Japan-Korea Trade Relations - Term Paper Example

? Japan-Korea Trade Relations Japan and Korea are among the most important economies in the East Asia. Any impact on these economies would affect the rest of the economies in the region; therefore it is highly important that both the economies remain stable. In the recent past, it has been observed that without any cooperation, these economies would not be able to handle the economic crisis in the Asia. The Asian economic crisis caused both these countries to promote a closer economic relationship. This time, it was determined that mere private sector cooperation would not suffice, but the economies will have to cooperate at governmental level. Thus, it can be inferred that the trade relations between Japan and Korea are just as important for the region as they are important for these two economies. According to Yamazawa (2000), a framework is being designed that would help Japan and Korea to implement upon their plan for a closer economic relationship. The framework would also include a Free Trade Agreement (FTA) which would facilitate the trade among these two countries even more. History of Japan-Korea Trade Relations According to William James (2001), trade relations between Japan and Korea have been there since the very origin of the Korean colony in the twentieth century. Korea was good at producing primary commodities such as coal, fish, silk, iron ore, wheat, rice and fruit; therefore Korea exported these goods to Japan. Japan, on the other hand was industrially established therefore Korea imported processed products such as tobacco products, beverages, processed foods, machinery, petroleum products, and textiles. Between the years 1918 and 1928, the export of products from Korea to Japan exceeded the imports from Japan. The imports and exports were both increasing at a constant pace. It can be inferred from these facts that Japan and Korea had very strong trade relations in the past because both of them depended upon each other’s products. Japan was unable to produce enough primary commodities, therefore it had to import those products from Korea; and on the other hand, Korea was not that developed industrially therefore it had to import processed products from Japan. This trade relationship was also very important for the economy of the region as it accelerated the economic activity. The contraction of the trade relations between Korea and Japan initiated between the years 1929 and 1933 which was the period of the Great Depression. However this contraction in the trade was temporary. The trade expanded again after the year 1933. The expansion was fast and the exports to and imports from Japan were 80% of the total exports and imports. The trade relations between Japan and Korea were severed after the World War II. As compared to the exports before the World War II, Korea’s exports were negligible. The exports in the year 1953 were merely 1% of the total Grand National Product (GNP); however the imports were 10%. This difference in exports and imports affected the Korean economy in a negative way and it created a very sophisticated system of exchange rates (Hong, 1979). Due to the Korean War, trade with Japan stimulated; however the extent of imports was far larger than that of exports. The scenario changed again the trade between Korea and Japan came down to a very insignificant rate of GNP by the end of 1950s. In the 1960s, trade between Korea and Japan began to grow again and by the mid of the decade the trade relations between both these countries were established. Both the imports from and exports to Japan rose by a significant degree and they accounted for a high proportion of the total imports and exports of Korea. From the perspective of Japan, exports to Korea were 2.8% of the total exports in the year 1962 (Haggard 1990). In the early 1960s, the President of Korea had initiated designing economic reforms that encouraged trade relations with Japan. Such reforms included unification of the exchange rates and the controls on exchange were also relaxed. Policies such liberalization of imports were also encouraged in order to encourage import of goods from Japan. However, these relaxations in the import policies in Korea provided a strong opportunity for Japanese firms to enter the Korean markets. Therefore, the Japanese firms started to lobby in the Korean markets with a view that they would be able to compete the local firms and they would be acquire a significant share in the Korean market. This scenario proved to be highly unfavorable for the Korean businesses and as a result the Korean economy. Japanese economy grew stronger and Japanese firms took advantage of the relaxation in Korean policies. As a result, the President had to face severe political pressure to modify the policies as they were harming the Korean economy. Despite the political pressure, the treaty was placed through legislature in the year 1965 (James 2001). In the 1960s, the trade between Japan and Korea accelerated and the imports and exports among these two countries were higher than exports to and imports from any other countries in the world. The imports and exports increased but as a result the bilateral trade deficit between these two countries also increased significantly. The trade deficit increased from $66 million to a comparatively very large amount of $579 million. This bilateral deficit did not stop at this point, but it increased at an ever increasing rate. In the 