ASEAN and KOREA: Emerging Issues in Trade and Investment Relations 9789814377027

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ASEAN and KOREA Emerging Issues in Trade and Investment Relations

Contributors

Yen Kyun Wang Professor Department of Economics Chung-Ang University Seoul South Korea Lee Poh Ping Professor and Chair of Public Administration Division Faculty of Economics and Administration University of Malaya Kuala Lumpur Malaysia Hong Seokjeong Pusat Bahasa (Language Centre) University of Malaya Kuala Lumpur Malaysia Lee Kwang-chul Associate Professor of International Business College of Business Administration Hongik University South Korea Yoon Hwan Shin Associate Professor Department of Political Science Sogang University Seoul South Korea Vijayakumari Kanapathy Senior Analyst Institute of Strategic and International Studies Kuala Lumpur Malaysia

Julius Caesar Parrenas Director Institute for International and Strategic Studies Center for Research and Communication Metro Manila The Philippines Daljit Singh Fellow Institute of Southeast Asian Studies Singapore Surachai Sirikrai Director Institute of East Asian Studies Thammasat University Bangkok Thailand Dong-Chon Suh Professor of International Trade Inha University Inchon South Korea Koo Sung-Yea! Professor of Economics Graduate School of Business Administration Yonsei University Seoul South Korea

ASEAN AND KOREA

Emerging Issues in Trade and Investment Relations

Edited by

Daljit Singh Reza Y. Siregar

I5EA5

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 119596 All rights reserved. 0/o part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1995 Institute of Southeast Asian Studies

i'he responsibilit)' foT farts and opinions expressed in this publication mts exrlusive(r with the authors and their interjn-etations do not neressaTily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data ASEA;'\ and Korea: emerging issues in trade and investment relations/edited b) Daljit Singh and Reza Y. Siregar. l. ASEAl\' countries- Foreign economic relations- Korea (South). 2. Korea (South) -Foreign economic relations- ASEAN countries. 3. Investments, Korean- ASEAl\' countries. 4. Investments, Japanese - ASEA::-1 countries. 5. ASEAl\' countries- Commerce- Kmea (South). 6. Korea (South) -Commerce- ASEA;'\ countries. L Daljit Singh. II. Siregar, Reza Y. HF1592.5 K7AS4 1995 sls95-69306 ISB;'\ 981-3055-10-3 Iss:-: o129-1920

Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Sl\'P Printing Pte Ltd.

Contents List of Tables

vz

List of Figures

xi

Foreword 1. Overview of ASEAN-South Korea Economic Relations Yen Kyun Wang 2. ASEAN, South Korea, and the Asia-Pacific Region Lee Poh Ping and Hong Seakjeong 3.

4.

xzzz 1

21

A Comparative Analysis of South Korean and japanese Foreign Direct Investments in ASEAN Lee Kwang-chul

33

Rethinking Indonesia-South Korea Relations: A Socio-Political Perspective Yoon Hwan Shin

55

5.

Malaysia-South Korea Economic Relations: Trends and Issues Vijayakumari Kanapathy

70

6.

Emerging Trends in South Korea-Philippines Relations Julius Caesar Parrenas

88

7.

Singapore-South Korea Economic Relations Daljit S'ingh

8.

Thailand and South Korea: From Political Alliance to Economic Partnership Surachai Sirikrai

9. 10.

The Role of South Korea and ASEAN in APEC Dong-Chon Suh South Korea and the Transitional Economies of Southeast Asia: A Case Study of South Korea-Vietnam Economic Relations Koo Sung-Yeal

111

125

149

167

List of Tables

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 l.l4 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24

2.1 2.2 3.1 3.2

South Korea's Trade with ASEAN Changes in ASEAN's Export Items to South Korea Changes in ASEAN's Import Items from South Korea South Korea's Trade with ASEAN by Country Changes in South Korea's Export Items to ASEAN Changes in South Korea's Export Items to ASEAN Changes in South Korea's Import Items from ASEAN Changes in South Korea's Import Items from ASEAN Changes in South Korea's Export Items to Indonesia Changes in South Korea's Export Items to Malaysia Changes in South Korea's Export Items to Singapore Changes in South Korea's Export Items to Thailand Changes in South Korea's Export Items to the Philippines Changes in South Korea's Export Items to Brunei Changes in South Korea's Import Items from Indonesia Changes in South Korea's Import Items from Malaysia Changes in South Korea's Import Items from Singapore Changes in South Korea's Import Items from Thailand Changes in South Korea's Import Items from the Philippines Changes in South Korea's Import Items from Brunei Changes in South Korea's Direct Investments in ASEAN South Korea's Direct Investments in ASEAN by Country Changes in South Korea's Direct Investments in ASEAN Manufacturing Sector South Korea's Direct Investments in ASEAN by IndustryOutstanding at End of 1993

