Bilateral Trade and Investment Relations Analysis: Indonesia and South Korea

Abstract

This paper attempts to assess potential opportunities and complementary cooperation of the bilateral economic relations of Indonesia and South Korea. On December 18th, 2020, both countries had officially signed the Indonesia-Korea CEPA. Indonesia has a big population for potential consumption and rich in primary products such as rubber, mineral, and palm oil. South Korea has immense potential in investment, light manufacture, and high-technology products and is classified as the most innovative country in the world for four consecutive years of 2016-2019 (Innovation Index, Bloomberg). This paper has two aims, first is assessing potential trade and long-run investment relations. It applies a combination calculation of RCA (Revealed Comparative Advantage) and CMSA (Constant Market Share Analysis). The second is knowing the potential impacts both short-run and long-run after tariff rate removal using the GTAP (Global Trade Analysis Project) model simulation. This paper found that Indonesia and South Korea can have complementary bilateral economic relations on trade and investment. Indonesia can learn how to avoid the Middle-Income Trap from South Korea experienced with manufacturing development. This paper showed that both countries could have mutual benefits in trade in the short-run and productivity improvement in the long-run.