the RMB exchange rate only affects trade balance between China and U.S. in the long term, and China seems to contribute to the adjustment of trade imbalance through the exchange rate system reform. However, considering the global value chain of China and emerging Asian economies, it is unclear whether the RMB exchange rate adjustment alone will resolve the trade imbalance. Instead, structural rebalancing such as the U.S. fiscal deficit reduction, the increase of private savings, and the development of financial market in China can fundamentally solve current account imbalance. Although the Trump Administration has not yet designated as a currency manipulator, the U.S. government still suspects the foreign exchange market intervention and the undervaluation of the RMB. It is possible that the pressure of the U.S. on RMB appreciation would direct at KRW exchange rate. On the other hand, considering the dependence of intermediate goods trade between China and Korea, deepening trade disputes between China and the U.S. may cause China to shrink its exports to the U.S., resulting in a slowdown in Korea’s intermediate exports to China. In addition, with the spread of protectionism, there will be a possibility of trade disputes including the subsidy problem between Korea and China due to Korea’s continuous surplus with China.