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PARK Bun-Soon

Korea-ASEAN Must Upgrade Economic Structures to Meet China

PARK Bun-Soon

June 12, 2009

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Given their political, economic and cultural relations, the ASEAN-Korea Commemorative Summit has a special meaning for all participating nations. The 10 member states form a mid-sized open economic bloc, with a combined population of 570 million, and a GDP of $2,200 per capita. Leading ASEAN countries achieved rapid growth until the mid-1990s by opening their economies in the 1970s. They went through a period of turmoil in the late 1990s due to clumsy countermeasures to the changing international financial market and excessive investment, but member countries still have a high potential for growth based on their educated workforces, natural resources and industrialization experience.

The importance of ASEAN to the Korean economy cannot be overemphasized. Korea and ASEAN, actually have a much closer relationship than we realize. The region has become Seoul's third-largest trade partner following China and the European Union (EU). Korea's exports to ASEAN stood at $48.3 billion in 2008 and accounted for 11.7 percent of its total exports, which is more than the $46.4 billion in exports to the United States.

Imports from the ASEAN region were $40.9 billion or 9.4 percent of total imports -- also higher than imports from the United States, which totaled $38.4 billion or 8.8 percent.

What's more, Korea purchases liquefied natural gas (LNG), natural rubber, coal and many other goods from the region. Investment in the region has been brisk. Initially focused on labor-intensive manufacturing in the late 1980s, it is now stretching to a range of sectors including finance and real estate.

As of late 2008, $15.7 billion was invested there, accounting for 13.5 percent of total overseas investment. That is not all. Hallyu, or the Korean cultural wave, has expanded the market of South Korea's pop culture and contributed to strengthening its competitiveness.

The ASEAN region had traditionally been the most popular spot for South Korean tourists, but now the number of travelers coming to Korea is increasing thanks to hallyu. Brides from ASEAN countries have contributed to Korea's multiculturalism and workers from Southeast Asia are working hard in smalland medium-sized companies here.

Korea and ASEAN are, however, facing common changing circumstances. Both must upgrade their economic structures as China emerges as a regional powerhouse, crowding out Korea and ASEAN in the world market.

Changing Circumstances

Even though it is raising imports via rapid growth, Korea and ASEAN no longer see an increase in their share of the global export market. Secondly, Korea and ASEAN are both facing the low growth of the global market triggered by the worldwide economic recession.

Both have seen growth thanks to export-driven economies but it may be hard for global trade to recapture the rapid growth seen before, even as the world economy recovers. U.S. consumers will not return to their high consumption habits of the past.

Third, both Korea and ASEAN are in the center of brisk discussions on East Asian economic integration. East Asia looks to advance market integration through trade and investment, and expand discussion on institutional integration.

However, it remains uncertain how competition with Japan and China, and the intervention of powerful countries such as the United States, will affect Southeast Asia's direction of integration. In a bid to cope with those circumstances, cooperation in trade and investment must be expanded.

Currently, Korea has an overall trade surplus with ASEAN countries. Even though Korea is in the red in Malaysia and Indonesia, nations from which it imports crude oil and LNG, it sees plenty of black ink through exporting parts and intermediate goods to Singapore, Thailand and Vietnam, which have developed manufacturing industries.

Korea has to gradually increase imports from countries with which it sees an imbalance. Particularly, it is necessary to expand imports from developing ASEAN countries, such as Vietnam, Cambodia and Laos. Last year, Korea had a trade surplus of $7.8 billion with Vietnam. Considering the trade volume, this was too large.

Cambodia, Laos, Myanmar are categorized as the least developed countries (LDCs) by the United Nations. For sound development of all sides, Korea has to make an effort to discover primary commodities, which Korea would be highly likely to import.

More Korean Investment in ASEAN

Korean companies should also increase investment in ASEAN. Recently, brisk investment in non-manufacturing industries such as real estate development has been carried but investing in the manufacturing industry must be reemphasized.

ASEAN's most comparative advantage is actually its workforce. Indonesia, Thailand, Vietnam, the Philippines and Cambodia have cheap labor and large populations. For sustainable development of ASEAN, the manufacturing industry should continue to play a leading role in the ASEAN economy.

Korean companies facing competition from China's cheap products in the world market have to advance to those countries. Since a significant portion of Korea's exports to ASEAN is a result of direct investment, expanding investment can lead to an increase in exports.

Regarding investment cooperation, Korea should encourage overseas Chinese businesses from Singapore, Malaysia and Thailand to develop resorts and the hotel industry. To expand trade and investment, the functions, financial resources and the scale of the Korea-ASEAN Center, which was launched earlier this year, need to be widened.

It must be capable of collecting and spreading information on promising small- and mediumsized companies in the ASEAN region, and firms to supply potential products. It should introduce the investment environment of ASEAN countries by holding seminars, symposia and presentations.

A Korea-ASEAN free trade agreement (FTA) has taken effect recently and we have to concentrate on full implementation and expansion with consistent openness. The important thing is that companies can practically utilize the trade deal.

It is essential to expand the scope of openness by cutting transaction costs and checking FTA proceedings on a regular basis. Korea should promote FTAs with Thailand, Indonesia and Vietnam separately in the future, as they have high market potential and high customs tariffs.

Cooperation between companies in Korea and ASEAN is also necessary. Currently, exchanges in the private sector are just beginning as joint venture projects between corporations. It is necessary to enhance understanding between companies and promote industrial cooperation via systematic exchange and cooperation led by the Chamber of Commerce or the Federation of Korean Industries.

Information and knowledge on ASEAN needs to be promulgated by forming an ASEAN forum involving businessmen, journalists and scholars.

Regional Issues

On the other hand, Korea and ASEAN can mutually beneficial by cooperating on East Asian regional issues. Market conditions for export of both sides have worsened due to the economic recession and China's growing share of the global market. They have to create a market within East Asia.

For this, the East Asia Free Trade Area (EAFTA) should be established involving ASEAN, Korea, China and Japan. Actually, the necessity of the EAFTA has been discussed for years but have not progressed due to conflict between China and Japan. As a mediator, Korea along with ASEAN, should persuade Japan and China to systematically cooperate.

Meanwhile, it is important for Korea's economic development that ASEAN smoothes the way toward economic growth, as its development benefits the country. It has sent overseas development assistance (ODA) to ASEAN, as do Japan and China. The two countries have distributed a large amount of funds to ASEAN, considering its economic and political status.

Some say Korea must map out a similar strategy. But it is difficult for Seoul to compete with Tokyo and Beijing. It is hard for it to mimic the construction of infrastructure projects with which Japan and China have assisted. Thus, Korea needs to establish a development cooperation model of its own in its ODA policy.

Given that the ASEAN economy has weak technology and knowledge capacities, it is necessary for Korea's policy to focus on development of technology and enlargement of the knowledge base in ASEAN.

Cooperation in the environment, of course, should be an important consideration when it comes to this development cooperation model.

This article orginally appeared in the Korea Times on June 2.
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