ASEAN-Korea Economic Relationship:

ASEAN-Korea Economic Relationship: A Road to More Active Future Cooperation. Choong Lyol Lee, Professor Department of Economics and Statistics Korea University at Sejong

Contents I. Introduction II. Economic relationship of the past thirty years III. Why their economic relationship developed so much? IV. What to be expected and what to do for the future? V. Concluding remarks

I. Introduction (1) Economic relationship between ASEAN and Korea has continuously improved for the past three decade since establishment of formal diplomatic relationship in 1989. Especially, trade and financial transactions substantially increased since 2000. To Korea: ASEAN is The second largest trade partner (next to China) The third largest investment partner. Good labor sources Major travel destination Major ODA recipients. To ASEAN: Korea is The 5 th largest trade partner (Next, China, Japan, US, and EU) One of important investment partners One of the important ODA Donors Development partner Origin of Korean Wave

I. Introduction (2) Why Korea and ASEAN s economic relationship becomes so closed for the past years? And what it will be? And what to do? Does the recent change of economic environment of the region as well as the world will make any substantial impact on this trend? This paper may provide the answer for these questions. First, we examine the statistical indicators representing the current and past economic relationship between ASEAN and Korea. Second, we investigate why both ASEAN and Korea actively cooperated with each other for the decades. We show that the regional value with ASEAN and Korea helps both party accelerate economic growths. The institutional and policy cooperation among governments also contributed to improvement of their economic cooperation. Third, we check the future regional and global economic conditions and its risk and challenge and then we suggest the policy recommendations.

II. Economic relationship of the past thirty years (1) 2.1 Trade and Investment Success story of trade and investment cooperation between ASEAN and Korea. Trade increased from USD10.2 bil in 1990 and USD38.3 bil in 2000 to USD 119.3 bil in 2016. Korea continuously recorded too much amount of trade surplus. Vietnam and Singapore are major trading partners to Korea. <Figure 1> Trade <Figure 2> Trade by Country 90 80 70 60 50 40 Vietnam 30% Brunei 1% Cambodia 1% Indonesia 15% Lao PDR 0% Malaysia 13% 30 20 10 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Korea to ASEAN ASEAN to Korea Trade Balance Thailand 9% Singapore 21% Myanmar 1% Philippines 9%

II. Economic relationship of the past thirty years (2) Korea s FDI into ASEAN outnumbers that of ASEAN to Korea Korea s FDI rose from USD0.267 bil in 1990 and 0.535 bil in 2000 to 5.1 bil to 2016. Only during the financial crisis of 1998-2000, ASEAN s FDI was higher that that of Korea. ASEAN Portfolio investment into Korea is far higher than those of Korea s into ASEAN. ASEAN s investment assets in Korea rose from USD3.8 bil in 2001 to 93.8 bil to 2015. <Figure 3> Direct Investments (bil USD) <Figure 4> Portfolio investment (bil USD) 6 5 4 3 2 1 50 40 30 20 10 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 0-10 2002 2004 2006 2008 2010 2012 2014 Korea to ASEAN ASEAN to Korea Korea to ASEAN ASEAN to Korea

II. Economic relationship of the past thirty years (3) 2.2 Number of Travelers and ODA About one out of nine Korean visited one of ASEAN member states in 2016. The number of ASEAN visitors increased from 0.6 mil in 2000 to 2.2 mil 2016. Korea s ODA into ASEAN keep increasing for the past decades. Both total expenditure and net expenditure increased from USD 85.6 mil 75.8 mil in 2006 to 446.2 and 418.9 mil in 2016. <Figure 5> Number of Visitors(1000) <Figure 6> Korea s ODA to ASEAN (mil USD) 7000 6000 5000 4000 3000 2000 1000 600 500 400 300 200 100 0 0 2000 2003 2006 2009 2012 2015 2006 2008 2010 2012 2014 2016 Korea to ASEAN ASEAN to Korea Net Expenditure Total Expenditure

II. Economic relationship of the past thirty years (5) 2.3 Establishment of Korea s regional value chain and investment circle. ASEAN and Korea established its own regional value chain in East Asia. Difference in endowment of both parties such as raw material and labor force from ASEAN and capital and technology are main reasons. <Figure 7> Value chain between ASEASN and Korea ASEAN Korea Raw Materials Intermediate Goods World (US, EU, and others) Consumption ASEAN Final Goods

