President Moon Jae-In proposed the three principles and eight ways of cooperation for new economic cooperation strategy with China. The three principles and eight ways of cooperation are the basic directions and guidelines for the Korean government to develop economic cooperation with China in the future. This study puts forward detailed measures for cooperation in major areas, taking full consideration of changes in internal and external conditions surrounding the Korean and Chinese economies.
   First of all, there is a need to enhance the stability and substantiality of bilateral cooperation by improving and consolidating the existing institutional frameworks in order to secure the stability and substantiality of the Korea-China economic cooperation. It will be necessary to maintain a two-way dialogue channel that requires the government to push forward future-oriented cooperation through a Korea-China economic ministers’ meeting centering on the Ministry of Strategy and Finance, and that sensitive trade issues be raised through a joint committee on the Korea-China FTA. In addition, working-level consultations will have to be continued so that cooperation can be materialized in the direction of achieving substantial results. In order to do this, it is necessary to actively utilize Korean, Chinese experts and provide a communication platform for spreading consensus and securing trust through public diplomacy.
   To suggest ways for enhancing the quality of trade between Korea and China, we analyze the participation in GVC at the national- industrial level and examine whether such participation contributed to upgrading the economic and industrial structure. We use data on 18 manufacturing industries in 43 countries from 2000 to 2014, and analyze whether forward participation and backward participation contributed to the value-added generation of industries.
   In addition, the results of our analysis on Korean and Chinese industries are similar to those of the rest of the world. Particularly, it is shown that forward participation has a relatively greater positive effect on the creation of value added in the industry compared to reward participation. In the context of GVC proliferation, measures to enhance the quality of trade between the two countries through industrial development and upgrading of economic structures can be summarized as GVC participation and upgrading.
   In the face of the 4th Industrial Revolution era, Korea and China have also proposed ways to cooperate in new industrial sectors. Witnessing the changes caused by the 4th Industrial Revolution, the status of development of new industries in China was analyzed with a focus on artificial intelligence (AI). Major analysis items related to new industries include promoting strategies, size and characteristics of investments, analysis of major business cases, problems and limitations, major AI technology applications (AI+), and comparison with major countries. Considering the limitations of government statistical data, we compare the competitiveness of Korea and China, such as global market share, revealed comparative advantage index and trade complement index, focusing on six new industries (intelligent robots, system semiconductors, electric vehicles, aviation- space, advanced medical devices, lithium). The cooperative cases of the New Industrial Sector in China were largely classified into three types: first, they were classified into vertical integration types, in which relatively recent leading companies led investment; secondly, global cooperation; and thirdly, government-led types that cooperated with foreign companies in the form of strategic alliances, etc. Considering each type of the cooperation cases, we propose the cooperation plans as follows: first, to develop a system for fostering and supporting start-up companies with vertical integration with major Chinese large companies; second, to support small and medium- sized enterprises with technological superiority and to establish an innovation system with which core components and intermediate goods can be supplied; and third, to target the Chinese market and overseas markets through strategic alliances with leading Chinese companies in the AI field.
   The Korean government emphasizes the importance of revitalizing start-up ventures in order to secure future growth engines and create jobs for young people, meaning there is a need for cooperation with China. China has also started to popularize startups and innovations under the banner of 'popularization of startups, human innovation' . The background of the Chinese government's start-up venture started from the increasingly high level of inflation, the elimination of real unemployment, and a desperate measure to upgrade the economic development centered on small- and medium-sized venture businesses and the Chinese-style innovation model through startups. We analyze the changes and growth contents of the startup venture ecosystem of China, which led to innovation and job creation in China and examined the direction of government-led core platform innovation, and based on this we propose the methodology of mutual win-win through open innovation cooperation and joint fund-raising between Korea and China.

   With regard to cooperation in the energy sector between South Korea and China, the two countries are facing a difficult situation after the global financial crisis. In the renewable energy sector, energy cooperation between Korea and China is not as easy as it used to be due to the capital increase of local Chinese companies, advances in domestic and overseas markets based on mass production and sales of cheap products, and the support of the central government and policy financial institutions for major domestic and overseas projects. In order to reflect the demand for energy cooperation between the two countries, the central governments of Korea and China have already made efforts for energy cooperation, but to further boost cooperation, they have proposed the nationwide spread of carbon emission trading by the Chinese central government, the process of promoting new energy generation outside of GEI, solar and wind power, and the development of new energy technologies and the use of opportunities for building energy infrastructure in China. In addition, Korea and China should reduce their reliance on thermal power, increase the proportion of renewable energy centered on solar and wind power, and emphasize the institutionalization of cooperation measures.
   Environmental cooperation between Korea and China has greatly expanded over the past few years. However, the lack of detailed information on the areas concerned, together with the systems implementation and methods of work in place at the Ministry of Environmental Protection, Forestry, National Development and Reform Commission and its affiliates, which are the main departments responsible for China’s environmental policy, has been a source of distress in the process of promoting cooperation. China is rapidly changing its environmental policies for the implementation of the Environmental Protection Act, the Air Pollution Prevention Act, and the announcement of action plans to improve air and water quality. This change in China’s environmental policy means a change in China’s policy demand in Korea-China environmental cooperation, and will pose challenges and provide new opportunities for environmental cooperation between Korea and China. Impacts from environmental pollution among countries are expected to increase from economic growth with pattern in resource use. It is necessary to review the environmental policies of China and Korea in order to enhance the efficiency and effectiveness of environmental cooperation between Korea and China to overcome environmental issues. As a solution to the environmental problems that the two countries can jointly strive for, the government has proposed to improve the constitution of eco-industrial development, which increases the efficiency of resource use and minimizes environmental pollution by reusing unused or by-products as raw materials or energy of other companies. It will be necessary to share the experience of implementing programs such as China’s circular economic complex (CIP) and domestic ecological industrial complex and analyze the transition to a clean production system through the efforts of various technological development and information exchange. We also emphasize the need for environmental cooperation between Korea, China, and also Japan to address current environmental issues including air quality. Other proposals include cooperative measures for sharing technologies, experiences and policies for building eco-friendly cities.
   The joint entry into infrastructure projects in third countries was analyzed based on China's one-to-one policy. The one-to-one policy aims to expand logistics networks through infrastructure investment in areas of economic interest by China, develop China's borders and expand its influence on neighboring countries. Since then, the Chinese government has signed agreements with more than 30 countries to materialize the one-on-one policy implementation. International cooperation is ongoing, including Indonesia's Bandung High Speed Railway, Hungary-Serbia Connecting Railway, China-Russia Natural Gas Eastern Line Corporation, Pakistan's Gwadar Port development and Kazakhstan's Yanun River Logistics Base. South Korea has been lacking in connectivity with one-to-one policy, but the recent improvement in the North Korean nuclear issue has caused a sharp rise in the Korean Peninsula's logistics program. Accordingly, we expect the necessity for three north-eastern provinces cooperation in international logistics policy, including Russia, Mongolia and South Korea. We review the three country’s pilot projects of joint advancement between China-Japan and analyze its major issues, also going on to seek a strategy of joint advancement and ways of cooperation between Korea and China for infrastructure projects.
   Lastly, in the area of promoting human-centered private exchanges and cooperation, we discuss the Chinese people’s current expectations of Korea, and the needs and necessities felt by the Chinese people. If the Korean and Chinese people could together resolve the deficiencies and dissatisfaction they commonly feel, the friendly relations between the two countries will continue to grow in the future. For this, first, this study analyzed the limitations and problems shown in the private exchanges between Korea and China, and suggested improvement measures. As an example of a ‘human- centered private exchange’ project, this study suggested projects to resolve environmental issues and cultivate talent, mainly because environmental issues have recently had the largest negative impact on mutual perceptions due to keen public interest in both countries. The Korean government should establish a system to raise the level of active exchange in the private level, and also futher develop its dialogues with the Chinese government to compose a platform that could spread the outcomes of individual projects. Human-centered private exchanges could be finally accomplished by introducing the process of solving realistic problems in which the people of both countries share great interest through private exchanges. 

