Since the early 2020s, a series of global economic disruptions—including the escalation of the U.S.–China trade conflict, the outbreak of the COVID-19 pandemic, the Russia–Ukraine war, and persistent political instability in the Middle East—has heightened geopolitical risks across East Asia and intensified the pressure for a restructuring of global value chains. In particular, following the inauguration of the second Trump administration in 2025, deepening political and economic tensions between the United States and China have exerted a substantial impact on the Korean economy, which had long relied on China as a pivotal component of its value chain. Under these circumstances, ASEAN has emerged as an alternative production base to China, underscoring its growing significance as a potential partner for more dynamic and diversified value chain integration with Korea.

Major research on international supply chains and value chains between Korea and ASEAN can broadly be classified into two categories:
(1) studies that analyze the overall industrial structures of Korea and ASEAN member states to identify complementarities and substitutabilities between the two regions, and (2) studies that investigate the general patterns of trade relations between Korea and ASEAN.

Empirical analyses drawing on more than two decades of statistical data indicate that trade and investment flows between Korea and ASEAN have expanded significantly, leading to the formation of complementary value chains shaped by differences in per capita income levels, wage structures, and resource endowments.

However, as most existing studies concentrate on national and industrial levels, they do not directly examine the activities or organizational structures of firms—the fundamental entities that constitute supply chains. These studies also fail to differentiate among various types of firms, including large corporations, small and medium-sized enterprises (SMEs), and foreign-invested companies operating within ASEAN. The present study seeks to address this limitation by conducting a firm-level analysis of ASEAN enterprises in order to identify the structural patterns and distinctive characteristics of value chains linking Korea and ASEAN.

The scarcity of firm-level analyses on Korea–ASEAN value chains can be attributed to several factors. First, comprehensive datasets and statistics on individual firms are largely unavailable in most ASEAN countries. Owing to relatively low income levels and limited corporate transparency, substantial portions of firm-level information are not publicly disclosed. Although listed companies are required to publish data in accordance with stock exchange regulations, the absence of well-established international accounting standards reduces the reliability of these statistics. Furthermore, a considerable number of firms remain unlisted and are therefore under no legal obligation to disclose their financial or operational information.

Second, even when firm-level data are obtainable at the national level, the process of compiling and analyzing regional datasets encompassing all ASEAN member states remains an extensive and resource-intensive undertaking. Given that ASEAN comprises ten countries, each with a vast number of enterprises, the collection and harmonization of such data represent a formidable challenge that is both time-consuming and difficult for individual researchers to execute independently.

To overcome these constraints, the present study assembled a comprehensive dataset on ASEAN firms and conducted the following analyses. First, financial information from listed companies across nine ASEAN stock exchanges was collected and systematically examined. The available data primarily encompassed indicators such as assets, liabilities, and profitability. A standardized analytical framework based on these financial metrics was employed to facilitate cross-country comparisons.

Second, for unlisted large firms, major representative companies in each country were selected, and publicly available information—such as newspapers, magazines, promotional materials, and websites—was used, given the lack of systematic financial data. For SMEs, the study relied on existing research on their characteristics and expert interviews.

Third, to examine the potential for cooperation between Korean and ASEAN firms, the presence and activities of Japanese and Chinese firms operating in ASEAN were also reviewed. Although most of these foreign companies were unlisted and reliable statistical data were limited, publicly accessible information sources were used.

The results of the analysis are as follows:
First, listed firms in ASEAN are mainly concentrated in (a) the domestic service sector, (b) the manufacturing sector—particularly food production, and (c) export-oriented mining and resource development. Within manufacturing, food processing had the highest share, followed by chemicals, basic metals, and rubber/plastics—indicating a focus on agro-processing and natural resource–based industries.

Second, unlisted large firms in ASEAN mainly focus on (i) domestic- oriented businesses and (ii) resource development. Specifically, they dominate sectors such as retail, real estate, and food production on the domestic side, and energy and resource extraction (e.g., oil, coal, cobalt, lithium) on the export side. These firms often operate as monopolies or oligopolies with close political ties and family-based management, resulting in non-transparent governance structures.

Third, while definitions vary by country, ASEAN SMEs are generally small in scale and concentrated in the service sector. They face limited access to finance, weak technological foundations, insufficient use of digital technology, and low productivity.

Fourth, Japanese and Chinese firms in ASEAN show distinct characteristics. Japanese firms have been active since the early 1990s, building regional value chains in electronics and automotive sectors, while also investing in local infrastructure and human resource training. In contrast, Chinese firms entered later, mainly after the 2010s, driven by the Belt and Road Initiative and China’s efforts to mitigate trade frictions with the U.S. Their investments have focused on large-scale, resource-related infrastructure projects financed by Chinese banks.

Fifth, Korean firms in ASEAN exhibit the following characteristics. Their initial entry in the 1990s was led by labor-intensive industries that were declining in Korea, expanded in the 2000s, and more recently diversified into electronics and automotive manufacturing, sometimes leveraging local natural resources. Large Korean firms operate local plants mainly in manufacturing, importing intermediate goods from Korea and exporting finished products to third countries. Many Korean SMEs and mid-sized firms function as suppliers to these large Korean firms, providing components and intermediate goods through local operations. However, cooperation with Japanese, Chinese, or local firms for parts procurement remains limited.

Future changes in Korea–ASEAN supply chains will depend on the evolution of ASEAN firms’ industries and roles. If ASEAN firms continue their current business models without expanding into manufacturing, Korea’s regional supply chains and value chains will likely continue to rely primarily on Korean firms operating locally.

In this case, the Korean government should implement policies to improve the productivity of Korean firms in ASEAN. Rising wages, land rents, and transport costs could erode profitability and even drive firms to relocate to other regions. As Latin America, India, and Africa are not yet viable alternatives, Korea must pursue policies that enhance labor productivity and business efficiency in ASEAN.

The most practical approach is to increase local labor productivity and reduce costs such as logistics.
1. Education and training for ASEAN workers are needed to upgrade them from unskilled to skilled or semi-skilled labor with higher productivity.
2. Management consulting should be provided to improve the productivity of both Korean and local firms in ASEAN.
3. Cooperation between large and small Korean firms should be strengthened to enhance overall supply chain efficiency.
4. Infrastructure support is crucial to control rising logistics costs—through port and road construction, customs digitalization, and energy system improvements.
5. New industrial parks and free trade zones should be established to mitigate rent and logistics cost increases.

To effectively promote these policies, several urgent tasks must be addressed: First, the Korean government and the public must recognize that supporting Korean firms in ASEAN is part of building global supply chains and value chains that contribute directly to Korea’s economic growth. Many policymakers and citizens still perceive international trade as simply exporting domestically produced goods abroad, overlooking the complex cooperation among firms across borders. Public communication and education should emphasize that supporting Korean firms in ASEAN ultimately strengthens Korea’s own industrial base.

