The Korean textile industry: still competitive, after all these years?

Abstract

Although a vital part of the economy, the Korean textile industry has been challenged by the recent reduction of international trade barriers, particularly as this industry was fully integrated into General Agreement on Tariffs and Trade (GATT) in 2005. The textile industries in Japan and many other countries have also faced difficulties. This study examines future prospects for the Korean industry by investigating the presence of economies of scale and relationships among the inputs of domestic capital, labour and intermediate goods, as well as foreign intermediate goods. The findings are consistent with constant returns to scale and a substitutes relationship among all input pairs except for domestic capital and foreign intermediate goods. Thus, there appear to be no further cost reductions available through increased output and economies of scale. However, some reduction in industry output may not result in increased unit costs either. A reduction in the price of foreign intermediate goods will not only increase the demand for domestic capital, but also, at least in the short run, add stress to the industry as it decreases the demand for domestic labour and domestic intermediate goods.