18

ASEAN Nations' Diplomatic Normalization with South and North Korea South Korean Trade with ASEAN and the World

22 25

South Korean and Japanese FDI in ASEAN Regional Distribution of South Korean and Japanese FDI inASEAN

2 2 3 4 5 6 7 8 9 9 10 10 11 11 12 12 13 13 14 14 15 16 17

34 35

List of Tables

3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 4.1 4.2 4.3 4.4

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12

Industry Distribution of South Korean andJapanese FDI inASEAN Average Investment Size per Project of South Korean and Japanese FDI, 1988-90 Ownership Distribution of South Korean andJapanese FDI Motivation of South Korean and Japanese FDI in ASEAN Sales Market Distribution of South Korean and Japanese FDI in ASEAN Sourcing Distribution of South Korean and Japanese FDI inASEAN Sources of Investment Conflicts for South Korean and Japanese FDI in ASEAN Decision-Making Relationship between Headquarters and Local Mfiliates in ASEAN Extended Dimensions of Kojima's Hypothesis Application of Dunning's Eclectic Paradigm Bilateral Trade between South Korea and Indonesia, 1979, 1989, and 1993 South Korean Direct Investment in Indonesia, 1967-93 Number ofVisitors between South Korea and Indonesia, 1987-92 South Korea's Direct Investments in Selected Asian Countries, 1991-93 Key Economic Indicators on Malaysia and Korea, 1992 Chronology of Agreements/Events between Malaysia/ ASEAN and Korea Malaysia-Korea Trade Flows, 1970-92 Malaysia-Korea Trade Flows by Commodity Groups, 1970, 1980, and 1992 Malaysia-Korea Trade in Major Commodities, 1992 Malaysia's Trade with NIEs, 1980, 1985, and 1992 Korean Direct Foreign Investment in Malaysia in Approved Projects, 1980-93 Trend of Foreign Investments in Malaysia, 1985-93 Capital Structure of Korean FDI in Malaysia by Industry as at 31 December 1992 Korean Presence in Malaysia by Sector, 1993 Tourist Flows between ASEAN and Korea, 1989 Unit Labour Cost of Selected Countries

Vll

37 39 39 41 42 43 45 46 50 51

57 59 60 63 71 73 74 76 77 78 79 80 80 80 82 85

List of Tables

Vlll

6.1 6.2 6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7

Top Twenty Products in Philippines-South Korea Trade, 1992 Fastest-Growing Products in Philippines-South Korea Trade, 1989-93 South Korean Direct Investments in the Philippines South Korea's Trade with Fast-Growing A~ia-Pacific Countries, 1991-93 Singapore's Imports from South Korea by Commodity Section Singapore's Exports to South Korea by Commodity Section Singapore's Re-exports to South Korea by Commodity Section Singapore's Visitors from South Korea South Korea's Direct Investments in ASEAN Countries Singapore's Investment in South Korea

8.14 8.15

Thailand's Major Trading Partners, 1984 and 1993 Thailand: Exports to, Imports from, and Balance of Trade with South Korea Thailand's Exports to South Korea, 1992-93 Thailand's Imports from South Korea, 1992-93 Net Flows of Foreign Direct Investment into Thailand Classified by Country South Korea's Direct Investment in ASEAN (as at end 1990) Foreign Direct Investment in ASEAN (as at end 1989) South Korea's Investment in Thailand, 1985-94 South Korean Investment in Thailand, 1990-93 South Korean Projects in Thailand Classified by Investment Size, 1992-93 South Korean Investment Projects in Thailand Applying for Promotion, Classified by Sector, 1990-93 South Korean Investment Projects in Thailand Approved hy Board oflnvestment, Classified by Sector, 1990-93 Thailand: Exports to, Imports from, and Balance of Trade with North Korea, 1984-92 Thailand's Imports from North Korea Thaiiand's Exports to North Korea

