20 Years of the Korea-China Economic Relationship: Retrospect and Prospect

Korea-China trade passing through the initial growth period (1992-1997), adjustment period (1998-2001), and second growth period (2002-2005), is now passing through its fourth phase, the stabilization period (2006-present). Although the scale of trade has increased, there is limited accessibility of Korean exports into the Chinese domestic market while processing trade still takes large share. - In the case of Korea’s trade with China, there is a strong connection with investment in China as an investment dependent export structure. However, following from the recent strengthening of local procurement by Korean business subsidiaries in China, there has been a decrease in the export inducement effect through investments. - Despite Korean shares in the Chinese import market holding second place after Japan at 9.6% as of 2011, shares in the domestic market are lower at 6.3% following Japan (11.3%), the US (9.1%), and Germany (7.5% in 2010). Korea’s investment in China, passing through the exploratory period (1989-1991), entrance period (1992-1997), adjustment period (1998-2001), growth period (2002-2008), and transition period (2009-present), has been diversified both in industry and region. However, there has been a recent decline. - After China’s admission to the WTO, the goals of Korea’s investment in China has changed from low-wage toll processing to the domestic market. In regards to industries, there has been a gradual transition from early light industries to heavy chemical industries, as well as a recent increasing focus on service industries. - In order to energize recent inactive investment, there is a need for policies that work to (a) cooperate to expand pioneering investments into the domestic market and (b) move the existing bases of production to the inland mid-western regions that are still needed by toll processing businesses, (c) establish and utilize new Korean industrial complexes, or (d) support the small and medium-sized enterprises which have business items to invest in China. There is an emerging need by both Korea and China to create a paradigm of mutually beneficial cooperation by concluding the FTA and uncovering new cooperative fields. - The reduction of tariffs and overcoming of barriers to entrance into the service industry, through the Korea-China FTA, can provide significant momentum for advancement into China’s domestic market. - In the finance and monetary area, Korea-China cooperation has not yet reached a level of real economy, however, in the future, if there is an increase in the international use of the RMB and a lowering of the barriers to the Chinese financial market, there will be a great increase in the possibility of actual cooperative endeavors. - In Korea’s 17 future growth engine industries and China’s 7 strategic industries, because of the abundance of overlap, there is a need to make a specific cooperative strategy according to areas where the two countries have its own strength and where the two countries experience comparative disadvantage in the world market.