Yoon Ja-young is in charge of articles translated by a generative AI system and edited by The Korea Times. She is interested in improving the newspaper through AI.
More exchanges key to better ties
By Yoon Ja-young
By Yoon Ja-young
Since the normalization of the ties in 1965, Korea and Japan have become close economic partners, indispensable to each other. The economic cooperation with Japan helped Korea become a global trade powerhouse, and Japan found a profitable market in Korea.
During the past few years, however, political and diplomatic conflicts have been alienating the two countries, with trade and investment also decreasing. Experts advise that Korea and Japan should enhance economic cooperation for their mutual benefit, separating it from politics.
“While implementing the five-year economic development plans in the 1960s, the Park Chung-hee regime used compensation from Japan. The Korean government used the money to set up POSCO, and actively adopted facilities, equipment and technology from Japan. That was the beginning of industrial cooperation between Korea and Japan,” said Sakong Mok, a research fellow at the Korea Institute for Industrial Economics and Trade.
Since then, the two countries have become indispensable economic partners. Trade between Korea and Japan totaled $220 million in 1965, but increased 390 times over the past 50 years to reach $86 billion last year. Tokyo is currently Seoul’s third largest trade partner following China and the United States.
Exports to Japan, however, have been falling, from 19.4 percent of the total in 1990 to 5.6 percent in 2014. Imports from Japan also decreased to 10.2 percent of its total imports last year from 26.6 percent in 1990. The total volume of trade also has been decreasing since 2011 when it peaked at $108 billion, to $86 billion last year.
While economic recession, the weakening of the Japanese yen, and diversification of the trade partners are the main reasons for the decrease in trade, a survey shows that worsening diplomatic relations are affecting trade as well. According to a survey by the Korea International Trade Association (KITA), nearly half of Japanese importers said trade with Korea is decreasing due to worsening ties. The decrease was especially notable in consumer goods such as rice wine, bread and agricultural goods.
Trade deficit chronic problem
While decreasing trade is a recent phenomenon, Korea’s deficit with Japan has been a chronic problem. During the past 50 years, Korea’s imports from Japan totaled over $1.1 trillion. Its exports to Japan, however, stand at slightly over $614.4 billion, because Korea has been importing parts and materials from Japan, to assemble and export them to the global market.
“It was somewhat inevitable. When Korea’s exports to the global market increase, imports from Japan also had to increase,” Sakong said.
“We can’t deny that the chronic trade deficit with Japan is a big hurdle for a Korea-Japan free trade agreement (FTA),” he added.
Korea and Japan started FTA negotiations in 2003, but stopped after a year. Experts say it is time to resume the talks. “The Korea-Japan FTA wouldn’t be simply increasing trade or creating jobs. It will help fundamental reform, strengthen the market economy system and expand consumer benefits,” said Kim In-ho, chairman and CEO of KITA.
Lessons from Japan
Korea succeeded in narrowing the technology gap with Japan, with some Korean businesses including Samsung Electronics, POSCO and Hyundai Heavy Industries surpassing their Japanese rivals.
Most Korean manufacturers, however, are increasingly concerned that they may be falling from the peak in terms of competitive edge, as did Japanese firms in the 1990s. They are especially concerned as they are chased by competitors in emerging countries like China. It contrasts with Japanese manufacturers which are finally enjoying better profitability after two lost decades.
Lee Ji-pyeong, a senior research fellow at LG Economic Research Institute, said Korean manufacturing firms have to learn from Japan.
“Japanese manufacturers are reviving not just because of weak yen. They have made innovations to strengthen corporate competitiveness and developed new products amid a long recession and the global financial crisis.”
He pointed out that Korean firms are going through the transition period during which they should transform themselves into innovators from fast follower, as did Japanese firms.
Japan also offers lessons for Korea’s economic policymakers.
“Japan has already experienced the issues that Korea is facing, such as an aging population, low birthrate and a fiscal deficit. We could learn lessons from policies that Japan has taken,” a ranking official at the Ministry of Strategy and Finance said.
Strategy and Finance Minister Choi Kyung-hwan and Aso Taro, Japan’s finance minister, had a meeting in Tokyo last month, where key economic officials exchanged ideas on diverse sectors such as the macro-economy, budget and fiscal policies, taxation, and international finance.
Sakong said Korea and Japan need a two-track policy separating politics and the economy. “Political or diplomatic conflict shouldn’t negatively affect economic ties,” he said, urging that bilateral cooperation should expand to the services sector and policy coordination.