9.1 9.2

Population Density GDP per Capita, 1992

8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 8.13

92 93 97

115 116 117 118 118 119 121 132 133 134 135 137 138 139 140 141 142 143 144 145 146 146 151 152

List of Tables

ix

9.3 9.4 9.5 9.6 9.7 9.8 9.9

Structure of Production, 1992 Structure of Merchandise Exports, 1970 and 1992 Growth of Exports Intensity Indices of South Korea's Exports, 1985 and 1992 Composition of South Korea's Exports, 1988 and 1992 South Korea: Net Export Ratio, 1988 and 1992 Intra-Industry Trade Indices, APEC Only, 1980 and 1990

152 152 153 155 155 155 156

10.1 10.2

South Korean Exports to Vietnam, 1988-94 Share of Vietnam-Bound Exports among Total South Korean Exports, 1988-94 South Korea: Composition of Exports to Vietnam by Market Share, 1994 South Korean Imports from Vietnam, 1988-94 Share of Imports from Vietnam among Total South Korean Imports, 1988-94 South Korea: Composition of Imports from Vietnam by Market Share, 1994 Trade Balance and Composition of the Major Trading Partners of Vietnam in the Convertible Area, 1986-92 Trade Composition ofVietnam by Commodity Groups, 1986-91 Exports ofVietnam, 1986-91 Vietnam: Composition of Exports to South Korea by Market Share Imports of Vietnam, 1986-91 Foreign Direct Investment in Vietnam, 1988-92 Foreign Direct Investment in Vietnam by Industry as in August 1993 Foreign Direct Investment in Vietnam by Country as in August 1993 South Korea's Foreign Direct Investment in Vietnam, 1992-94 South Korea's Foreign Direct Investment in Vietnam by Scale oflnvestment (Permission Balance), as at 31 May 1994 South Korea's Foreign Direct Investment in Vietnam by Scale oflnvestment (Investment Balance), as at 31 May 1994 Vietnam: South Korea's Foreign Direct Investment in the Manufacturing Sector, May 1994 South Korea's Foreign Direct Investment in Vietnam by Scale of Ownership (Permission Balance), as at 31 May 1994

172

10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16

10.17 10.18 10.19

173 173 174 175 176 177 178 179 178 180 182 182 183 183

184 185 186

187

X

List of Tables

10.20 South Korea's Foreign Direct Investment in Vietnam by Scale of Ownership (Investment Balance), as at 31 May 1994 10.21 Survey of South Korean Firms in Vietnam 10.22 Composition of South Korean Firms Surveyed in Vietnam 10.23 Foreign Direct Investment in Vietnam by South Korean Business Groups 10.24 South Korea: Invisible Trade with Vietnam, 1992-94

189 190 190 192 193

List of Figures 3.1 3.2

Toyota's Network Strategy Samsung's Network Strategy

48 49

5.1

Malaysia-Korea Trade Balance, 1970-92

75

6.1 6.2 6.3 6.4 6.5

South Korea-Philippines Trade, 1966--93 Total Exports of South Korea and the Philippines, 1966--93 Visitor Arrivals in the Philippines, 1986--93 South Korea's Direct Foreign Investments, 1980-92 Total Foreign and South Korean Direct Investments in the Philippines, 1980-93