 

   The A number of challenges have been burdening the labor market of Korea today, including the deceleration of the speed of jobs creation, the increase in youth unemployment and deepening of ‘dual structure’ of the labor market. The weakening of Korea’s economic growth dynamics and the corresponding bottleneck in implementing the traditional growth engine of the Korea economy – Economic Growth and Jobs Creation through Export Expansion – are often quoted as the main causes of these difficulties. The Moon administration has been making enormous efforts to counter these unwelcome trends, by establishing the Presidential Committee on Jobs and adopting a jobs-centered approach to policy enforcement. However, the achievement is rather unsatisfactory so far. Therefore, it is quite timely to check the effectiveness of the current policy instruments and to adopt a new orientation in the policy making for jobs creation.
   Against this backdrop, this research has been carried out to provide the policy makers with hands-on and useful policy implications, based on case studies conducted on three European countries that have and had experienced similar situation over the past decades. Countries selected for case studies are three European countries, Germany, France and Ireland.
   Chapter 2 of the report scrutinized the major issues related with jobs creation and trends of jobs creation in major countries in the world. It is discussed in this chapter that the diverse labor-market problems have different root causes, so that the policy efforts to cure these problems should also take the diverse causes and different policy transmission mechanisms into consideration. After reviewing a number of publications on the relevant issues, the chapter summarized the main challenges facing the national labor markets in the following five points: (i) income disparity and employment gap by gender; (ii) employment gap by the level of education; (iii) widening gap between the regular and irregular workers; (iv) distribution problem related with the productivity gains; (v) stagnant wage increase; (vi) high youth unemployment; and (vii) issues related with employment of elderly workers.
   After this overview of labor market issues, Chapters 3-5 have been devoted to case studies on Germany, France and Ireland. These European countries have experienced common fates since the outbreak of the global financial crisis in 2008. As they are all member countries of the Eurozone, they have had similar macroeconomic developments since the 2010 Eurozone sovereign debt crisis, especially in terms of macroeconomic and labor-market performances. The research team went beyond these recent crises in order to draw meaningful and useful implications for Korea, and analyzed the country-specific labor-market developments since the 1980s, as well. In fact, Germany experienced economic shocks caused by the unification of two German states in 1990, while Ireland had experienced severe setbacks during the economic recession in 1980s. Policy reorientations and instruments that were put in place to cure these country-specific problems would provide a number of policy implications that can be referred to by the Korean government, as they were devised in times of economic difficulties, as experienced by the Korean labor market in recent years.
   Chapter 3 was devoted to the case study of Germany. As noted before, the German economy has experienced two common crises and one specific economic shock caused by the 1990 unification of the two German states, which forced the country to implement a major economic reform, including the strongest-ever labor-market reform called “Hartz Reform” around 2005. In addition to the well-documented and well-researched Hartz Reform, the German economy has set an exemplary case of social partnership by the successful negotiation and implementation of the Auto 5000 Program. The Auto 5000 Program was initiated and proposed by the managers of the Volkswagen AG to the trade union and the city of Wolfsburg, especially as an instrument to save jobs that would otherwise have been lost due to the difficulties facing the company as a result of fierce international competition. The management and the trade union reached a “win-win” solution after a long negotiation, which can provide a lesson to the Korean counterparts, as there has been an experimental exercise of similar model under the leadership of the Gwangju Municipal Government. The case study provided a meaningful conclusion that “mutual trust” is a desperately needed social capital that has not been yet observed in the Korean society.
   The case study of France was conducted in Chapter 4, mainly focusing on the main policy reorientation by the French government and the strengthened interests of the French policymakers in the support for the startup companies. In fact, an interesting policy change has been observed in the overall economic policy of the French government. While public institutions have traditionally had a strong influence in economic activities, the Macron government since May 2017 has been placing the private sector role at the center of economic policy-making. It was one of natural consequences of this policy reorientation that they started supporting the startup companies more rigorously. The French Tech was established as a hub for all the supporting activities for the startups, and a number of private and public startup campuses have been established and started to generated synergy effects. A characteristic of French policy is seen in how the traditional French virtue of tolerance and liberalism were observed in the government support activities for the startups; the government subsidies for startup companies were provided regardless of the nationality of the companies (tolerance) and highly talented human resources were given the chances to settle down in France for the purpose of making the landscape more colorful and competitive (tolerance and liberalism).
   Chapter 5 was reserved for the case study of Ireland, a country which joined the European Union (EU) in 1973 and has experienced unprecedented economic growth ever since. In fact, the Irish per-capita income was below 60% of the EU average before 1973, but has risen to above average and is one of the top nations within the EU today. The attraction of FDI into Ireland, especially in the sectors of knowledge-intensive and top-notch services industries have been main vehicle for the economic growth and sustainability of Ireland. The Irish government established the IDA (Industrial Development Authority) as the organization fully in charge of FDI attraction, and set up highly competitive vocational education and training (VET) scheme. This research scrutinized the VET system of Ireland more detailed, and found a number of interesting and useful implications that can be utilized by Korea. For instance, by adopting the Action Plan for Jobs (APJ) during the period of 2012-2018, the Irish government has shown its strong commitment to jobs creation. Also, in implementing the jobs strategy, the public institutions, such as the Enterprise Ireland and IDA, adopted a self-monitoring mechanism, which checked the achievement of job creation regularly. Another success factor was that the cooperative system established both among the public institutions responsible for job creation and between the private-sector and public-sector institutions, thus leading to the maximum effectiveness of the policy instruments.
   Chapter 6 summarized and evaluated the case studies and proposed a workable “job creation model,” which described 7 policy tasks leading to job creations in the Korean context. The conclusions drawn in Chapter 7 are all directly related with these 7 policy tasks. Main conclusion of the report are as follows. First, productivity gains are one excellent source of more jobs. As observed in the case of Germany and Ireland, productivity gains in small and medium-sized enterprises (SMEs) would over-proportionally contribute to job creation. However, an excessive wage increase would undermine the capability of private-sectors job creation. Second, if job creation is high on the national agenda, one should seriously consider the performance of job creation as one of important evaluation indicators for the institutions established for attracting FDIs and/or supporting SMEs. Third, as for the support for startup companies, the role of the government is especially important in the early phase of startup activities. The government should introduce startup-friendly business environment and ensure the maximum synergy effects to unfold, thereby raising the overall productivity level of the startups and even the existing companies. Also, tolerance and liberalism we have identified as success factor of French startup support policies could be implemented in Korea, in order to drastically improve the startup ecosystems. Fourth, a close collaboration with advanced multinational corporations has proved an excellent instrument for job creation in Ireland, which could be localized and emulated by the Korean government. Especially important in this context is to bring about an effective scheme through which the capability of local companies can be expanded through contacting, cooperating and even cross-possessing ownerships with the MNCs. Regulations related with joint ventures (JVs) should be eased for that purpose. Fifth, in the areas of education and vocational training, forward-looking in-depth research is needed to predict the future development of industrial structures and the amount and pattern of labor demand from the newly emerging industries. This is a prerequisite for the introduction and implementation of appropriate educational and vocational training systems. Sixth, a clear-cut division of labor between the government and public institutions on the one side and the private sector on the other is one necessary condition for the success of all job-creation efforts. The government should focus on making the labor market work under the leadership of companies through setting rules and adopting needed regulations, thus leaving room for the labor demand and supply to unfold and finally settle in the labor market. Seventh and finally, as for the social partnership it is found that mutual trust between the stakeholders of the labor market, especially between the employers and employees, is one of most important social capitals. In the history of modern Korea, we can rarely find an event where mutual trust was contributing to the settlement of any labor-related disputes. In fact, we have seen too many adversary cases where mistrust resulted in the failure of any efforts for friendly settling disputes. However, the recently reached agreement on the establishment of the Gwangju Job-creation Model between the Hyundai Motors and Gwangju Municipal Government is a welcome result of long-lasting negotiations. The research team is pretty much in the hope that a successful implementation of this model could be an excellent basis for the accumulation of mutual trust. For the continuation of this project, and to bring about second and third such win-win deals, the government will need to take an active role. 