Second, Korea should actively utilize ODA (Official Development Assistance) funds in ASEAN. Currently, about 23.8% of Korea’s ODA goes to ASEAN countries—five of which (Indonesia, Vietnam, Cambodia, the Philippines, and Laos) rank among Korea’s top ten ODA recipients. If ODA projects are designed to include participation by Korean firms in ASEAN, the effects of value chain formation could be maximized.

Third, political and business exchanges between Korea and ASEAN should be expanded through regular forums and seminars to build mutual understanding and cooperation.

Finally, youth and academic exchanges between Korea and ASEAN should be encouraged, as young people will be the future leaders of business collaboration between the two regions.

The study examines methodologies for quantitatively analyzing the impact of global supply chain fragmentation and applies these approaches to scenarios involving critical minerals. It identifies two primary analytical approaches: microeconomic and macroeconomic.

Microeconomic methods provide detailed insights at the item or firm level but face challenges due to limited access to specific supply chain data. Macroeconomic methods, while suitable for industry- or national-level analysis, often rely on unrealistic assumptions when applied to item-level fragmentation. Despite the significant macroeconomic effects of disruptions in critical supply chains, existing item-level analysis techniques struggle to capture these impacts accurately. For instance, efforts to link item-level analysis with GDP using linear programming or inoperability input-output analysis often encounter limitations due to rigid assumptions about input-output structures. High-tech items, in particular, pose challenges due to their complex supply chain interdependencies and their significant influence on final production.

To address these issues, the study proposes an integrated methodology combining machine learning techniques for microeconomic analysis with the OECD METRO model for macroeconomic evaluation. This approach considers key issues and transmission channels identified in previous research. The study also reviews critical mineral management policies in major economies such as the United States, European Union, China, and Korea. The United States identifies critical minerals essential for economic and national security through legislative measures like the 2020 Energy Act and has implemented strategies to strengthen North American supply chain resilience. The European Union has updated its critical raw materials list every three years since 2008 and enacted the Critical Raw Materials Act in 2024 to expand production capacity and enhance international cooperation. China, despite lacking a clear legal definition of critical minerals, strengthens its resource management through export controls and cooperation with resource-rich countries. Korea designated 33 minerals as critical through its 2023 Critical Minerals Securing Strategy, prioritizing 10 strategic minerals essential for industries like electric vehicles and semiconductors. However, Korea’s reliance on imports for most critical minerals highlights its vulnerability.

The study conducts a vulnerability analysis of Korea’s critical mineral supply chains using indicators such as the Trade Specialization Index (TSI) and Herfindahl-Hirschman Index (HHI). It identifies high global supply chain concentration in minerals like cobalt, lithium, and neodymium, which are crucial for secondary batteries and electric vehicles. To assess geopolitical risks, it examines import trends from China across seven countries from 2017 to 2023. Sharp declines in imports of gallium, graphite, and rare earth elements suggest potential disruptions due to trade conflicts or export controls.

The study employs a Dual-Stage Attention-Based Recurrent Neural Network (DA-RNN) model to predict the impact of critical mineral fragmentation on Korea’s exports of key items like batteries and semiconductors under three scenarios involving germanium, graphite, and rare earth elements. The results show significant decreases in export values across all scenarios. For example, restrictions on germanium imports led to a 3.9% decline in battery exports, while rare earth element shortages caused a 10.8% drop.

Using the OECD METRO model, the study evaluates the macroeconomic impact of critical mineral fragmentation under two approaches: direct analysis of import disruptions (Approach 1) and integration of microeconomic results into macroeconomic simulations (Approach 2). The findings indicate that germanium fragmentation could reduce Korea’s real GDP by 0.15%, while graphite and rare earth element disruptions could lead to decreases of 0.14% and 0.89%, respectively.

Based on these findings, the study recommends strengthening supply chain monitoring systems by integrating fragmented platforms across government agencies and establishing a centralized control tower. It also suggests diversifying procurement strategies, promoting R&D for substitute materials, and supporting SMEs through digital-based supply chain management platforms. Additionally, it emphasizes harmonizing policies with major economies to prevent over-securitization and redundant investments while expanding international cooperation for joint mineral exploration and development projects.

Foreword

Part 1 Key Policies for Open Strategic Autonomy
01. The Evolution of South Korea’s Economic Security Strategy | Seungjoo Lee |
02. Partners Under Pressure: Strengthening Dutch-South Korean Economic Security Amid a Fractious Indo-Pacific | Richard Ghiasy |
03. Toward a Strategic Partnership in Science and Technology between Korea and the Netherlands | Myong Hwa Lee |
04. Cooperation on Control Points is Needed for Strategic Autonomy | Joris Vierhout, Amber Geurts |

Part 2 Key Technologies for Open Strategic Autonomy
01. Korea–Netherlands Cooperation Agenda for Advanced AI Semiconductor R&D | Seokjoon Kwon |
02. Quantum Technology as a New Frontier of Cooperation: NL-ROK Partnership Opportunities | Anna Grashuis, Ingrid Romijn, Ulrich Mans, Mayra van Houts |
03. ROK-NL Strategic Cooperation in Energy Security | Sunghun Cho |
04. Key technologies for Open Strategic Autonomy in Korea and the Netherlands: Critical Raw Materials for Defense | Irina Patrahau, Benedetta Girardi |

Conclusion and Policy Recommendations

As has recently been observed, the global economic order is undergoing a profound transformation. The intensifying geopolitical rivalry among great powers, the retreat from multilateralism, the resurgence of protectionist policies, and the weaponization of trade and technology have shaken the foundation of the open and inclusive global economic order, which has been around for a long period. These changes underscore the growing importance of technological leadership, secure supply chains, and resilient industrial ecosystems in shaping the economic security and strategic autonomy of individual nations. However, pursuing security and autonomy does not mean isolation. Ironically, the necessity for like-minded countries to cooperate has never been greater, as no single nation can cope alone with the shift in the global economic order.

The Republic of Korea and the Netherlands, as middle powers and trading nations, share a deep interest in preserving the stability, openness, and resilience of the global economy, which ultimately contribute to the prosperity of all participating countries. South Korea, for example, has long been a globalized manufacturing power house, heavily relying on global value chains to support its growth. However, a series of shocks, including China’s economic retaliation over THAAD, Japan’s export controls, the COVID-19 pandemic, and US–China technology competition, revealed structural vulnerabilities of Korea’s export-oriented economy. Korea’s new economic security strategy, as detailed in this volume, reflects efforts to reconcile its position as an export leader and an import-dependent economy. Similarly, the Netherlands, one of Europe’s most open trading nations, faces the challenge of mitigating risks while preserving openness. The country positions itself as a logistics hub, a high-tech innovator, and a host of globally competitive firms such as ASML. As the European Union attempts to lower its external dependencies in strategic sectors, the Netherlands plays a significant role in shaping Europe’s economic security agenda.

