Neighbors more helpful than distant cousins
March 11 marked the one-year anniversary of the earthquake and tsunami in East Japan in 2011. It was a time to honor the memory of loved ones lost and to express, once again, our deepest condolences.
Now is also the time to remember that Japan and Korea as two immediate neighbors and the most matured market economies in Asia, ranked number two and number four, respectively, must enhance their economic connectivity.
It is well known that Japan’s economy has experienced a “lost two decades” and that Korea faces a declining potential-GDP growth rate, which has dropped to the mid-3 percent from 8 percent in the early 1990s.
Both countries also have rapidly aging societies. The fully matured economy of Japan and the maturing economy of Korea are under a similar factor endowment without energy resources and mineral deposits, and they must strengthen win-win cooperation.
In the context of rising East Asia, the countries must work together to nurture an ongoing East Asian regionalism into an open entity, making it a significant building bloc toward the WTO movement and Asia and their own sustainable growth through trade.
Given their intra-industry linkages, especially in parts and components, Japan and Korea should not wait for a formal bilateral FTA to pursue possible collaborations.
The fact that natural disasters can happen at any time and to any country due to anomalous weather conditions further necessitates mutual collaboration between countries.
In light of last year’s earthquake in Japan, new opportunities for collaborations between Korea and Japan must be urgently recognized. After all, as the Korean saying goes, “Neighbors are more helpful than distant cousins.”
Japan is now Korea’s third largest trading partner after China and the U.S. while Korea is Japan’s third export destination and the 6th largest import country in recent years.
However, mutual FDI flows between the countries have been very low. Although Japan still accounts for the largest share of Korea’s total inbound FDI, FDI from Japan to Korea has consistently accounted for less than 2 percent of Japan’s total outbound FDI, which is far lower than the trade linkage level between the countries.
Above all, both Japan and Korea can gain a great deal by encouraging mutual FDI in each other’s economy.
The large conglomerates of both countries have been very active about promoting outbound FDI to nations where they can easily market their products and improve efficiency through cross-border production fragmentation and outsourcing via supply chains.
Despite Korea’s proactive FDI policies in the past decade, its outbound FDI has been far greater than its inbound FDI, four times greater in 2010, in fact.
Given this difference, it is imperative that Korea actively induce FDI by revamping its business environment and, for example, the labor market, to generate multiple positive effects such as growth, job creation and technology transfer for the Korean economy.
With the earthquake and tsunami in 2011, not to mention the shutdown of nuclear power plants and unstable electricity supply, Japan and Korea must renew the mutual FDI flows between them to enhance necessary connectivity. Japan is looking for back-up factory sites to support factories located in earthquake-prone areas.
Naturally, Korea is one of the most ideal choices for its proximity, the fact that earthquakes do not occur here and for its highly skilled manpower. The two countries could develop numerous win-win projects by enhancing power and logistics connectivity.
The bilateral promotion of tourism is another key area for job creation and economic growth through the launch of low-cost carrier arrangements under an open sky agreement between the two countries.
Then there are Korea’s six free economic zones, each of which offers incentive schemes. Three of them are located along Korea’s southern and southeastern coastal line near Japan.
Of course, Korea’s FTAs with the EU and the U.S. could also provide Japanese companies invested in Korea easy access in terms of the products they manufacture here to enter the EU and U.S. markets. And as icing on the cake of mutual collaboration, Korea and Japan must eventually complete suspended bilateral FTA negotiations as well.