 

   This study examines EU2020, the development strategy of the European Union, with a focus on its background, implementation system, and the characteristics and the means in the fields of industrial policies and labor market policies.
   The Europe 2020 strategy was presented in the context of challenges posed by globalization facing the EU and its social change. With China emerging as an economic power to challenge the dominance of the United States, it is becoming more and more difficult for the EU to maintain its current geopolitical and geopolitical importance. Climate change, energy needs, and demographical issues such as aging and immigration, are serious challenges to its economy and society. Europe 2020 is a comprehensive growth strategy to achieve sustainable development in response to these problems, which simultaneously embodies the value of innovation and inclusion. In addition, the inclusion of environmental and social values ​​is also emphasized. For its implementation, the evaluation and monitoring system at the EU level has been strengthened to create a close link between economic and financial strategies. In addition, to overcome the limitations of the flexible open system, the evaluation and monitoring functions of the executive committee have been strengthened and the partnership participation of various interest groups has been expanded.
   In the historical context of industrial policy, Europe’s industrial policies have traditionally been based on horizontal approaches which do not appear to have substantially changed in Europe 2020. However, the strategy incorporates a so-called matrix-type policy structure that takes into account sectoral and regional characteristics on the basis of a horizontal approach centered on policies to foster innovation and competition. In contrast to the traditional approaches, which focused on the function of the pseudo capital market, directing production resources such as capital to specific industries, the industrial policy of the EU is focusing on  creating conditions for innovation by establishing an “information market” and promoting R&D.
   The new industrial policies of the EU, represented by the flagship initiative of “industrial policies in the era of globalization,” are a combination of smart specialization strategies based on entrepreneurial self-discovery and strategic coordination and open-innovation policies based on an industrial ecology system in which industry-academia cooperation and civil societies play a key role. Although there is a consensus on the necessity of such an EU industrial policy in the long term, several issues remain in regard to its implementation. These include the absence of a clear definition of responsibilities and coordination among the executive committees in charge of industrial policy, the fragmentation of policies and low synergies resulting therefrom, the ambiguous division of labor between the EU and its member countries, and differences in policy formulation and implementation due to differences in historical backgrounds and economic systems among the latter.
   Another flagship initiative of Europe 2020, “new technologies and jobs,” has four priorities: improving labor market operations, providing employable skills, improving job quality and working conditions, and supporting job creation and labor demand. In order to achieve these goals, the EU has fostered dialogue among the social partners and carried out legislative improvements at the EU level, based on an evaluation of the effects of existing policies and regulations. However, the result of the interim assessment in 2014 was that “the initiative was not successful in creating a consistent framework for employment policy.” Following a mid-term evaluation, efforts have been made to clarify employment-related policies directions in the European Employment Guidelines and to regularly review their implementation by individual member countries within the framework of the European Semester. Although the overall employment situation in the 28 member countries of the EU has improved since the mid-2010s, there are still structural problems in the EU labor market, such as low employment rates in the southern member countries, low employment rates among the young and the less educated, the segregation of labor markets, deteriorating matching efficiencies between labor supply and demand, sluggish growth of real wages, and increase of “in-work poverty.”
   The following are some important policy implications that can be drawn from these EU experiences.
   First, the so-called horizontal approach focusing on correcting market failures in industrial policy should not be the only option. The horizontal approach is favored as a counteraction to the vertical approach to select specific industries which was once prevalent in East Asia. However, depending on the characteristics of the industry, the institutional characteristics of the region, and the effectiveness of policy implementation, a vertical approach may be preferred in some cases. The experiences of the EU show that a bias towards the horizontal approach can make it difficult to achieve performance within a given period of time.
   Second, a shift in the perspective on industrial ecosystems is necessary as evidenced by the smart specialization and industrial and innovation policies of the Open Innovation 2.0 paradigm. Perceiving the economy as an ecosystem implies the assumption that every pertaining subject, including the public, the private sector, the research sector, and the citizens, participates in innovation and economic activities. Therefore, the relationship among these players is complementary and horizontal based on the principles of check and balance. Therefore, competition and cooperation should interact and, based on the interplay that results, the market and reputation-based mechanisms must function simultaneously to perform a screening role.
   Third, the role to be played by the public sector must be reformulated in relation to the second issue mentioned above. In a situation where a holistic innovation is needed that encompasses not only technological innovation but also social innovation, it should be kept in mind that the public sector can play a variety of important roles, providing tangible and untangible resources or the competencies needed to form a platform that can support innovations, coordinate interests, purchase innovative products, create markets, and employ public finance to catalyze additional private investment.
   Fourth, it is necessary to escape from the obsession with “cutting-edge” projects. There is a tendency in industrial policies in Korea to prefer radical projects which do not sufficiently take into account the competitive advantages the country or region already possesses. On the other hand, the smart specialization strategy promotes structural changes in a country or a region. This necessitates consideration for various paths such as “modernization” or “diversification.” These are strategies that try to strengthen public support for interfaces between general purpose technologies and existing industries to encourage convergence between them, thereby upgrading existing industries. In order for such a strategy to be successful, it is necessary to choose an appropriate path based on the identification of existing strengths and weaknesses.
   Fifth, the EU 2020 strategy seeks not only to increase productivity, but also to strengthen inclusive policies to maintain and expand employment. The growing interest within the EU concerning employment in the manufacturing sector since the global financial crisis is due to the recognition of various problems that weaken manufacturing competitiveness. In particular, local communities can eventually collapse in areas where the industrial base is weakened due to a lack of skilled labor and equipment investment, which in turn makes it impossible for the manufacturing industry to recover. As such, while making efforts to increase the competitiveness of existing industries, measures should also be considered at the same time to strengthen social safety nets that can minimize the negative effects of industrial restructuring.
   Sixth, in the context of labor policy, it is important to promote autonomous social dialogue between labor and management representatives. In particular, when implementing the concept of “flexicurity,” a balance of flexibility and stability is essential. In this regard, the government needs to actively utilize financial resources for clearly targeted purposes when necessary.
   Seventh, in order to adapt to rapidly changing technologies and to match demand and supply in the labor market, it is necessary to place a high policy priority on constant improvement of education and training systems through cooperation between industry and education/training institutions. 

 