Against this backdrop, Korea and the Netherlands emerge as natural partners. Their complementary strengths in semiconductors, advanced manufacturing, quantum technology, and clean energy transition can create opportunities for them to build resilient supply chains and shape global standards jointly. Their partnership also aligns with broader Indo-Pacific regional frameworks, including the EU–Korea Strategic Partnership and the international component of Horizon Europe, positioning both countries to contribute to a stable, rules-based global order.

This edited volume, “Industrial Open Strategic Autonomy in the Indo-Pacific: Focusing on High-tech Industrial Innovation and Supply Chain Security”, examines how Korea and the Netherlands can deepen their cooperation across key policy areas and critical technologies to advance open strategic autonomy. Drawing on contributions from leading experts, the volume is organized into two parts. Part I analyzes the policy foundations of economic security and strategic autonomy and Part II explores the technological domains essential to achieving these goals. Based on the authors’ in-depth analyses, three main recommendations for ROK-Netherlands cooperaion on open strategic autonomy are suggested: first, establish a shared economic security foresight mechanism. Third, coordinate sustainable supply chain resilience. Third, coordinate sustainable supply chain resilience.

The importance of tariff measures in recent international trade has been highlighted again with the universal tariffs and reciprocal tariffs of the second Trump administration in the United States, as well as the retaliatory tariffs from trade partners. Interest in their economic effects is growing day by day. To properly analyze these economic effects, it is essential to accurately estimate the tariff elasticity of trade. This study comprehensively analyzes the main content of previous researches on the tariff elasticity of trade through a literature review, presenting various theoretical grounds and analytical methodologies. We applied these to Korea’s 2014 import clearance data to empirically estimate tariff elasticity. The main contents and analysis results of this study are as follows.

First, this study introduces the basic theoretical model of Fontagné et al. (2022) and derives an equation to estimate tariff elasticity. According to this, the tariff elasticity of trade can be estimated by the elasticity of substitution between items. If a consumer can easily substitute another product when the tariff of a specific product rises, the import of that product is expected to decrease more actively.

Second, this study suggests the possibility of developing a more realistic model based on the basic theoretical model of Fontagné et al. (2022). Particularly, the development of theoretical models and empirical analysis strategies that appropriately reflect other factors affecting tariff elasticity in addition to the elasticity of substitution between items is necessary. These suggestions can be categorized into 1) the level of hierarchy in the CES utility function, 2) consideration of the export supply function, 3) the possibility of partial pass-through, 4) consideration of other trade costs, 5) resolution of endogeneity issues, and 6) consideration of the customs valuation.

Third, this study investigated several empirical analysis studies on the tariff elasticity of trade. The results showed that the estimated value of tariff elasticity of trade ranged from an absolute value of 2.5 to 5.1 on average, but the variance was quite large depending on the sample, data characteristics, and analysis methodology. By country characteristics, it was confirmed that the greater the market dominance of the importing country, and when the exporting country is a developed country, the smaller the tariff elasticity of trade. Also, tariff elasticity was relatively large when there was a bilateral trade agreement, but smaller in cases of past colonial relationships, large price gaps, or great geographical distances. By industry and item characteristics, homogeneous and standardized products such as agricultural and mineral products had higher tariff elasticity, while heterogeneous products like machinery and textiles had lower tariff elasticity. In terms of industrial structure, the higher the use and diversity of intermediate goods, the greater the productivity differences between items within the industry, and the more products traded on regular exchanges, the higher the tariff elasticity of trade. Regarding market competitiveness and structure, the more intense the market competitiveness, the higher the tariff elasticity, but items with larger profit margins had lower tariff elasticity. It was also confirmed that various non-price competitive factors such as technological advantages and brand awareness were important. By firm characteristics, tariff elasticity of trade was greater when strategic complementarity between firms was high but smaller when firm productivity was high. Regarding data characteristics, the finer the aggregation level of item classification, the greater the tariff elasticity appeared. It was also confirmed that the analysis period and scope, data source, and consideration of proxy variables could also affect changes in estimated tariff elasticity.

Fourth, this study applied these discussions to the quarterly HS 6-digit import clearance data of Korea in 2014 to estimate tariff elasticity. The empirical analysis methodology mainly considered the Poisson Pseudo- Maximum Likelihood (PPML) estimation based on the structural gravity equation. The empirical analysis results estimated the absolute value of tariff elasticity to be about 5 to 10, confirming it to be similar to existing previous studies. However, it was found that the estimated tariff elasticity significantly differed statistically depending on the aggregation unit of the product, and the pattern of difference varied according to the setting of fixed effects. By product characteristics, the tariff elasticity of consumer goods was the highest, followed by intermediate goods and capital goods. By product group, the tariff elasticity of homogeneous items such as mineral products was estimated to be very large with an absolute value of 10 or more, but statistically significant elasticity was not observed in some product groups such as stone and ceramics. To verify the robustness of the main analysis results, both the log-linear equation and asymptotic bias-corrected PPML estimation method were applied, but the analysis results were qualitatively similar and statistically significant consistently.

Based on these analysis results, this study draws the following implications. First, the government should manage and pay close attention to the elasticity of substitution between similar products when establishing tariff policies. In particular, since the elasticity of substitution varies by industry and item, tailored tariff policies that consider the characteristics and substitutability of each industry and item are necessary. Especially for homogeneous products like agricultural and mineral products, meticulous policy design is required as they are sensitive to tariff changes. Second, the government should consider various factors in addition to the elasticity of substitution when establishing tariff policies, including economic and political relations with trade partners, strategic behavior of related firms, and market competition structure. Comprehensive consideration of these variables becomes a prerequisite for the government to design more effective and sustainable tariff and response measures. Third, when estimating tariff elasticity as a basis for policy, the aggregation method of data is crucial. In particular, it is important to divide the data in detail by item rather than total data to design the correct policy. Fourth, in analysis methodology, appropriate fixed effects should be selected by fully considering the analysis purpose and data characteristics. Fifth, when establishing and evaluating trade policies, careful consideration of other trade costs, such as freight insurance rates, in addition to tariffs is necessary. Lastly, regarding empirical analysis techniques for estimating tariff elasticity of trade, it is proposed that the general PPML estimation method is a sufficiently reliable and valid approach for analyzing tariff elasticity.

This study comprehensively analyzes cross-border investment and spillover effects of artificial intelligence (AI) technology in the era of the 21st century’s paradigm shift toward an intangible asset-centered economy, and proposes policy directions for enhancing Korea’s AI industrial competitiveness. The research particularly focuses on exploring effective response strategies that technology-follower countries like Korea can adopt in a situation where global AI investment is extremely concentrated in the United States and China.

