Economic Relations between Korea and China - Essay Example

Paper Proposal "Economic Relations between Korea and China" For centuries, China stood as a leading country, easily outpacing other countries in the arts and sciences. In the 19th century and early 20th centuries, however, China was overwhelmed by civil unrest, major famines, military defeats, and foreign occupation. It seemed like China would never catch up with the Western developed countries economically, but after the 1978 reform period, Deng Xiaoping, a hero of China, focused on market-oriented economic development and by 2000 output had quadrupled. There is no doubt that China has had tremendous effect on Korea economically, politically and culturally since early days of Korea due to proximity and Korean speaking ethic minorities living in China. We must not fail to indicate here that Korea here refers to both North and South Korea. Both of these republics have trade relations with China. South Korea and China normalized diplomatic and economic relations in 1992 and North Korea did so round about the same time. Although the relationship between Korea and China had ceased during the Cold War, the reestablishment of diplomatic relations had led to a surprisingly rapid growth of bilateral exchanges. Statistics show that Korean Foreign Direct Investment (FDI) to China has increased at very fast rate and continuous to increase as China has become the second most viable destination for investment after the United States. The development of economic relations between South Korea and China over the past decade has been dramatic. At the beginning of the 1990s, China was a relatively minor trade partner for South Korea, yet by the end of this year China will have become South Korea's dominant partner in trade and investment. 1Earlier in 2003, China claimed the top spot from the U.S. as a destination for Korean foreign direct investment. "Such developments are all the more remarkable in light of the fact that South Korea and China only normalized diplomatic and economic relations in 1992. The truth be told, however, when Korean trade with Hong Kong and Taiwan (much of which is actually destined for or emanates from China) is factored in; these milestones were actually passed much earlier. In numbers, direct bilateral trade between Korea and the PRC has gone from $4.4 billion in 1991, the year before the normalization of relations, to $41.1 billion in 2002 and has already reached $39.8 billion in just the first three quarters of 2003."2 China's entry into the WTO had caused them to grow quite rapidly. The recent brisk exports from Korea to China have also been a key factor in the economic growth of China. This growth had caused demand for electrical equipment, semi-conductors and communication equipments which are the main exports of Korea. For an example, North Korea's trade volume hit a new record in 2004, approaching $1.38 billion. North Korea's exports to China topped $582 million, up 47.2 percent compared with 2003. Imports totaled $795 million, up 26.5 percent from the preceding year. North Korea's total trade volume for 2005 reached nearly $2.9 billion. 3 This increase in North Korea's exports to China can be attributed to the increase in exports of crabs, fish, and shellfish; metal products; and textile goods. It is also interesting to note that the North's increase in imports from China is mainly attributed to the increase in the import of energy elements such as crude oil and foods such as frozen pork. Imports of different types of grains like rice and wheat are also noticeable. According to L. Gordon Flake, Executive Director, Mike and Maureen Mansfield foundation, "Korea's imports from China are currently undergoing a structural transformation. China has begun to manufacture electronic components because China is undergoing rapid industrialization. It means that both Korea and China are entering into a highly a competitive market with regard to electrical equipments. This bilateral economic exchange between China and Korea can create negative effects such as trade imbalance."4 Small and medium sized companies of Korean origin have played a key role in the investment drive in China rather than larger companies. Again, Korean FDI (foreign direct investment) to China has been tilted more toward the manufacturing sectors. The report given to the U.S Commission on Korea -China Economic and Security Review by L. Gordon Flake, states that "Despite benefits from economic exchanges with China, this relationship could be a threat for Korea. The bilateral economic exchange with China can cause unemployment, industrial hollowing out, and economic instability of certain regions. However, if concerns over Korea's economic problems do not reverse in a short time, China would quickly become a threat to Korean economy". Overall Korea-China trade has averaged more than 20 percent growth each year for the last decade, and most economists predict that even with moderate rates of growth in China's economy, bilateral trade volume will increase twice over to $100 billion annually by 2010 if not earlier. One major factor which has contributed to Korean firms been attracted to China is low wages and ready labor market which has made China the world's solution to cheap labor supply. According to the Korean Ministry of Finance and Economics, 34% of the total amount of outward Korean investment (US$5.06 billion last year-on an approval basis) was destined for China. Total Korean investment in China in 2002 was US$1.72 billion. This amount far surpassed Korean investment made in the United States, which totaled US$1.37 billion in 2002. The expansion of Korea-China economic relations has also been facilitated by the normalization and acceleration of Korea-Chinese political and diplomatic relations. Korean tourism to China has also played a key economic role in dramatically increasing trade relations between China and Korea. In the field of education, a total number of 36,000 Korean students officially studying in China accounted for 44 percent of the total number (85,829) of foreigners studying in China in 2002. Despite these economic achievements between the two countries, there has being some moments of friction. The 2003 China -Korea economic relations to the US commission report says that "South Korea has run a relatively consistent trade surplus with China and this coupled with Korean concerns about a flood of inexpensive Chinese products has led to trade frictions on both sides that have spilled over into the broader public realm. Most memorable was the "garlic war" in 2002 where a Korean attempt to