   When speaking of the European economy, small and medium -sized enterprises (hereafter SMEs) have been playing a pivotal role in creating jobs and adding value to products. In this sense, the EU and the Member States are focusing on SMEs for innovative growth as a core element of sustainable development. The Korean government is also eagerly supporting SMEs to enhance their competitiveness. Yet there is room for policy improvement. This report will overview the important aspects of SME policies of the EU and selected Member States. Based on the findings we will make suggestions for the advancement of Korea’s SME policy.
   European SMEs take a share of 99.8% among the total number of enterprises and account for 66.4% of the number of jobs, and 56.8% of value creation. Despite this high performance by European SMEs, their innovative competitiveness does not necessarily match that of the large enterprises in Europe. Moreover, many European SMEs complain about the hardships of internationalisation, particularly in finding international buyers, competing with other companies in similar fields, financing, etc., which is another indicator of their competitiveness. Considering this situation, the EU has been providing a number of guidelines and policies to support SMEs, such as the Small Business Act (SBA), COSME programme, funding, and programmes to assist their internationalisation and standardization. The SBA proposes 10 principles in promoting entrepreneurship, such as “Think Small First”, and access to finance, innovation and technology, based on which the governments of Member States have established domestic legislation on SMEs. COSME, an SME competitiveness enhancing programme, involves financing, internationalisation, protection of intellectual property rights, etc. In terms of funding, the EU is trying to ease the gap between SMEs and large-companies’ loan interest rates and to support market access and technological innovation by utilising EIC funding. In particular, the SME Instrument has been used to financially support SMEs with innovative technology. The EU has announced a strategy for the circular economy and is supporting the transition to an environment-friendly economy. The EU has also been reinforcing its support for standardization, not only for SMEs but enterprises of all sizes, to harmonise differing standards within the Member States as well as to have the EU standards adopted at the international level. Stronger financial support is being provided for the stakeholders in the discussion of standardization, to lessen their burdens in order to participate in the discussion actively.
   As the Member States ultimately lead policies to support SMEs with EU-level policy playing a supplementing role, it is important to analyse policy features at the national level. Therefore, based on the national competitiveness index and industrial characteristics, in this research we selected Germany, France, Italy, and the Netherlands for our case study. Germany, famous for its “hidden champions,” has been carrying out the “Future of the German Mittelstand” Action Programme to secure financial support and boost the growth of its SMEs. Based on this programme, the “Mittelstand-Digital” strategy operates to convince SMEs of the need to digitalize their operations and provide customized services. The Central Innovation Programme for SMEs (ZIM) not only provides financial support for R&D at SMEs but has since been expanded into an international cooperation network to support SMEs. The management and technical innovation consulting programme “go-Inno” and technology transfer support programme “INNO-KOM” are also assisting SMEs in practical terms.
   France, facing a similar problem with Korea of ensuring the growth of both large companies and SMEs, announced the Action Plan for Business Growth and Transformation (PACTE) in 2018. PACTE provides a wide range of support, such as to facilitate the establishment of firms, revitalise unsuccessful companies, company transfer, financing, R&D technology support, compensation for employees, etc. with the aim of easing the burden of emerging companies. The “competitive cluster” policy provides additional benefits for SMEs struggling with competitiveness issues and technical development, and the “La French Tech” policy aims to nurture regional start-up clusters and invite competitive start-ups.
   Italy is supporting start-ups to become competitive SMEs through investment cooperation. The nation actively manages the brand “Made in Italy” and exercises strict quality control over SMEs authorized to use it, providing a good example of brand management at the national level having a positive effect on companies. Italy also operates regional clusters to increase the competitiveness of its SMEs.
   The Dutch industrial policy is based on a top-sector approach. The nation operates an innovative incentive scheme (MIT) that aims to help SMEs take part in innovation, and which has been positively evaluated for the role it plays. SMEs and start-ups can receive specialised support such as from the Netherlands Organisation for Applied Scientific Research (TNO). These research institutions link the companies with the government and complement the role of the government by providing the practical support that SMEs need.
   Just like the SME policies of the EU and the Member States, Korea’s SME policies are comprehensive in scope and involve many different ministries in various ways. Despite these similarities, Korea’s policies mostly differ from the EU and the Member States at the micro level and enforcement processes. This indicates the need to measure the effectiveness of existing policies, obtain feedback, and perform an overall re-examination of their performance efficiency. In this context, and based on the case studies, we are suggesting the following implications for Korea.
   First, it is essential to support the establishment of an online cluster network to improve utilization of the clusters. This online cluster network will enable the companies to receive integrated support directly by intra-cluster or inter-cluster support. To achieve this goal it is important to prepare a detailed phasing strategy.
   Second, we can consider establishing nation-wide competence centres in Korea. Korea already has numerous types of SME support centres. For better performance it is crucial to present a clear and specific objective, for instance, providing specialised support for digitalisation of the SMEs. This should be done considering regional characteristics, such as logistics digitalisation for regions specializing in logistics and e-commerce support for regions where marketing and online business is active.
   Third, it will also be necessary to greatly expand the functions of technical research institutions, which play a significant role in the Netherlands, Sweden, Denmark, and Germany. Offering more assistance for research support institutions will help SMEs to receive the support they need with specific issues in the areas of R&D, technical difficulties, training human resources, finance and taxation problems, etc.
   Fourth, the introduction of an integrated nation brand of Korea would help SMEs to export or expand overseas, especially those who lack a well-known brand name. Considering the elevated nation brand value of Korea, thanks to developments such as the Korean wave (Hallyu), establishing an integrated nation brand will have a significant impact. Once Korea establishes an integrated nation brand, SMEs who wish to utilise it would voluntarily participate in efforts to improve their product quality and competitiveness in order to acquire the rights to use the integrated nation brand.
   Fifth, it would be wise to establish an institutional basis for outward processing in advance to provide for the internationalisation of SMEs and their involvement in value chains. Policies to facilitate trade will be of great help toward this. Considering the future of the Korean Peninsula, establishing an area for outward processing would also be important for cooperation between the two Koreas. 

Executive Summary

1. Introduction

2. Conceptual Framework

3. Empirical Model

4. Data

5. Empirical Results

6. Robustness Analysis

7. Conclusion

References 

The purpose of this paper is to examine whether or not there is a spillover effect of third countries’ regional trade agreements (RTAs) on their bilateral trade relationships. To identify the RTA spillover effects, we expand a gravity model into a third-country framework using a dataset of bilateral trade and RTAs for 62 country-pairs over the period 2002-2013. We construct a weighted third-countries’ RTA contiguity matrix as well as a spatially-weighted matrix to identify both the spillover and spatial effects of RTA on trade flows. The results show that the spillover effects of RTAs on trade are positive while the spatial effects of RTA are negative and imply that third parties’ RTAs have complementary effects on bilateral trade while the existence of neighbors in the RTA between the two trade partners reduces their bilateral trade. As a result, the proliferation of RTAs expand international trade through spillover effects as well as trade creation and trade diversion.

 

Keywords: regional trade agreements, spillover effects, spatial effects, gravity equation
JEL Classification:  F14, F15 

 

 

 

