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Impact of China on South Korea's Economy
Region: Asia
Theme: Economics
Location: Korea, South, China
Published May 25, 2011
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In 2005, the Korean ambassador to China was excited about the completion within five years of the target trade volume of over $100 billion with China, which was set by the Korean government at the time of the inauguration of President Roh Moo-hyun in 2003. China also became the number one recipient of Korea’s outflow of investment as well as the destination of one of the largest groups of Korean students studying overseas. On the one hand, many businesspeople talk about the further importance of China, and they even send their children to China.1 On the other hand, many of the high-society households in Korea, especially in the Kangnam district that is considered to be the Korean Beverly Hills, hire ethnic Koreans who have returned from China to serve as their housemaids.

On the increased importance of China for the Korean economy, there are two different schools of thought in Korean academia: one school argues that China is a mere clone or extension of other Asian countries that were once glorified as newly industrializing economies or high-performing Asian economies . In this context, China could be a really tough competitor for Korean companies, especially for Korea’s exporting industries, and could undermine the export basis of Korean growth. The other school of thought tries to prove that China’s growth is intrinsic in the sense that it has resulted from a combination of improved resource allocation and a new model for a sizable economy that has been carried out by China’s own design (endogenous growth). As a result, Koreans hope that China will become an additional country for quick economic interaction, similar to the role of the United States vis-à-vis Korea during the past 60 years.

In the real economic interactions with China since 1992, both winners and losers in Korea seem to coexist. Some winners are export-related businesspeople who have extended their exporting life cycle by shifting their production facilities to China; they utilize China as their export platform. Also, some heavy-industry sectors such as chemicals, driven by government initiative, sold their products to the new China market and were able to survive the crises in the late 1980s and early 1990s.2 Some people, however, worry about the hollowing out of the Korean economic base. Also prevalent is the fear of China’s gigantic economy soaking both the Korean industrial base and raising prices on resources such as petroleum, steel, cement, and other construction infrastructure–related materials. It is also observed that some Korean investments are shifting to Southeast Asian countries from China. Recently, we have seen a footwear factory decide to move its operation from near Shanghai to Vietnam. It is now time to reevaluate the importance of China to the Korean economy. Key questions are:

• How has China impacted Korea’s economy on such a massive scale within a short two decades?

• To what extent will economic interaction with China be helpful for upgrading Korea’s economy, or will such interactions threaten Korea’s economy instead?

• Will China resume its role as the core external influence on the Korean economy, similar to the role of the United States over the past 60 years?

In this context, this paper focuses on the reevaluation and interpretation of economic relationships between China and Korea. In both international economics and international relationship textbooks, there seems to be no analytical model or framework for measuring the influence of one country on the other. As such, this paper will design a rule of thumb measurement by adopting a trial country impact index (CII). In addition, this paper will include qualitative arguments based on data reading, interviews, and on-site observations. Section II will describe current economic interaction between Korea and China, will interpret the past economic relationship between two countries, and will forecast the bilateral relationship by means of a comparison between Korea and the United States in the past. Section III explains a trial measure of the CII; this is followed by controversial issues related with China in section IV. Finally, in section V, we derive a tentative conclusion.

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