Examining the research background, the proportion of intangible assets in the market value of major global companies has surged from 17% in 1975 to 90% in 2020, with global AI investment reaching approximately $252.3 billion in 2024, a 17-fold increase from 2013. However, while the United States accounts for over 60% of global AI investment, Korea represents merely 1.5-2.0%, revealing an extreme polarization of technological hegemony with 93% of AI-related patents concentrated in the US and China. In this context, although Korea possesses successful technology catch-up experience in manufacturing sectors from the past, the AI era’s technological competition presents fundamentally different challenges due to the characteristics of intangible assets—high initial development costs and near-zero marginal production costs.

Starting from this problem awareness, this study systematically conducted historical experience analysis, global AI investment status surveys, theoretical model construction, and empirical analysis using the GVAR model. Analysis of Korea’s past technology spillover experiences revealed that Samsung Electronics’ case of overcoming a 5.5-year technology gap in the memory semiconductor sector demonstrated the importance of systematic technology partnerships and continuous R&D investment. In the IT hardware sector, economic benefits related to productivity improvement increased approximately 3.7-fold from 76.4 trillion won to 286.4 trillion won during the 2000-2005 period.

Through theoretical model analysis, the study confirmed that when intangible asset investment spillovers occur from technology-leading countries to technology-adopting countries, the adopting countries can achieve higher utility while investing less. Furthermore, under an appropriate spillover royalty system, benefits can accrue to both leading and adopting countries; however, the findings suggest that adopting countries need to maintain continuous intangible asset investment to prepare for potential spillover cessation by leading countries due to narrowing technology gaps.

The empirical analysis using the GVAR model yielded particularly noteworthy results. When Korea experienced an AI-related FDI outflow shock, domestic real GDP increased by 0.33%, while FDI inflow shocks resulted in only a 0.19% increase, confirming that technology acquisition through overseas investment may show stronger economic correlations. Stock indices showed a positive response of 0.75% to FDI outflow shocks and a negative response of -1.61% to FDI inflow shocks, indicating that markets tend to positively evaluate overseas AI investment from the perspective of securing future competitiveness.

Synthesizing these analytical results, this study presents the following policy implications. First, considering that overseas AI investment shows stronger economic correlations than domestic investment attraction, it is necessary to establish an institutional foundation that supports Korean companies’ investments and joint ventures with global AI companies and facilitates the return of acquired technology and talent to Korea. Second, given the 83-fold investment gap with the United States, rather than competing in all AI fields, a strategy of selection and concentration in specific areas such as AI hardware-software convergence that leverages Korea’s strengths in manufacturing and IT hardware capabilities is required. Third, while effectively utilizing technology spillovers, Korea must maintain an appropriate level of independent intangible asset investment to prepare for potential technology blockades by leading countries. Fourth, Korea should pursue a balance between international cooperation and independent innovation by strengthening partnerships with the United States while also participating in the establishment of AI technology cooperation networks within the Northeast Asian region.

In conclusion, this study suggests that for Korea to bridge the technology gap in the AI era and secure sustainable competitiveness, it needs to reinterpret past success patterns to fit the characteristics of the AI era and adopt a differentiated approach through selection and concentration. Particularly, an integrated strategy linking technology acquisition through overseas investment with the construction of a domestic innovation ecosystem is required, along with the establishment of a flexible policy framework capable of responding to the rapidly changing global AI technology environment.

As strategic competition between the United States and China intensifies, tensions in the Taiwan Strait are escalating. The wars in Ukraine (2022) and between Israel and Palestine (2023) have further heightened global uncertainty. The Council on Foreign Relations (CFR) has designated Taiwan as the most dangerous region since 2021. U.S. military, intelligence leaders, and academic experts have warned of potential military conflict over Taiwan by 2027, and numerous reports assume U.S. intervention in the event of a Chinese invasion. China has conducted four large-scale military exercises around the Taiwan Strait since the visit of U.S. House Speaker Nancy Pelosi during President Tsai Ing-wen’s administration (2016–2023) and following the inauguration of President Lai Ching-te (2024–present). The Trump administration’s second term further underscored China’s expanding influence and its ambitions regarding Taiwan in its Interim National Defense Strategic Guidance (INDSG) released in March 2025. Against this backdrop, the Democratic Progressive Party’s (DPP) strengthened pro-independence stance, increased U.S. legislative and military support, and China’s declaration of possible military unification have collectively exacerbated political and diplomatic instability among the United States, China, and Taiwan. In particular, Taiwan’s geostrategic value—bolstered by its advanced semiconductor technology—is gaining prominence, further intensifying U.S.-China rivalry.

As a result, there is growing focus on whether Trump’s second term will lead to a fourth Taiwan Strait crisis amid tensions between the United States, China, and Taiwan. This is because various issues surrounding Taiwan are expected to have a direct impact on the economic and industrial stability of Taiwan, South Korea, and Japan as these tensions intensify. Therefore, there is an increasing need to analyze the mutually complementary industrial structures between Taiwan and South Korea, China, and Japan, and to measure the potential ripple effects in preparation for a Taiwan crisis.

Against this backdrop, this study comprehensively analyzes the potential impact of a Taiwan crisis on the economies and industries of South Korea, China, and Japan in East Asia, based on a scenario involving Trump’s second term. It aims to examine the triangular relationship between the United States, China, and Taiwan not only from a political perspective but also from an economic standpoint.

Above all, unlike political conflicts, cross-strait relations continue to exhibit a strong structure of economic interdependence. In 2024, Taiwan’s export and import dependence on China (including Hong Kong) stood at 20.3% and 26.6%, respectively, with electrical and electronic machinery accounting for 62.3% of this trade, indicating a high level of supply chain linkage. As of 2020, six of China’s top ten exporting companies were Taiwanese firms, primarily in the information and communications sector. Taiwanese companies also remain a major source of foreign direct investment (FDI) in China, contributing significantly to tax revenue and job creation. Furthermore, measures such as China’s tourism restrictions and the partial suspension of tariff-free trade under the ECFA have not had a significant impact on Taiwan’s macroeconomy.

This duality in cross-strait relations functions in an even more complex way within the triangular dynamics of the United States, China, and Taiwan. The Taiwanese Democratic Progressive Party(DPP) government has strengthened its pursuit of independence by focusing on advanced semiconductor manufacturing and expanding diplomatic and security cooperation with the United States to counter China. In parallel, the United States, aiming to decouple its semiconductor industry from China, has deepened cooperation with Taiwan and encouraged TSMC’s investment in the U.S. through initiatives such as the CHIPS Act.