   The World Trade Organization (WTO), launched in 1995 as a successor of the GATT system, has ambitiously begun its first multilateral trade negotiation round, Doha Development Agenda (DDA) in 2001. Since then, notwithstanding with its great ambition, the DDA has failed to draw visible results for more than 17 years, and hence confidence in the WTO-centered multilateral trading system has been declining accordingly. Nevertheless, there are some of the accomplishments of the WTO. The liberalization of the commodity markets has expanded and deepened through the conclusions of plurilateral negotiations under the WTO such as the Information Technology Agreement (ITA) and the Government Procurement Agreement (GPA), and rules in service and intellectual property rights have been set-out and established. As a result of these achievements, the volume of global commodity trade has increased by more than three times, and the market share of developing countries has also increased from 28% in 1995 to 43% in 2017. The expansion of the number of member states is another achievement of the WTO. Although such expansion may have increased the difficulties and complexity of decision making in the WTO, it is clear that the expansion of new business opportunities by successfully incorporating developing countries into the global economy and applying unified WTO rules and standards is an achievement of the WTO. Along with the strengthening of the dispute settlement system, the Agreement on Trade Facilitation (TFA) and its implementation are the greatest achievements of the WTO system. The Trade Facilitation Agreement is the first multilateral trade agreement concluded after the establishment of the WTO and the launch of the DDA negotiations, while the Information Technology Agreement and the Government Procurement Agreement are plurilateral agreements. Economically, it is expected of the increase in exports by more than $ 1 trillion, the creation of 20 million export-related jobs, and the increase in the world's GDP by about $ 960 billion due to the reduction of trade costs and the improvement of trade environment.
   The limitations and problems of the WTO system are as clear as these achievements. In particular, governance issues that have long been pointed out are such typical examples. Decisions in the WTO system are in fact made by consensus, and enlarging the number of Member States has become a decisive factor in hindering efficient decision-making in the WTO. Although The ‘Single Undertaking’ principle of concluding the agreement contributed to maintaining the consistency and stability of the multilateral trade system, it caused the problem of the rigidity of the WTO system at the same time. The dispute settlement procedure is also increasingly problematic. Recently, the dispute settlement implementation process is increasingly followed by the retaliation process. In such processes, the situation in which the complainant must observe the implementation failure of the defendant until the retaliation is approved is undermining the fairness of the WTO system. Not only that, the lack of safeguard measures in service trade and the limitations and problems of special and differential treatment for developing countries have been pointed out as major challenges related to the current WTO system. In addition to the challenges of the WTO system itself, the fact that the WTO does not adequately respond to the rapidly changing global trade environment is also a major problem of the current WTO system. The reason why the FTAs around the world in the 2000’s have rapidly expanded is the WTO multilateral system has failed to respond effectively to the new trading environment. Since the early 2000s, the Global Production Networks have rapidly spread out and the 'made in world' has become common due to such international division of production, and hence the set-out of new trading rules and further tariff concessions in accordance with such development has long been awaited. However, the progress of DDA has fallen far short of expectation due to the confrontation between developed and developing countries. As the global economic slowdown has been prolonged since the global financial crisis in 2008, countries around the world have strengthened their protectionist policies for their industries and jobs. Notwithstanding, the WTO failed to issue a proper prescription for them. WTO members have constantly bashed protectionism and stated the importance of strengthening multilateral trade system whenever there is opportunity, but this is only an empty declaration; non-tariff measures have steadily increased since the financial crisis and have not returned to pre-2008 levels.
   Furthermore, the trade liberalization that has been pursued so far has mainly focused on trade barriers, especially tariff concession. However, in terms of market access, behind-the-border or non-tariff measures and regulations such as customs procedures and domestic regulations has persistently remained. In this situation, the abolition of tariff barriers has rather created a favorable environment for large companies. Large companies have more human and physical capital than small and medium enterprises to deal with customs procedures and domestic regulations. As a result, SMEs have failed to enter the foreign markets due to complex customs procedures and regulations behind the border, while large companies have succeeded in entering those markets. Such imbalance results in the concentration of benefits from trade liberalization into large corporations. The same stark reality applies between capital and labor; since the share of labor income after trade liberalization is gradually decreasing, the issue of unequal distribution of benefits from trade liberalization between labor and capital has been pointed out in multilateral trade negotiations. Therefore, inclusiveness and sustainability of international trade have become main topics. The need for discussions about reform of the WTO system are invigorated among developed and developing economies alike.