II. Economic relationship of the past thirty years (6) ASEAN and Korea made a FDI and Financial investment circle in ASEAN and Korea. ASEAN financial institution put extra savings into Korea and Korea utilize them by loan to Korean firms in ASEAN. <Figure 8> Financial flow between ASEASN and Korea Korea Firms (Current Account Surplus) Korea Financial Institutions (Deposit) ASEAN Firms (Production and Export) Korea and ASEAN Firms (Loan and security)

III. Why their economic relationship has improved so much? (1) 3.1 Growth of Korean Economy Korea succeeded in joining to Group of Twenty. Its industrial structure continuously upgraded for the past two decades. It successfully overcome East Asian financial crisis of 1997-1998 and Global financial crisis of 2008. Furthermore, it accelerated its market opening policy. <Figure 9> GDP per Capita of Korea <Figure 10> Openness of Economy of Korea 30,000 25,000 20,000 15,000 10,000 5,000 0 1953 1963 1973 1983 1993 2003 2013 120 100 80 60 40 20 0 1953 1963 1973 1983 1993 2003 2013

III. Why their economic relationship has improved so much? (2) <Table 1> Industrial Structure of Korea 1960 1970 1980 1990 2000 2010 2016 Manufacturing 100 100 100 100 100 100 100 1. Food, beverages and tobacco 36.5 19.6 10.7 7.2 6.1 4.2 4.7 2. Textiles, leather and fur products 25.2 28.0 23.2 13.4 7.9 4.8 4.7 3. Wood, paper, printing and reproduction 9.2 8.9 4.8 5.0 4.2 2.8 2.7 4. Petroleum, coal and chemicals 9.7 14.1 19.9 14.3 15.3 15.4 17.0 5. Non-metallic mineral products 4.9 6.3 6.4 6.5 4.0 3.1 3.0 6. Metal products 2.7 10.3 14.4 13.3 16.0 14.9 7. General machinery 2.9 4.5 7.1 8.1 8.2 8.7 8. Electric machinery 13.0 4.3 10.6 15.9 24.9 26.3 26.0 9. Precision instrument 0.9 1.7 1.5 1.4 1.7 1.9 10. Transport equipment 8.5 5.3 12.1 13.1 16.0 14.7 11. Furniture and other manufacturing 1.5 3.7 2.6 2.7 1.8 1.4 1.6

III. Why their economic relationship has improved so much? (3) 3.2 Establishment of ASEAN Economic Community ASEAN became a very stable and fast growing regions in the world More opened and integrated economy. For example, the average tariff rate substantially fell from 2.58 percent in 2007 to 0.23 percent in 2015 7 6 5 4 3 2 1 <Figure 11> Growth Rate by Regions (%) <Figure 12> Tariff Rates on ASEAN Intra-trade (%) 0 World Advanced economies Latin America MENA Sub-Saharan Africa ASEAN 1990-99 2000-2009 2010-2016 2017-2022

III. Why their economic relationship has improved so much? (4) 3.3 The Active Role of Leader and Governments Leaders of AMSs recognized the importance of mutual cooperation The experience of 1997-98 Asian Financial Crisis and 2008 Global financial Crisis help them to more progressive. Institutional framework such as a regular ASEAN summit meeting or ASEAN economic or finance minister meeting helps to build mutual trust within the region. ASEAN governments lead the regional economic cooperation for years under the several framework such ASEAN, ASEAN+1, ASEAN+3 and EAS

IV. What to be expected and what to do for the future? (1) 4.1 More economic cooperation or less one in the future? Korea has to accelerate its cooperation with ASEAN for the time being. Currently regional values chain are successful in some sense to maintain its growth rate. China risk and high wage of Chinese works will make more Korean companies move from China to ASEAN for the time being. ASEAN has large incentives to cooperate with Korea for the time being. ASEAN has to cooperate with Korea to upgrade its industrial structure and get out of the middle income trap. Still, ASEAN low income countries should have more FDI from Korea to raise their production and to solve their employment problem. ASEAN s regional values chain with Korea is still very effective to maintain its high growth rate. ICT development and improvement of ASEAN connectivity will enhance the cooperation by reducing the coordination cost.