At the same time, while Taiwan pursues a strategy aligned with the United States in the semiconductor sector, it seeks to maintain strategic balance by managing its economic ties with China. Notably, Taiwan’s semiconductor exports to China (HS code: 8542) in 2024 are approximately six times larger than those to the United States. Although Taiwan’s export dependence on China is gradually declining and its reliance on the U.S. market is increasing, this trend does not indicate a complete decoupling from China, as political tensions in the Taiwan Strait persist. This pattern reflects structural factors, including rising labor costs in China, the substitution of intermediate goods due to China’s industrial upgrading, the erosion of Taiwan’s comparative industrial advantage, and the impact of the U.S. ‘Friend-Shoring’ strategy.

Moreover, under the second Trump administration, U.S. policy toward Taiwan has shifted toward a more pragmatic approach characterized by transactional diplomacy rooted in ‘America First’ (MAGA) principles. Following TSMC’s announcement of a $100 billion investment in the U.S., Washington has adopted measures such as pressuring Taiwan to increase defense spending and imposing higher tariffs, thereby exacerbating security concerns within Taiwan. Consequently, Taiwan may adjust its diplomatic strategy to prioritize practical interests between the United States and China. While the United States has enacted pro-Taiwan legislation and provided military support, ambiguity persists regarding the extent of U.S. military intervention in a Taiwan contingency, particularly in terms of defense spending commitments and the political will to resist Chinese aggression.

Therefore, Taiwan is expected to avoid transferring core semiconductor technology to the United States and focus on strengthening its domestic production capabilities to maintain its strategic position. The United States will likely continue intervening in cross-strait relations due to its need for cooperation with Taiwan, while China will accelerate semiconductor localization and maintain its involvement in cross-strait dynamics. As a result, a semiconductor security balance among the United States, China, and Taiwan may emerge, potentially stabilizing tensions in the Taiwan Strait to a certain extent (Scenario I: Status Quo Among the United States, China, and Taiwan).

Conversely, if Taiwan’s core semiconductor technology is transferred to the United States, Taiwan’s strategic value may decline as the U.S. achieves semiconductor localization, leading to reduced U.S. engagement in cross-strait affairs. Meanwhile, China would likely accelerate localization efforts and continue its intervention. If Taiwan further advances its independence agenda, U.S. support may become more limited, increasing the likelihood of intensified Chinese pressure and Taiwan’s isolation (Scenario II: Taiwan’s Isolation). In such a scenario, South Korea, China, and Japan—countries deeply interconnected with Taiwan through industrial and trade structures—would face inevitable economic and industrial losses. This study analyzes the structural impacts of the Taiwan issue on these economies, with particular attention to ripple effects in the semiconductor sector. It further quantifies production and export multiplier effects using input-output (IO) analysis and assesses competitiveness and vulnerabilities in the semiconductor industry through trade statistics (TSI, RCA, ESI, Interdependence Ratio) and the Analytic Hierarchy Process (AHP).

Through industrial linkage analysis, Scenario I: Status Quo demonstrates that industrial linkages between Taiwan and the three East Asian countries—South Korea, China, and Japan—remain intact, generating positive spillover effects on production and exports. China exhibits strong production linkages with Taiwan, while South Korea shows robust export linkages. Japan maintains a relatively stable trade structure, particularly in intermediate goods and equipment exports. Taiwan continues to play a central role in the East Asian supply chain, especially in electrical and electronic equipment, precision machinery, metal, chemical, and general machinery sectors. This suggests that the region’s industrial cooperation structure is unlikely to be easily disrupted in the short term, even as U.S.-China strategic competition intensifies.

In contrast, Scenario II: Taiwan Isolation reveals that all three countries—South Korea, China, and Japan—would suffer significant economic shocks across industries, particularly in electrical and precision machinery. The analysis indicates total losses of $161.1 billion in production-induced effects and $371.9 billion in export- induced effects. South Korea would incur $13.79 billion and $51.18 billion in losses, respectively, with relatively modest production impacts but high sensitivity in export effects, highlighting significant supply chain dependency risks. China would face losses of $120.19 billion and $232.27 billion, respectively, with substantial impacts across industries, particularly in electrical and electronic sectors. Japan would incur losses of $27.15 billion and $89.45 billion, concentrated in metal and machinery-centric industries, raising concerns about intermediate goods supply stability. Overall, Taiwan’s industrial share and multiplier effects in electrical and electronic equipment and precision machinery are the largest among these economies, underscoring its strategic role in East Asia’s supply chain.

To analyze changes in semiconductor industry competitiveness among Taiwan, South Korea, China, and Japan, this study examined export-import structures and supply chain relationships across eight key semiconductor categories. Taiwan demonstrates high export competitiveness in foundry operations (notably TSMC) focused on system semiconductors, as well as individual devices and diodes. South Korea maintains a strong position in memory semiconductors. China holds significant market shares in silicon wafers, memory semiconductors, and discrete semiconductor components, while Japan excels in semiconductor materials, parts, and equipment, including integrated circuit and discrete components.

If Taiwan’s semiconductor exports were to cease, the impacts would be as follows: South Korea would face bottlenecks in system semiconductors, disrupting production and undermining competitiveness in high-value-added ICT industries such as smartphones, AI semiconductors, and telecommunications equipment. Supply disruptions of intermediate goods, including diodes and transistors, would lead to production delays and higher costs. China would urgently need to secure alternative suppliers for system and memory semiconductors, integrated circuit components, and silicon wafers, with supply gaps in high-performance chips creating critical vulnerabilities in AI and high-performance computing. Japan, heavily dependent on system and memory semiconductor imports, would face production setbacks in automotive and advanced manufacturing due to disruptions in automotive semiconductors and control chips. Additionally, a halt in exports to Taiwan could trigger secondary declines in Japan’s exports of semiconductor materials, components, and equipment.

According to the results of the Analytic Hierarchy Process (AHP) analysis, changes in Taiwan’s semiconductor supply chain are recognized as a complex variable encompassing risks across geopolitical, technological, supply chain, and economic dimensions. In Scenario I: Status Quo, where Taiwan’s semiconductor competitiveness strengthens, South Korea (0.3229) and China (0.2915) are the most affected. South Korea’s vulnerability stems from technological competition pressure with Taiwan and excessive supply dependency, whereas China’s vulnerability is driven by its strategic objective of narrowing the technological gap with Taiwan. Differences in perception among expert groups were identified: South Korean and Japanese experts assessed South Korea’s exposure as greater, while Chinese and Taiwanese experts assessed China’s exposure as greater.