   Nevertheless, the current WTO reform discussion is to be characterized as the multilateralization of the U.S-China bilateral trade conflict. According to the proposals submitted by developed countries regarding WTO reform, transparency and notification enhancements are on the table. A set of regulations is to be strengthened in order for the WTO member states to comply with the notification duty. In spite of how the reform of the WTO Appellate Body will be done is controversial, that reform will move in the direction of mitigating the complaints of the United States. In that regard, a certain extent of differentiation among developing states will be inevitable. It is obvious that such a discussion will face strong opposition from developing countries. However, as the economic heterogeneity across developing countries is widening up, it is difficult for developing economies to ignore the disparity in their levels of development and to assert the same obligation among all developing countries. In addition, plurilateral negotiations will also be actively pursued in parallel with the existing DDA. Since some issues that developing countries argue to keep on the DDA negotiation table will be there as they are now, the 'flexible multilateralism' referred to by the EU will also be at the center of the debate. Considering the current conflicts between developed and developing economies, it cannot be ruled out the possibility that the multilateral system could be divided into alliance among developed economies and a group of developing countries if the WTO reform initiative led by developed countries such as the United States is not reaching to their desired level due to the opposition of developing economies. In this case, the current WTO regime may demise indeed.
   Therefore, Korea needs to be strategically prepared for the reform of the WTO system. With regard to transparency enhancement and notification enhancement, obtaining information on industrial subsidies across member states is intended and according to them more stringent classification and international review of subsidies is expected to be set-out. Therefore, Korea should review whether the current supplementary policies are strictly in accordance with the WTO regulations and minimize the possibilities of countervailing duties from other WTO members in advance. Maintaining the status of developing countries has been the principal premise of the DDA agriculture negotiations of Korea. However, given that recent development of the discussion with regard to the differentiation of developing countries, keeping Korea as a developing country will not be an option any longer. Since the obligations between developing and developed countries is considerably different in the agricultural sector, the implementation of Korea's obligations as a developed country will not show a favorable impact on the agricultural sector for a while. Therefore, there is a need for thorough preparation of the agricultural sector for such changes. Since the discussions on reform of the WTO system will go through every detailed issues, it is necessary for Korea to actively participate in the discussions on the agenda of our interests, especially transparency and notification and differentiation of developing countries, and reflect our interests in those discussions as much as possible.
   Moreover, the direction of Korea's multilateral trade policy, taking into consideration of the WTO system reform and the changes in the global trade environment, should include strengthening the status of Korea in the WTO, promoting inclusive trade within the WTO system, multilateralization of bilateral and regional trade agreements, and embracing the sustainability issues in the multilateral trade agenda. In order to strengthen Korea's status within the WTO system, it is necessary to cultivate multinational trade experts and expand the dispatch to the WTO Secretariat. In addition, it is necessary to increase the contribution of Korea by actively participating in various projects managed by the WTO. It is also a good idea for Korea to lead the WTO ministerial meeting. At the same time, it is an effective way to substantially promote Korea's position in the multilateral trade stage with new proposals supported by developed and developing countries that can break through the deadlocked DDA.
   To pursue and lead inclusive trade, it is necessary for Korea to contribute to promoting the implementation of the trade facilitation agreement first. In particular, it is effective to provide customized consulting services to developing countries focusing on the e-Customs clearance system or ‘single window’ system that Korea has strengths with and developing countries are in need of. It is also important to develop a Korean GSP program for developing countries. For example, Korea opens up commodity markets developing countries desire and provide technical and financial support contents in those sectors so that encourage them to experience the benefits of trade liberalization. Along with these efforts, a customized bilateral solution system for SMEs as well as large companies to resolve the difficulties with regard to access to those markets should be pursued together.
   In order to multilateralize bilateral or regional trade agreements, a unified framework is needed to connect the FTAs together ​​that Korea has been promoting so far. In the case of tariffs, for instance, the tariff concession for all products in all FTAs could be uniformly set at the most liberalized schedule Korea has offered to any WTO members. In the case of services, a unified liberalization framework can be created as well with applying the MFN principle.
   Last but not least, in order to strengthen the sustainability of trade, we have to consider the resumption of Environmental Goods Agreement (EGA) negotiations, the harmonization of trade and environment, and the promotion of new rules for permitting environmental subsidies. Furthermore, we must now consider sustainability issues i.e. the implementation of the Paris Climate Accord in the multilateral trading system.