90 90 94 95

9.1

Mcyor Destinations of South Korea's Exports, 1985-93

96 154

Foreword The last decade has seen an enormous increase in trade and investment links between South Korea and the ASEAN region. The Republic of Korea also became a dialogue partner of ASEAN and, like the ASEAN countries, is a member of other important regional institutions like the Asia-Pacific Economic Co-operation (APEC) forum and the ASEAN Regional Forum. It was against this background that the Institute of Southeast Asian Studies (ISEAS) in Singapore and the Korean Association of Southeast Asian Studies (KASEAS) decided that there should be more exchanges and discussions between scholars from ASEAN countries and South Korea to examine the issues arising from the more intensive and extensive interactions between South Korea and the ASEAN countries in the areas of trade, investments, and tourism. One consequence of this decision was a conference on "Emerging Issues in Trade and Investment Relations between Korea and ASEAN" held in Singapore in October 1994. Funding for the project comes from the ASEAN-Republic of Korea Special Co-operation Fund. This volume comprises the revised and edited versions of papers delivered at the conference. The primary focus is clearly economic. However the political dimensions have not been entirely ignored. Nine of the chapters in this volume deal with South Korea-ASEAN relations. The last chapter is on South KoreaVietnam relations. At the time of the conference Vietnam was only a prospective member of ASEAN. Today it is a member. I take this opportunity to thank the authors who have done so much to make this publication possible. They are responsible for the facts and opinions expressed in their articles. Their interpretations do not necessarily reflect the views of ISEAS or KASEAS. I also thank the editors for the work they put in.

Chan Heng Chee Director Institute of Southeast Asian Studies August 1995

1

Overview of ASEAN-South Korea Economic Relations Yen Kyun Wang

I. Introduction The Asian newly industrializing countries (NICs) and ASEAN have the most rapidly developing economies in the world. Asia's dynamism has increased further with China and other socialist countries in Asia turning into market economies. With growing regionalism in the form of the North American Free Trade Agreement (NAFTA) and the European Union (EU), there is a growing need for closer economic co-operation among the Asia-Pacific countries. If South Korea and ASEAN can formulate closer economic co-operation schemes, both will benefit. In the next section of this chapter, changes in trade and direct investments between South Korea and ASEAN are examined. Following that, prospects for future economic relations are discussed. The final section presents the conclusions.

II. Changes in Trade and Direct Investments South Korea's trade with ASEAN increased rapidly from 1980 to 1993. ASEAN's share in South Korea's total trade was 6.6 per cent in 1980, but had risen to 10.0 per cent by 1993. Also ASEAN's share in South Korea's total exports and imports reached 11.4 per cent and 8.6 per cent respectively in 1993. ASEAN's exports to South Korea increased at an annual rate of 12.6 per cent, while imports increased by 17.6 per cent per annum from 1980 to 1993; from 1980 to 1989 ASEAN's total exports and imports increased 6.4 per cent and 7.9 per cent respectively (Tables 1.1 to 1.3). About 70.5 per cent of ASEAN's total exports to South Korea consisted of primary products in 1980 but the ratio declined to about 40 per cent in 1989. During the period the absolute value of these exports decreased. On the other

2

Yen Kyun Wang

TABLE 1.1 South Korea's Trade with ASEAN (In US$ million)

(1) Export (2) Import Trade (1)+(2)

1980

1985

1990

1993

Average Growth Rate, 1980-93 (Percentage)

1,132 (6.5) 1,480 (6.6)

1,524 (5.0) 2,697 (8.7)

5,062 (7.8) 5,086 (7.3)

9,339 (11.4) 7,204 (8.6)

17.6

2,612 (6.6)

4,221 (6.9)

10,148 (7.5)

16,543 (10.0)

15.3

12.6

NOTES: 1. Figures in parentheses denote shares in South Korean total. 2. Customs clearance basis. SOURCE: KFTA.

TABLE 1.2 Changes in ASEAN's 1 Export Items to South Korea (In US$ million) 1980

1985

1989

SITC 3

0-4: 0: 1: 2: 3: 4:

%

Value

%

Value

Primary Goods 48,350 6,997 Food and animals Beverages and tobacco 247 Crude materials 12,341 Mineral fuels and lubricants 25,945 Animal and vegetable oils and fats 2,820

70.5 10.2 0.4 18.0 37.8

34,585 8,480 325 7,071 16,330

52.9 13.0 0.5 10.8 25.0

47,551 12,634 702 10,573 19,977

39.7 10.4 0.6 8.8 16.7

-0.2 6.8 12.3 -1.7 -2.9

4.1

2,379

3.6

3,665

3.1

3.0

17,539 1,675

25.6 2.4

27,810 2,179

42.5 3.3

68,708 4,416

57.4 3.7

16.4 11.4

5,848

8.5

6,779

10.4

16,303

13.6

12.1

7,215

10.5

13,749

21.0

34,966

29.2

19.2

2,801

4.1

5,103

7.8

13,023

10.9

18.6

2,670

3.9

2,978

4.6

3,525

2.9

3.1

65,404 100.0 119,784 100.0

6.4

5-8: Manufactured Goods 5: Chemicals 6: Manufactured goods by materials 7: Machinery and transport equipment 8: Miscellaneous manufactured articles 9: 0-9

1980-89 2 %

Value

Miscellaneous Transactions

68,557 100.0

NOTES: 1Excluding Brunei. 2 Average annual rates. 'SITC -Standard International Trade Classification. SOURCES: Asian Development Bank (1990); Kim (1991).