IV. What to be expected and what to do for the future? (2) Change of global economic and political conditions such as Brexit or North Korean nuclear problem, rise of China or current US protectionism will change the current trend of economic cooperation between Korea and ASEAN? Temporary Yes but in the long term No. The development of ICT and improvement of logistics of the world will accelerate the international economic cooperation such as commodity, service and financial transactions. The competition among companies based upon the global value chain will become more tense and pierce. To survive in the global world, both Korea and ASEAN companies need active cooperation with each other.

IV. What to be expected and what to do for the future? (3) 4.1 More economic cooperation or less one in the future? Although current regional value chain on the manufacturing industry will be effective for the time being but new way of cooperation will show up. More cooperation on service industry such as ICT service industry, financial industry should be made. Korean food and fashion industry based upon Korean wave will be promising. Excess savings and current account surplus will make ASEAN utilize the Korean financial market. From vertical cooperation to horizontal cooperation. Some ASEAN companies equipped with higher technology will try to work with Korean company

IV. What to be expected and what to do for the future? (4) 4.2 Risk and Challenge Korea: Less understanding on the foreign culture, traditions and customs.: not much studies and education are given up to now on the topics of Southeast Asia. A very limited number of students and faculty members are studying and teaching the society and economy of Southeast Asia in the university or graduate school. Instead, worrying on too much investment on ASEAN: especially on one or two countries such as Vietnam. ASEAN: Do not expect too much assistance from Korea and what Korea can do to ASEAN is very limited. Korea is a non-threatening small country and is different from China and Japan in terms of size of economy and population. Korea s development model and experience is very valuable and useful to apply into Southeast Asia. But it has some limitations.

IV. What to be expected and what to do for the future? (5) 4.3 What to do in the future?: A Comprehensive approach Formerly, there is no comprehensive plan to cover the overall economic relationship with ASEAN. ASEAN is made of ten countries. Only a few plans for a specific country or industry have been made. What is the comprehensive plan and research? Systematic plan: Object and goals, instruments and strategies covering many items such as trade, investment, service and ODA etc Many industries should be covered: labor intensive(textile, garment, shoes. Food processing, etc) capital intensive(electronic, chemical, machinery), construction. Way of cooperation and value chain: Horizontal cooperation or vertical cooperation Regions and country specific plan: Multilateral and bilateral, Mekong Area and Islands area, one for each ASEAN individual countries.

IV. What to be expected and what to do for the future? (6) Policy to promote the regional values chains. The relationship between Korean firms and foreign firms should be emphasized not as a competitor but as a partner. Does government has to help the domestic company to relocate into foreign company? More FTAs with the ASEAN individual countries should be made. For this purpose, more extensive analysis on the regional economy and individual country should be made. More focus on the service industry should be made. ICT service industry or financial one can be very promising with the development of ASEAN. (ASEAN economic community 2025 and ASEAN Connectivity 2025)

IV. What to be expected and what to do for the future? (6) These kinds of new ways of cooperation cannot be done without a deeply understanding on each other.: A Korea-ASEAN culture program should be provided for the businessmen in the region. More emphasis should be put on the cultural and historical understanding on both sides of Korea and ASEAN. More researches on Korea and ASEAN should be done. More books should be published and more programs on mass communication should be provided. More public and private cultural activities should be made on ASEAN and Korea. Exchange of young students and scholars of these regions should be much encouraged. More roles of ASEAN Korea Centre and ASEAN Culture Center in Koreas are expected.

V. Conclusion Economic cooperation between ASEAN and Korea has remarkably improved for the past three decades. Trade, service and financial transaction, the number of tourists and the amount of ODA have increased very much for this time. It benefits to both ASEAN and Korea in terms of economic growth by building a regional value chain. A more active economic cooperation between ASEAN and Korea is expected to continue for the next decade. Its effectiveness and usefulness will depend on the preparation of market participants and government policy of both parties. More cooperation will made on the service industry such as finance, medical, beauty and ICT etc. which requires more human and cultural exchange. Mutual understanding is a must for the future cooperation. Korea s development of assistance in the field of economic development will be more meaningful.

Global World: Where is the most promising region? VI. Conclusion Europe CIS NE Asia North America MENA South Asia ASEAN Sub-Sahara Africa Central and South America 24 24