 

   Recently, the global trade system is deteriorating and the basis for world free trade is being threatened by a rise in trade protectionism. The multilateral trade system represented by the WTO has shown its limitations in efficiently reflecting the rapidly changing global trade environment. In the meantime, free trade agreements have continued to increase up to recently, not only in terms of their numbers but also the scope they cover. While free trade agrements in the past focused on tariff reduction, more recent free trade agrements include complex provisions on issues such as non-tariff barriers, services, investment, digital trade, and intellectual property rights. This study reviews the contents of free trade agreements and investigates their effects on trade using data from Worldbank (2017). First, more recent free trade agreements appear to contain more contents or provisions. We also find that Korea tends to sign more comprehensive free trade agreements, containing an average of 26 provisions, which is higher than the world average of 18. Second, we find that establishing such comprehensive free trade agreements has greater positive effects on trade. In particular, free trade agreements including more WTO-X provisions promote trade flows more effectively. Third, we also investigate the effect of each type of provision on trade. Empirical results are as follow. Market access provisions increased trade significantly. However, service provisions appear to have a negative effect on trade. Investment provisions also have a negative effect on trade, mainly negative for export from advanced countries to both advanced and developing countries. We also find that intellectual property rights provisions play a restrictive role on trade between developing countries while public procurement provisions have a positive effect on export to developing countries. Finally, while standard provisions have a negative effect on exports from developing countries to advanced countries, they appear to promote trade between developing countries. As mentioned above, the effects of provisions on trade are heterogeneous by the level of a country’s economy. Moreover, these might vary depending on how they are implemented, so further research is needed for an accurate interpretation of the results. 

 

   The adoption of the Sustainable Development Goals (SDGs) and Paris Agreement in 2015 accelerated the transition to a low-carbon climate-resilient economy which requires significant investment for both new and existing infrastructure. This study aims to provide policy implications for supporting Korean companies participating in overseas climate-related infrastructure projects.
   Chapter 2 provides a literature review of low-carbon climate-resilient infrastructure and the importance of investment in climate-resilient infrastructure. For the purposes of this study, climate-resilient infrastructure refers to low-carbon climate-resilient infrastructure that contributes to the mitigation of greenhouse gas emissions and adaptation efforts to climate change. Investment for low-carbon climate-resilient infrastructure provides new business opportunities and promotes capacity building in developing countries vulnerable to the adverse impacts of climate change. It has been shown that the amount of investment in climate-related infrastructure is steadily increasing, particularly in developing markets. Based on forecasts for infrastructure needs that factor in climate change, this study focuses on three sectors – energy (power), transportation and water – to perform our analyses and case studies.
   In Chapter 3, the current trends of investment for climate-resilient infrastructure provided by multilateral, bilateral and private actors are analyzed. Multilateral development banks and climate funds can bridge recipient countries and private investors. The six major multilateral development banks mobilized an average of $22.05 billion in investment annually in climate-resilient infrastructure projects for the last six years(2012~17), with the energy sector (renewable and energy efficiency) receiving the majority of these funds. Meanwhile, from bilateral perspectives, Korea allocates only 9.3% of its ODA budget into climate-related projects while members of the OECD Development Assistance Committee (DAC) provide 19.1% of their ODA support for climate projects.
   Since infrastructure projects require significant amounts of funds and inevitably entail risks to be shared among investors, most of the projects are conducted as public-private partnership (PPP) projects. According to the World Bank, private participation in infrastructure increased from $88 billion in 2008 to $150 billion in 2012. Energy and transportation projects received the majority of investment from private and public partnerships in 2017 and the share of energy projects has consistently increased after 2015. In addition, private climate finance and institutional investors are expected to increase their contribution to expanding investment for climate-related infrastructure. With the aim of understanding the impact of climate change and aligning this with investment decisions, the private sector has introduced numerous initiatives and efforts such as the Equator Principles, recommendations from the Task Force on Climate-related Financial Disclosures(TCFD), ESG principles and the Green Bond.
   Chapter 4 examines the key features of international climate infrastructure investment and the risk factors associated with various cases, going on to analyze the conditions in Korea and obstacles to overseas investment by Korean companies. First, in light of various previous studies, renewable energy generation, energy storage systems, electric vehicles, BRT, water resource facility and water efficiency programs are suggested as promising fields of international climate infrastructure. However, prior cases of major climate infrastructure investments promoted by multilateral development banks often revealed complexities stemming from how each sector is linked and integrated. Our case analysis of major climate infrastructure projects indicates how various strategies and means for mitigating project risks have been utilized, including support from various multilateral climate funds, financial safety measures such as exchange rate indexation, participation of experts in the international community, and the adoption of comprehensive capacity building programs.
   In Korea, on the other hand, various overseas investment support systems are in operation for general and climate infrastructures, but problems such as insufficient mainstreaming of climate change agendas throughout the support system, lack of a dedicated platform for climate infrastructure, biased support for renewable energy, and lack of experts outside of the EPC areas. Over the past decade, Korean companies have been expanding overseas, mainly in the field of renewable energy. However, as a result of the interviews and informal surveys conducted on participants in climate infrastructure projects, a lack of clear understanding of climate infrastructure, difficulties in financing, lack of domestic and overseas business performance, lack of business development and management capacity were pointed out as the major obstacles that Korean companies face.
   In Chapter 5, based on the results of the previous analysis, the following implications can be derived for government and private initiatives to promote participation in overseas climate infrastructure projects.
   First, it is necessary to establish a comprehensive support system for the whole project including the planning, construction, operation and financing of overseas climate infrastructure projects. To this end, the support system needs to perform various support functions necessary at the initial stages of the project, such as providing a wide range of business information, conducting feasibility studies for the project, and promoting participation in the project by multilateral development finance partners. In addition, the support system can serve as a window for developing projects with domestic GCF implementing organizations and for using various domestic funds. It can also provide a pool of labor that the private sector cannot secure on its own, and support training by experts in related fields.
   Second, the government should improve relevant policy measures to effectively support private sector expansion overseas in climate infrastructure. First of all, the government must provide opportunities for the private sector to participate in projects by utilizing existing infrastructure funds or expanding the contribution of climate infrastructure in policy finance, and should support domestic companies to participate in the process of developing international climate infrastructure projects led by multilateral development banks. The government should also encourage institutional investors such as pension funds and private financial companies to participate in investment projects, and induce these participants to utilize specialized financial instruments such as green bonds. In addition, the government should cooperate with the private sector to develop and propose various business models, and support expert training. Finally, in order to accumulate experience and promote the performance of domestic projects related to climate infrastructure, deregulation and promotion strategies should be prepared beforehand.
   Third, selection and concentration strategies based on promising areas are necessary for efficient utilization of limited investment resources. Based on this analysis of the characteristics of the international market and precedents provided by climate infrastructure project cases, our study identified notable fields such as smart eco-city development, off-grid photovoltaic power generation, disaster response and recovery projects, climate-resilient agriculture and water resource projects.
   Fourth, to encourage companies to participate in investment and promote the development of government policies and regulations, it is necessary to first disclose relevant information based on a common understanding of climate change and to mainstream climate change in corporate and government decision making. First of all, the private sector should strive to transparently disclose information on risk factors, opportunities, and financial impacts associated with climate change, and develop strategies and action plans to mainstream climate change in corporate management and decision-making processes. In addition, the government also needs to redesign the system and policies for overseas infrastructure investment considering the domestic and foreign climate change issues. 