In contrast, under Scenario II: Taiwan Isolation, where disruptions occur in the semiconductor supply chain, the United States (0.2960) is expected to be the most affected, followed by South Korea (0.2595), China (0.2379), and Japan (0.2066). This reflects the United States’ high dependence on TSMC, coupled with its semiconductor self-reliance still being in a transitional phase, such that supply disruptions from Taiwan could rapidly escalate into strategic risks. In this scenario, South Korean and Chinese experts assessed the impact on South Korea as greater, whereas Japanese and Taiwanese experts assessed the impact on the United States as greater. Overall, South Korea demonstrated high sensitivity in both scenarios, indicating that its industrial structure is particularly susceptible to changes in Taiwan’s supply chain and underscoring the urgent need for measures beyond addressing simple trade imbalances to mitigate industrial security risks.

Based on this analysis, the study recommends that South Korea strengthen its supply chain resilience and secure greater strategic autonomy to effectively respond to U.S.-China strategic competition and Taiwan-related risks. This requires investment in R&D across the full value chain, including the internalization of system semiconductor production, advancement of memory semiconductor technologies, and development of next-generation semiconductor technologies. Additionally, it is essential to restructure the semiconductor industry ecosystem as a national strategic sector and establish a virtuous cycle of technology development, talent cultivation, and capital investment.

Moreover, multi-layered response strategies are necessary, including supply chain diversification, localization of core components, and strategic stockpiling of key materials, as well as enhancing global value chain stability through multilateral cooperation with the United States, Japan, and the EU. South Korea must also play a leading role in restoring WTO functions and strengthening the multilateral trade system to help establish a sustainable trade order amid global trade uncertainties. In this context, it is critical to proactively explore mid- to long-term strategies to stabilize supply chains and reinforce industrial security through comprehensive analyses that anticipate structural shocks arising from U.S.-China strategic competition and Taiwan-related risks.

Korea and Japan normalized diplomatic relations with the signing of the Treaty on Basic Relations on June 22, 1965. In 2025, the two nations mark the 60th anniversary of this normalization. Over the decades, both countries have developed their relationship through active exchanges and cooperation in politics, economics, society, and culture, underpinned by the shared values of liberal democracy and a market economy. However, historical disputes—such as the issues of wartime “comfort women” and forced labor, visits by Japanese officials to the Yasukuni Shrine, and territorial disputes over Dokdo (Takeshima in Japan)—remain unresolved. These tensions continue to negatively affect broader cooperation.

Against this backdrop, this study focuses on envisioning a future- oriented relationship. This concept emphasizes overcoming historical entanglements that hinder progress on cooperative agendas. By considering changing circumstances surrounding bilateral ties, it presents a long-term vision for Korea–Japan relations looking toward 2050, based on comprehensive analysis across various fields.

1. Diplomacy and Security: Future Vision 2050

Korea and Japan must establish themselves as responsible partners in defending democracy and a rules-based order, while jointly shaping a regional multilateral security architecture. In the context of U.S.–China strategic competition, both countries should take on proactive roles as designers of world order working to prevent war. Key measures include: Building early warning systems, Enhancing operational information- sharing technologies, Expanding public diplomacy for mutual understanding, and Strengthening trilateral Korea–U.S.–Japan cooperation to ensure sustained constructive U.S. engagement.

Looking ahead, if conditions emerge for North Korea to rejoin the international community and pursue economic development, Korea must already have a clear mid- to long-term strategy of proactive engagement. Japan’s role would be critical in this process. Coordinated engagement by Seoul and Tokyo would benefit both countries, requiring the establishment of a cooperative framework. Proposals include creating a Northeast Asia Development Bank to support North Korea’s reform, opening, and infrastructure development, serving as an institutional framework to manage the involvement of multiple state actors.

On energy and climate issues, Korea and Japan should deepen cooperation to strengthen energy security and respond to the climate crisis. This includes joint LNG procurement and stockpiling systems, collaboration on Alaska LNG projects, and nuclear cooperation such as securing enriched uranium supplies. Strategies proposed are: Establishing a high-level intergovernmental dialogue, Creating joint investment and information-sharing platforms among private companies, Expanding next-generation talent exchanges, and Linking bilateral cooperation with regional/global initiatives such as ASEAN+3 and APEC.

2. Advanced Technology and Economic Cooperation

The study identifies humanoid robotics as a promising area for Korea–Japan collaboration, based on comparative analysis of long-term national strategies and mission-oriented R&D programs. A three-stage roadmap toward 2050 is proposed, covering both technological and market/ application cooperation. Such collaboration could not only solve social challenges and enhance global competitiveness but also serve as an innovative model spreading across Asia.

In the economic field, supply chain cooperation is a top priority. Both nations face vulnerabilities due to high external dependence on energy, food, and minerals. With similar levels of economic development and shared values, Seoul and Tokyo should institutionalize economic security and industrial cooperation, eventually pursuing binding trade agreements.

Financial cooperation is another priority. The two countries should extend or renegotiate the bilateral currency swap agreement, set to expire in March 2026, and expand its scale. A yen–won swap mechanism could also be used for trade settlements, broadening its utility.

The study highlights green economy cooperation, focusing on hydrogen and ammonia. By sharing a vision for carbon neutrality by 2050, the two governments can lay the groundwork for long-term cooperation. The situation calls for “practical” agendas to address shared challenges in realizing a hydrogen society.

In the blue (marine) economy, opportunities for cooperation include: Joint development of seabed resources (oil, gas, rare earths) and offshore wind expansion; Technology collaboration on smart ports, autonomous vessels, and maritime communication; and Building interoperable port automation systems and smart port networks.

The upcoming termination of the Korea–Japan Continental Shelf Agreement demands a long-term vision. Considering China’s persistent claims and global climate change, Seoul and Tokyo could explore turning this area into a trilateral (Korea–Japan–China) cooperation zone, or even a “Korea–Japan–China+U.S.” arrangement, in light of the U.S.–China strategic competition. Korea should take the initiative to make the Joint Development Zone (JDZ) a space for cooperation, not competition.

Finally, the study stresses the role of minilateral cooperation within platforms such as the RCEP and IPEF. Such arrangements can generate tangible outcomes despite limitations in bilateral institutionalization. Korea and Japan should use existing agreements strategically, strengthen RCEP-based Korea–Japan–ASEAN cooperation, and lead digital transformation initiatives. Proposals include: Leading discussions on rules of origin and carbon reduction in RCEP, Launching joint digital pilot projects, and Supporting ASEAN digital capacity-building.

3. Social Dimension and People-to-People Ties

Both Korea and Japan face demographic crises of ultra-low fertility, aging, and population decline, leading to regional extinction—i.e., the disappearance of local communities. Policies for 2050 must focus less on raising birth rates and more on structural adaptation. Cooperation could include policy exchanges, youth and startup collaboration, digital regional revitalization, and cultural-tourism projects.

The study emphasizes the central role of youth in shaping future relations. Exchanges through culture, travel, and social media have brought younger generations closer than ever. However, asymmetries exist: in 2024, two-thirds of bilateral visitors were Korean, and Korean participation in student and youth exchange programs far exceeded Japanese. Reducing this imbalance is key to fostering mutual understanding.