stem the inflow of Chinese garlic led to Chinese retaliation on much higher value Korean electronic imports and a rather hasty Korean retreat." With China's admission to the WTO, bilateral trade disputes had been placed in the context of international rules and norms and Korea has been the primary target of Chinese legal action on trade issues. We can conclude from the data available that the resumption of diplomatic and economic relations between Korea and China has been good. It has brought the two countries closer and has improved lives in that region. But of course one should not loose sight of the fact that China has the greatest share of this prosperity in terms of economic strength, capacity and labor. This is because "the potential embodied in the huge Chinese market and the prospects for the overall expansion of China's economy have represented somewhat of a double-edged sword for Korea. The expansion of the Chinese market is at once one of the major sources of growth for the Korean economy, while at the same time; Chinese firms are increasingly likely to compete with Korean firms both in the global market place and in Korea's domestic market".5 Some Koreans consider the establishment of trade relations with China to be a "shock" to the Korean economy. This can be compared to the "shock" experienced when Korea normalized relations with Japan in 1965. This" shock" is seen as both a threat and an opportunity. One major fear is that Korea may not be able to stand up to the challenge that the Chinese manufacturing sector poses to the Korean economy. The fear is that "China's economic ascendance will inexorably lead to the hollowing out of Korea's manufacturing sector. Ultimately, the worry is that Korea will not be able to compete with Chinese competition both at home and abroad and that this will lead to the flight of Korea's manufacturing sector." These concerns have primarily focused on China more than on any other significant trading partner such as the U.S. or Japan due to cost factors of manufacturing concerns which is dominated by Korea. However, these concerns are particularly acute in Korea because of its historic rates of development. Korea does not consider its economy to be developed enough to be able stand up to the pressure of more developed economies. . The Samsung Economic Research Institute, in an August 30, 2003 report on the issue, reported 1,800 cases of overseas investment by Korean firms in 2002 compared with 1,000 cases in 1994.6 "To put Korean investment in China in perspective, even with China commanding the lion's share of outgoing Korean FDI in manufacturing, the total amount of manufacturing investment in China by Korean firms still accounts for only around 5 percent of Korea's domestic investment in manufacturing. While still relatively small, the trend lines worry Korean analysts who point to the danger of the hollowing out taking place too early in this stage of Korea's development. For example, the Korean manufacturing sector "constitutes 29.6% of the nation's whole economic output, hires 26% of the labor force and its export takes up as much as 35% of the nations GDP." (SERI, Korea) Moreover, Koreans tend to view these trends as inevitable, even natural-ones that must be adapted to rather than fought. As such, with the exception of a few minor trade disputes, Korean's concern over its economy is not yet reflected in political relations between Korea and China. More intangibly, fear of Chinese competition is widely regarded within Korea to have been a primary motivating factor behind Korean economic reforms. The positive benefits of Korea's trade with China are undeniable. While the relative portion of Korea's trade with the U.S. and Japan has decreased, from a Korean perspective this trend represents a much-needed diversification of Korea's export market. In fact, Koreans widely credit the expansion of Korean trade with helping their economy to not only survive but thrive during the chronic downturn of the Japanese economy and the recent U.S. downturn. Similarly, while not abandoning the U.S., Japanese or European markets, many if not most Koreans see their future as tied to the Chinese market.7 Koreans, however, see these trends as inevitable, even natural-ones that must be adapted to rather than fought. As such, with the exception of a few minor trade disputes, Korean concern over its economy is not yet reflected in political relations between Korea and China. The fear of Chinese economic competition is was is the deciding factor behind Korean economics reforms. It is worth noticing that despite the drastic expansion in China -South Korea relations, China arguably maintains greater economic influence over North Korea than South Korea. And this, according to Gordon L. Flake report, "is not due to significant levels of trade or investment-both remain moribund-but rather to that fact that China continues to provide North Korea with essential energy and food inputs. This lifeline has never given China proactive influence over North Korea, as it was seen by North Korea as a Chinese effort to shore up its own interests by avoiding the collapse of North Korea and the resulting instability in the region". South Korea has paid a political price for its improved relations with Beijing; it is in the litmus test issues that China demands of nearly all of its relationships. China exacted this by successfully pressuring South Korea-which has a sizable Buddhist population-to forego visits by the Dalai Lama. China also feels very sensitive about South Korea relationship with Taiwan. North Korean refugees' status in China is also a very sensitive issue to the Chinese Government. Human rights organizations and religious groups have raised serious concerns about the issue but the South Korean government remains ambivalent about the refugee flows. At a point this might become a serious issue in Korea-China bilateral relations. The growth in China's economic has the possibility of crowding out the economy of the Koreas. Checks and balances must be put place to make sure that the benefits of trade relations between the two countries are shared economically. If China is left to go on as it is now, it might become an economic and political bully not only to Korea but the Asia region as a whole. This might outweigh the positive impact of China-Korea relations. References: Seung-Yul Oh," North Korea's international economic relations: Trends and Future prospects". Testimony of Flake, Gordon L, "china's growth as a regional economic power: impacts and implications." The Maureen and mike Mansfield Foundation, December 2003. Read More