Korea Needs an Economic Framework With China

○ From competitive relations to strategic partnership

The Korea-China summit has provided momentum for Korea to set up a new economic cooperation framework with China, the world’s second largest economy, which is mutually beneficial for growth.

In other words, Korea needs to abandon its black-and-white view that China threatens the Korean economy, and pursue mutual interests that strike a balance in both trade and investment between the two countries.

However, many point out that given the scale of potential damage to Korea’s agricultural, fishery and textile industries, the two countries need a careful approach when pursuing a Korea-China free trade pact.

○ Increasing Korea-China economic exchanges

Since 1992, when Korea and China established diplomatic relations, trade volume between the two countries increased dramatically. China emerged as Korea’s largest export market in 2003, unseating the United States. Last year, China was the largest exporter to Korea, outpacing Japan. Korea has come to a point where it cannot make economic progress without any active economic cooperation with China.

In the past, China exported agricultural, fishery, and textile products to Korea. But now, its export items are shifting toward capital-intensive products, such as electronic goods, boilers and steel products. Electronic equipment now accounts for a quarter of China’s export volume to Korea.

China’s economic paradigm is changing as well. It is shifting from an investment-led economy through foreign direct investment (FDI) to a consumption-led economy. The share of its private sector has increased and China is moving from a labor-intensive industry to a technology-intensive one.

“In the past, China was regarded as a country to outsource for Korean companies but now, we need to change our perspective to see how to target the giant Chinese market,” said Yoo Byeong-gyu, director of the industry strategy team at the Hyundai Economic Institute. “The two countries need to complement each other by strengthening cooperation in science, technology, finance and human resources.”

○ China helps Korean economy

The Korea Institute for Industrial Economics and Trade said that China has narrowed the technology gap with Korea from 4.7 years in 2002 to 3.8 years last year. The gaps in the steel and textile industries are each 4.1 years. But that of the electronics industry is 3.4 years and that of the automobile industry is 3.6 years.

However, it seems that growth in China’s manufacturing industry has supported growth in Korea’s manufacturing business. According to the Korea Development Institute, the share of Korean exports to China of capital goods and machinery parts was only 16.3 percent in 1992 but increased to 64.7 percent in 2006. During the same period, the percentage of intermediate goods decreased from 82 percent to 33.8 percent.

“Before the Asian financial crisis, Korea and China were in a competitive relationship in that Korea’s manufacturing production decreased as China’s exports increased,” said Han Jin-hee, fellow researcher at KDI. “However, with increases in China’s exports of machinery and parts, China’s growth has helped to boost the country’s manufacturing.”

Chinese tourists are also a key solution to Korea’s chronically weak tourism industry. Each year, as many as 40 million Chinese travel abroad. Last year, more than one million Chinese tourists (1.07 million) visited Korea, but the number is only less than half of Japanese tourists (2.23 million). In 2006, 23 percent of Korea’s tourism (8.5 billion dollars) was attributed to China.

parky@donga.com