The role of the media is also crucial. Korean and Japanese media should move beyond sensationalism in reporting on historical and territorial disputes, providing balanced, context-rich coverage. To this end, proposals include creating a Korea–Japan Media Monitoring Committee and launching a joint “Future Journalism” program at leading universities of both countries.

For cultural industries, three proposals are made: Government cooperation to expand exports of cultural content, Joint measures against illegal overseas distribution, and Support for Korean startups entering the Japanese market.

4. Conclusion: Entering a New Era The year 2025 represents both reflection on the past 60 years and exploration of the next 60—effectively marking the first year of a new Korea–Japan era. Yet both countries face unstable political leadership and external pressures from “Trump 2.0,” with heightened tariff and alliance burden-sharing demands limiting space for long-term vision.

Nevertheless, bottom-up dynamics are favorable: public perceptions are more positive than ever, and the two economies are deeply intertwined. Both nations share a vital interest in defending openness and free trade amid global protectionism.

Therefore, the future vision must move beyond bilateral reconciliation, instead focusing on cooperative agendas that ensure the well-being, prosperity, and welfare of future generations. Despite domestic political risks and external challenges in 2025, the responsibility of the current generation to contribute to this vision is more urgent than ever.

Since the onset of the U.S.-China trade dispute, economic tensions between the two countries have persisted, with the Biden administration maintaining a hardline stance on China. With the recent return of the Trump administration, a large-scale tariff war is once again anticipated, making thorough analysis and policy responses increasingly critical. This study examines the impact of the tariff war triggered by the U.S.-China trade dispute on the Korean economy, and derives policy implications based on the findings.

First, the U.S. tariff increases on Chinese goods have led to a decline in Korea’s exports to the U.S. and a reduction in imports from China, thereby reshaping trade flows. However, the strengthening of U.S. non-tariff barriers has increased Korea’s exports to the U.S., particularly in consumer goods, suggesting that Korea can play a crucial role as an alternative supplier. Consequently, the Korean government and businesses must diversify their markets beyond key trading partners by expanding into emerging markets such as Southeast Asia and Latin America to mitigate trade risks. To achieve this, the government and research institutions should systematically collect and analyze data on the economic, political, legal, and consumer trends of these emerging markets and provide relevant insights to businesses.

Furthermore, to diversify its export industries, Korea must enhance its manufacturing competitiveness and foster high-value-added industries. Given the complementary nature of Korea’s exports of industrial goods to the U.S. with those of China, an increase in U.S. tariffs on Chinese goods could potentially lead to a decline in Korea’s exports to the U.S. Therefore, Korea should diversify its export portfolio to include not only industrial goods such as semiconductors and machinery but also consumer goods, thereby mitigating the negative impact of trade disputes. To achieve this, Korea should continuously invest in research and development (R&D) to advance products and services while enhancing industrial processes through expanded investments in Fourth Industrial Revolution technologies and R&D. Additionally, policies should be implemented to support small and medium-sized enterprises (SMEs) by promoting technological innovation and providing tax incentives to strengthen overall industrial competitiveness.

Additionally, a systematic response to non-tariff barriers is required. Amid ongoing trade disputes and rising protectionism, non-tariff barriers have been reinforced alongside tariffs, often offsetting the effects of tariff policies. Thus, focusing solely on countering the negative effects of tariff measures may introduce unnecessary uncertainty, underscoring the need for a comprehensive response that also addresses non-tariff barriers. Accordingly, response strategies should take into account the simultaneous impact of systematic trade policies, including tariff and non-tariff measures. Moreover, a preemptive monitoring and early warning system should be established to continuously track trends in non-tariff barriers and enable swift policy responses.

Next, adjustments to foreign direct investment (FDI) strategies are necessary. Following U.S. tariff increases on Chinese goods, Korean multinational corporations (MNCs) have shown a tendency to increase their FDI in the U.S., a trend particularly evident among large enterprises. Meanwhile, although the number of subsidiaries of Korean MNCs operating in China has been declining—particularly among firms with higher import shares and heavily dependent on the global value chain—, the overall scale of FDI to China has not significantly decreased. This suggests that firms are reallocating their investments in China more efficiently. In particular, U.S. tariff measures on Chinese goods have created opportunities for Korean firms to expand their investments into third countries such as ASEAN, leading to increased FDI in this region. This trend reflects ASEAN’s advantages, including low production costs and strengthened connectivity with both the U.S. and Chinese markets, positioning it as an attractive alternative investment destination for Korean firms. Therefore, the Korean government should formulate policies to support the FDI strategies of Korean businesses while also considering measures to prevent the hollowing out of domestic industries.

Finally, ensuring flexible macroeconomic stability policies, including foreign exchange market and monetary policies, is crucial. Analyzing past U.S. trade policy shifts reveals that as U.S.-China trade conflicts intensified, trade policy uncertainty increased before tariff adjustments. This led to a depreciation of the Korean won against the U.S. dollar and heightened exchange rate volatility. The impact of trade policy uncertainty did not have a statistically significant effect on Korea’s key macroeconomic variables, as its influence on exports and imports was offset by the depreciation of the Korean won. However, U.S. tariff increases negatively affected Korea’s total production and dollar-denominated exports, partially explained by changes in the won-dollar exchange rate and price levels. Therefore, it is essential to ensure that Korea’s macroeconomic policies can respond more swiftly and flexibly. Coordination between monetary, fiscal, and foreign exchange policies should be strengthened to maintain economic stability.

In summary, changes in U.S.-China trade policy have significantly increased trade costs between the two countries, leading to reduced trade volumes and rising import costs, with substantial structural impacts on third-country economies, including Korea. Consequently, the Korean government and businesses must develop strategies to adapt flexibly to the evolving trade environment, followed by further research and policy discussions should continue. In particular, to minimize the negative impact of the prolonged U.S.-China trade dispute on Korea’s trade environment, more sophisticated trade policies should be formulated, and measures should be implemented to support Korean firms’ FDI strategies amid growing protectionist trends.

Additionally, policy support should be strengthened to enable Korean firms to respond flexibly to the restructuring of global value chains. Furthermore, institutional improvements are needed to enhance the speed and flexibility of macroeconomic policies, allowing for effective responses to exchange rate volatility amid increasing uncertainty in U.S. trade policy. Through these measures, Korea must establish a comprehensive strategy to ensure continued economic growth and competitiveness despite the U.S.-China trade conflict and shifts in U.S. trade policy with other countries.

