ASSESSING A JAPAN‐KOREA FREE TRADE AGREEMENT

Abstract

TRADE between Japan and the Republic of Korea expanded dramatically after bilateral diplomatic relations were normalized in 1965. This happened in large part because the two countries were neighbors. Both lacked natural resources and they competed with each other in the manufacture of industrial goods, but they complemented one another in many ways. Along with growing trade, investments and personnel exchanges also increased. Friction between the two countries arose as a result. Korea’s persistent trade deficits with Japan became a core issue, and Japan was called on to improve the situation. To curb imports of Japanese products, Korea introduced its Import Sources Diversification Program. In 1992 the then Prime Minister Kiichi Miyazawa and President Roh Tae Woo agreed on cooperation programs to promote exports of Korean products to Japan and Japanese investment in Korea. The aim of the program was to correct the trade imbalance. On the private-sector level, the Japan-Korea Industrial Technology Co-operation Foundation was established to implement cooperation programs to foster industrial technology among small businesses, develop human resources, and enhance productivity. These industrial technology cooperative efforts have undoubtedly been effective over the long run. The trade imbalance between Japan and Korea has improved in terms of export-import ratio, and its absolute value has continued to expand. But this has taken place against a backdrop of increasing bilateral friction, and trade and investment between the two countries has shrank relative to that with other countries. Korea’s exports to Japan accounted for around 20 per cent of all exports in the late 1980s; the share fell to around 10 per cent in the late 1990s. The share of Korean imports from Japan also fell from 30 per cent to 20 per cent during the same decade. During this time, Korea’s trade deficit with Japan continued to increase. However, over the past five years Korea has increased its surplus in its trade in services with Japan which partially offsets its trade deficit. Concerning foreign in-