1970s, this deficit increased even further and by the end of the decade the deficit was $2,280 million. This amount increased even further in the 1980s and by the end of the decade, the deficit had reached a very high of $6,000 million. Despite the trade policies designed by both the countries in order to bring balance to the trade relations, the trade deficit persisted. According to certain economists, this persistent trade deficit is one of the most important reasons behind the trade friction between Korea and Japan. However, it can also be said that this trade deficit was caused by the trade friction between Korea and Japan that was in existence already. Keeping the historical facts in view, it can be said that these both factors are interlinked with each other and one aggravates the other. The increasing friction in the trade relations between Korea and Japan caused increased trade deficit between both the countries. The trade deficit has also drawn political attention and it is one of the reasons behind the political friction between these two countries as well. Approaches Adopted by Korea to Handle the Trade Deficit According to James (2001), there are two approaches that have been adopted by Korea in order to handle the trade deficit. First approach is the expansion of exports from Korea to Japan. The expansion of exports to Japan depended upon the policies of Japanese authorities. Korea would only be able to export to Japan if the Japanese authorities cooperated with Korea and let the products be imported. Initially Korea was given a preferential treatment by Japan in case of imports to Japan. Japan had formed Japan’s Generalized System of Preferences in the year 1973 according to which Japan gave preferential treatment for imports from underdeveloped countries and Korea was one of the countries that were favored under GSP. However, after 1980s, imports from Korea became sophisticated and Korea was not covered under the countries favored under GSP, therefore the deficit in trade continued to increase. In the year 1998, Korea stopped to be covered under GSP and it had to compete with other markets that were not given any preferential treatment. This scenario made it even harder for Korea to stabilize its trade relations with Japan. The second approach adopted by Korea in order to handle the trade deficit has been to limit the imports from Japan through a number of ways. The means used by Korea to restrict the imports were local content schemes through which consumers were encouraged to use the local products rather than the products imported from any other country and other selective restrictions on import. Korean government also discouraged imports from Japan through Import Source Diversification Program which confined the imports from Japan to mere consumer goods, while it kept the key products such as cars from being imported from Japan. Imports of goods have been subject to the discretion of Korean authorities that only allowed certain selected products to be imported in Korea. According to Bridges (1991), the list of items to be imported was amended on a regular basis in order to keep the flexibility in the program. Japan noticed that the limitation were unfair, however it did not take any action through the international authorities. The Korean program to restrict the imports also targeted the countries that hosted the multinational firms with investment from Japan. The list of restricted kept growing and Japan was indirectly restricted from exporting to Korea. However, in the year 1991, Japan showed its concerns over the ever increasing restrictions on imports therefore Korea began to remove the restrictions over the items in a progressive manner. Despite the fact that Korea tried to reduce the restrictions on imports, it had no effect on the increasing trade deficit which kept getting worse. Reasons behind the Unfavorable Trade Relations The main reasons behind the state of trade relations between Japan and Korea are the trade deficit and the political relations between both the countries. From the historical facts and figures, it can be observed that the trade deficit in the bilateral trade between both these countries increased gradually over the decades and ultimately it became so high that it created a difficult scenario for both the countries to carry on trade without worsening the trade deficit. Apart from the trade deficit, there are political reasons behind this particular state of trade relations between Japan and Korea. The effects of the political relations were observed in the shape of certain embargoes applied by Korean authorities on the nature of items to be imported. These embargoes were indirectly pointed at Japan and Japan was unable to export those products to Korea. In the year 1998, both the countries decided to reinforce the trade relations and discussions were held in order to determine the ways in which trade relations would be developed. However, within a period of over a year, the political scenario between both the countries reached a critical state and this again affected the trade relations between both the countries. Another reason behind the unfavorable trade relations between Japan and Korea was the inequality of the composition of the imports and exports. Japan is industrially developed, however Korea depends upon its human capital. Korea has more labor intensive production units; while on the other hand, Japan relies upon machinery. Japan plays an important role