As Korea’s Official Development Assistance (ODA) continues to grow, so does the need for a more coherent research ecosystem to support effective policymaking. This reference study aims to inform policy discussions on the development of Korea’s international development research infrastructure by exploring the roles, functions, and contributions of leading research institutes in the field. Focusing on their institutional characteristics, operational models, and relevance to Korea’s policy environment, the study provides foundational insights for building a more strategic and integrated research system.

Chapter 2 provides a comprehensive review of research trends in Korea and abroad. In Korea, while academic research on development cooperation has declined over the past five years, policy- and project-oriented studies commissioned by ODA implementing agencies have increased significantly. This reflects growing policy demand, but also highlights several limitations: many of these studies are short-term, conducted on an ad hoc basis, narrowly focused on immediate issues, and often lack coherence, making it difficult to ensure continuity or generate long-term strategic value. The fragmented nature of Korea’s ODA system—where multiple ministries and agencies not only implement projects but also commission research independently—further hampers efforts to build a coherent knowledge base, foster collaboration, and strengthen long-term research capacity.

While Korea currently lacks a dedicated research institute for development cooperation, some leading international cases demonstrate more integrated and multifaceted approaches. Given the multidisciplinary and practice-oriented nature of development cooperation, specialized research institutions are expected to perform a range of functions that go beyond traditional knowledge production. These include policy advisory, monitoring and evaluation, capacity building, knowledge dissemination, global networking, discourse shaping, and responsiveness to emerging global issues.

Chapter 3 examines ten major international research institutes engaged in development cooperation, focusing on their operational models, roles, and core functions. These institutes conduct both academic and policy-oriented research, respond to emerging and priority development issues, and actively contribute to global discourse. They also disseminate knowledge through a variety of platforms and channels.

Common thematic areas include sustainable economic and social development, climate change, peace, and governance—often approached from the perspective of global public goods. Many institutes also take the lead in advancing research on topics they have strategically prioritized, such as human security, social and economic justice, and digital transformation, while conducting country- and region-specific studies in parallel. Increasingly, they are placing emphasis on evidence-based evaluations of development effectiveness and impact.

These institutions play a key role in shaping international discourse by identifying timely research agendas and spotlighting emerging issues. Their ability to offer relevant, policy-oriented insights enhances both their strategic value and practical influence. In addition, they actively promote outreach, collaboration, and global partnerships, reflecting the inherently international and problem-solving nature of development cooperation.

From an institutional standpoint, many of these research institutes operate with flexible staffing structures and conduct multi-year research projects, often in collaboration with external experts and networks. Given the complexity and multidimensionality of development challenges, such long-term engagement—supported by sustained data collection and rigorous analysis—is essential for generating credible findings. In Korea, where government budget cycles tend to constrain multi-year research, establishing a dedicated research institute with a continuous mandate could help ensure coherence and overcome the inefficiencies of fragmented, one-off studies.

Based on this analysis, the study identifies key roles and functions for establishing a specialized research institute in Korea. These include conducting regular foundational and reference studies on critical development issues, building robust knowledge repositories, facilitating knowledge sharing and dissemination, and supporting timely policy responses to international development challenges. A dedicated institute could enhance the quality, continuity, and responsiveness of research efforts, while also strengthening Korea’s engagement in global development discourse.

In the short term, it is essential to articulate a clear vision and operational framework for such an institute, and to lay the groundwork—both in terms of institutional infrastructure and government support systems—for a continuous research ecosystem. Over the longer term, efforts should focus on building institutional capacity through stable staffing, sustainable funding, deepening expertise, and strong networks. Ultimately, the institute could serve as a national knowledge hub for development cooperation research.

Executive Summary

Chapter Ⅰ. Introduction
1.1 Background
1.2 Literature Review
1.3 Data
1.4 Structure of the Report

Chapter II. Consumer Behavior in India
2.1 Consumption patterns in India
2.2 Household Financial Portfolio in India

Chapter III. Optimism and Consumer Behavior
3.1 Introduction
3.2 Estimation Strategy
3.3 Household Consumption and Saving in India in Relation to the Direction of Forecasting Error
3.4 Category 2 Consumption Expenditures Relative to Income
3.5 Food Subcategories
3.6 Saving Rate
3.7 Household Financial Portfolio
3.8 Conclusion of Chapter 3

Chapter IV. Conclusion
4.1 Summary of the Research
4.2 Discussion

References

Appendix Tables: Household consumption by region and gender

This study examines Indian household consumption and financial behaviors using data from the Consumer Pyramids Household Survey (CPHS), focusing on how spending patterns and financial strategies evolve in response to economic conditions, demographic factors, and forecasting errors.

Chapter 2 analyzes household consumption patterns, revealing that food accounts for nearly half of total expenditures, emphasizing its critical role in household budgets and food security. Non-food consumption is more dynamic, with significant shifts during the COVID-19 pandemic. Spending on non-essential categories like entertainment and dining declined, while healthcare saw a modest increase. Education and healthcare remain smaller components of spending, reflecting budgetary constraints, particularly among lower-income households where post-pandemic financial pressures further limited these expenditures.

The chapter also highlights regional and demographic disparities. Rural households allocate a larger share of their budgets to food, reflecting subsistence needs, while urban households spend more on non-food items due to higher incomes and market access. Female-dominated households allocate slightly more to health and education, suggesting a prioritization of family welfare and human capital investment influenced by socio-cultural factors. These findings underscore the need for targeted policies to address disparities in essential spending areas like health and education.

Chapter 3 explores how forecasting errors—discrepancies between expected and actual financial outcomes—shape household financial decisions, including consumption, savings, and borrowing. Households with optimistic errors increase non-food consumption while reducing savings, particularly in liquid assets like fixed deposits, favoring immediate consumption. Conversely, pessimistic households reduce spending on non-essential services while increasing savings across all asset types as a precaution against economic uncertainty.

Urban households with optimistic errors show stronger tendencies to reduce formal savings and increase spending on food and services. Rural households with pessimistic errors prioritize informal savings mechanisms but reduce food expenditure more significantly. Post-COVID trends reveal that pessimistic households intensified precautionary savings across all asset types while reducing debt exposure, reflecting heightened economic caution.

Borrowing behavior also varies with forecasting errors. Optimistic households favor informal borrowing channels like shop-based credit, especially among low-income groups with limited access to formal financial institutions. Pessimistic households broadly reduce debt exposure across both formal and informal sources, with this effect being more pronounced in rural areas. Post-COVID analysis shows that the cautious approach tied to pessimistic errors has intensified, while the impact of optimistic errors on borrowing has diminished. Overall, this study highlights how Indian households adapt their financial strategies based on economic conditions and sentiment-driven forecasting errors. It underscores significant regional and demographic variations in these behaviors, emphasizing the need for targeted policy interventions to promote balanced growth in essential areas like health and education while enhancing financial resilience across household segments. These insights are critical for designing policies that address disparities and foster stability in the face of economic uncertainty.