 

   In July 2017, the Moon Jae-In administration announced its New Northern Policy, aimed to create a new northern economic space and strengthen connectivity between Korea and the Eurasian continent. Vitalizing Korea–Russia economic cooperation is an important factor in realizing the policy. In this regard, Korea needs to come up with new economic cooperation measures which correspond to Russia’s socio-economic conditions, industrial policy and regional development plans. This study focuses on Russia’s Far East development policies and Korea’s measures to cooperate in the region. The Russian Far East has abundant natural resources and is situated relatively close to Korea. However, high living costs and poor housing and transport infrastructure conditions deteriorate the quality of life in the Far East, resulting in chronic depopulation. Moreover, the commodity-dependent industrial structure has to be improved and diversified for sustainable economic growth. Considering all these factors, this study suggests to seek cooperation in the Far East’s key and growing industries such as the mining, transport, fishery sectors. In addition, Korea can foster new cooperation projects in the high technology and services sectors.
  The Far East development policy carried out in Putin’s third term was targeted mainly at regional development and investment promotion. The major achievements of the policy can be summarized as the establishment of an institutional base, such as with the advanced development zones, Vladivostok free ports and the Far East Hectares. The challenges in the coming years will be to specify development plans and investment projects, improve the business climate, and raise the quality of life, among others. The policy will continue in a similar manner during Putin’s fourth term as well, but with more focus on increasing the quality of life. Whether the ultimate goal of the policy will be successfully achieved is now up to whether the authorities can find appropriate ways to distribute benefits from development while efficiently managing the institutions that have been adopted.  
   China’s strategy towards the Far East has expansionary features, focusing on transport connectivity. China and Russia relations became stronger after the imposition of Western sanctions on Russia. The two nations formed a foundation for more detailed and practical economic cooperation by establishing funds for investment projects in various fields. The two sides are seeking new projects in the high-tech, manufacturing, agriculture and tourism sectors.
   Japan’s strategy towards the Far East is to expand a business model that has been domestically successful and applying this to the Far East. Japan has traditionally concentrated its investment in the energy sector, especially in Sakhalin Oblast. Recently, however, the country is trying to employ its comparative advantage and know-how in the region, based on an 8-point cooperation plan.
   Korea established a joint investment platform with Russia in 2013. Based on this, various projects such as the Vladivostok cold storage project, Zarubino port development, Nakhodka fertilizer plant, and Sovcomflot’s oil-tanker support services projects have been discussed. However, these projects were blocked from progress due to the West’s sanctions, lagging investment climate, and lack of experience in the Far East. Responding to this, Korea proposed the “9 bridge” strategy at the 3rd Eastern Economic Forum in September 2017. The strategy is under discussion between Korea and Russia.
   Korea’s key cooperation directions towards the Far East are “9-bridge + α and trilateral cooperation between Russia, North and South Korea. The former is in the making for tangible results. The latter holds strategic importance toward forming the base for vitalizing Korea and Russia cooperation and joint prosperity in North East Asia. In fact, the trilateral cooperation is closely related with the ”9 bridge” strategy because the two already overlap in some sectors, namely in the areas of gas, railroad, electricity, etc.
   Our policy suggestions are to: 1) prepare economic cooperation action plans by sectors and by stage (short-term, mid-term, long-term) under the umbrella of the “9-Bridge+α” strategy, 2) design Korea’s cooperation strategy towards the Far East, 3) formulate comprehensive strategy for the rapidly changing international environment in the NEA, 4) seek new forms of trilateral projects, 5) enhance cooperation between regional governments, and 6) construct channels for sustainable cooperation.