A Study on Trade Interdependence between Korea, China, Japan, the US

Abstract

Using an international input-output table, our study analyzes the interdependence among four countries (i.e. Korea, China, Japan and the US) using empirical trade and industry data. While both China and Korea exhibit high backward linkage effects, China's - as well as Japan's - forward linkage effects are still higher than Korea's. These results imply that interdependence among the three countries in Northeast Asia is increasing. Moreover, Korea and China's dependence on Japan and the US has been augmented, whereby economic cooperation is increasingly rising among the three Northeast Asian countries (Korea, China and Japan) realizing each country's comparative advantages. However, these countries need to prepare themselves for long-term negative aspects of closer cooperation, especially the negative impact of economic fluctuations in counterpart countries. In this context, Korea and China need to concentrate development of three key industries: the materials industry, parts industry, and high-technology industry. Furthermore, these countries need to establish an independent industrial system by diversifying trading partners, develop the service industry to support the manufacturing industry, and stimulate domestic demand. Finally, a sound economy structure needs to be established through improvement of productivity.