in the development of industries in Korea as the machinery imports were made from Japan; while on the other hand, consumer products from Korea are imported to Japan. However, this scenario has created an imbalance in the composition of products exported and imported. Another reason behind the unfavorable trade relations between both these countries is the sentiments of the citizens against each other. According to Tong (1996), the anti-Korean sentiment in Japan is severely affecting the Japan-Korea trade relations. In Korea, the authorities ran a campaign which encouraged the citizens to use local products rather than the products imported from Japan, while on the other hand, people in Japan had anti-Korean sentiments which kept them from encouraging the trade relations between Korea and Japan. The reason behind such sentiment is the political friction between both the countries. In the recent years, matters such as nuclear research and other international matters are keeping both the countries from reaching a consensus and this scenario is affecting the trade relations between both the countries in a severe manner. Economic Significance of Japan-Korea Trade Relations Trade relations of Japan and Korea are highly significant from the economic perspective of both the countries. If the trade relations between both these countries are favorable, it would highly beneficial for Korea which would have increased exposure to investment and international trade. With the increased Foreign Direct Investment in Korea, there would be industrial development in the country which would result in the increased economic activity. This international investment in Korea would benefit the Korean economy because there would be accelerated economic activity, economic growth and the rate of employment would also increase due to the introduction of new industries. The dilemma in this situation is that; Korea will have to bring certain fundamental changes in its economic system in order to get out of the current situation that is keeping its trade relations with Japan from flourishing. Such fundamental changes may face high political and social resistance. In case of Japan, this trade relationship is also economically significant because Japan will get a new market to explore. Apart from the fact that Japan exports certain products to Korea, there are certain restrictions that keep Japan from exporting the full potential of products. With a free trade between both these countries, Japan will be able to present its products in the Korean markets and it would be able to derive increased economic benefits. Recent Developments in Korea-Japan Trade Relations Japan and Korea have been discussing reviving the economy and improving the tourism after Japan got hit by the recent earthquake and Tsunami. Japanese Prime Minister and Korean President agreed that Korea will help Japan in reviving its tourism and economy. According to a press release, it was decided that both the countries will hold exhibitions to improve trade between these countries. It was also decided that Korea will send a team in the areas that were severely hit by the natural disasters that will discuss with the local officials about different ways through which trade in the region can be improved and also about the development of the infrastructure. An agreement was also made indicating the trade of cultural items between both the countries in order to remind the citizens of both the countries about their similar origin. According to Okonogi (2010), the counry that can play an important part in strengthening the Japan-Korea reationship is China. China is one of the most powerful economies and this trilateral relationship can be beneficial for all the countries in the East Asia. Conclusion It can be concluded that the trade relations between Korea and Japan have not been quite smooth since their very inception. There have been certain factors that keep the trade between these countries from developing. According to historical facts, Japan and Korea have made a number of attempts to improve the trade. However, the imbalance in the trade between these countries kept increasing over the years till the trade deficit reached a very high point. The trades relations have been unfavorable since then, however both the countries have been trying to get improve the trade relations once again and discussions between the officials of both the countries are underway. Works Cited Beck, Peter M. A Korea-Japan Alliance. East Asia Forum, 9 June. 2011. June 17, 2011. http://www.eastasiaforum.org/2011/06/09/a-korea-japan-alliance/ Haggard, Stephen. Pathways from the Periphery: the Politics of Growth in the Newly Industrializing Countries, New York: Cornell University Press. 1990. Print. Hong, Won-tack. Trade, Distortions and Employment in Korea. Seoul: Korean Development Institute. 1979. Print. James, William. “Trade Relations of Korea and Japan: Moving from Conflict and Cooperation?”, East West Center Working Papers. Vol. 11, January 2001. Okonogi, Masao. Japan-Korea Relations in a New Era. East Asia Forum, 24 August. 2010. Web. June 17, 2011. http://www.eastasiaforum.org/2010/08/24/japan-korea-relations-in-a-new-era/ Tong, Kurt. “Anti-Korean Sentiment in Japan and its effects on Korea-Japan Trade”, Center for International Studies, MIT Japan Program. 1996. Print. Yamazawa, Ippei. “Towards Closer Japan-Korea Economic Relations”, East Asian Economic Perspectives, Vol. 11, March. 1990. Print. Read More