Overview of ASEAN-South Korea Economic Relations

3

TABLE 1.3 Changes in ASEAN's 1 Import Items from South Korea (In US$ million) 1980

1985

1989

SITC'

0-4: Primary Goods

%

Value

%

Value

24,518

38.7 7.4 0.6 5.3 24.5

22,386 4,228 503 2,799 14,128

35.3 6.7 0.8 4.5 22.3

28,220 7,066 870 6,303 13,024

22.3 5.6 0.7 5.0 10.4

1.5 4.7 9.0 7.2 -1.9

0.9

728

l.l

777

0.6

3.2

36,876 5,444

58.2 8.6

39,254 6,230

61.8 9.8

93,238 12,878

74.3 10.3

10.9 10.0

9,601

15.2

8,842

13.9

21,239

16.9

9.2

19,175

30.3

20,614

32.4

51,347

40.9

11.6

2,656

4.2

3,540

5.6

7,774

6.2

12.7

1,924

3.0

1,851

2.9

4,181

3.3

9.0

63,491 100.0 125,459 100.0

7.9

0: Food and animals

1: 2: 3: 4:

4,660 Beverages and tobacco 399 3,380 Crude materials Mineral fuels and lubricants 15,494 Animal and vegetable oils and fats 585

5-8: Manufactured Goods 5: Chemicals 6: Manufactured goods by materials 7: Machinery and transport equipment 8: Miscellaneous manufactured articles 9:

Miscellaneous Transactions

0-9

1980-89 2 %

Value

63,317 100.0 1

NOTES: Excluding Brunei. 2 Average annual rates. 3 SITC- Standard International Trade Classification. SOURCES: Asian Development Bank (1990); Kim (1991).

hand, the share of manufactured exports from ASEAN increased from 25.6 per cent in 1980 to 57.4 per cent in 1989. These exports increased at an annual rate of 16.4 per cent during the period. Machinery, transport equipment, and miscellaneous manufactured goods recorded the greatest increase. The share of primary goods in ASEAN's total imports from South Korea declined from 38.7 per cent in 1980 to 22.3 per cent in 1989. However, the share of manufactured goods increased from 58.2 per cent in 1980 to 74.3 per cent. The manufactured imports of ASEAN increased at an annual rate of 10.9 per cent during the same period. In 1989 machinery and transport equipment imports accounted for 40.9 per cent of the total imports, and manufactured goods by materials 16.9 per cent. The share of manufactured goods increased rapidly in both the exports and imports of ASEAN, especially in exports (Tables 1.2 and 1.3).

4

Yen Kyun Wang

TABLE 1.4 South Korea's Trade with ASEAN by Country (In US$ million) Export

Import

1980 1993 Malaysia 1980 1993 Singapore 1980 1993 Philippines 1980 1993 Thailand 1980 1993 Brunei 1980 1993

336 2,095 184 1,430 266 3,109 152 935 165 1,761 0 10

485 2,588 472 1,947 161 1,540 272 318 91 539 0 273

-119 -493 -288 -517 105 1,569 -120 617 74 1,222 0 -263

1980 1993

1,132 9,339

1,480 7,204

-348 2,135

Indonesia

ASEAN

Trade Balance

NOTE: Customs clearance basis. SOURCE: KFIA.

ASEAN is South Korea's fourth largest trading partner in both exports and imports, after the United States,Japan, and the EU. South Korea recorded a trade surplus of US$2.1 billion with ASEAN in 1993, broken down into trade surplus with Singapore (US$1.6 billion), the Philippines (US$0.6 billion), and Thailand(US$1.2 billion); and trade deficits with Indonesia (-US$0.5 billion) and Malaysia (-US$0.5 billion) (Table 1.4). South Korea's exports to ASEA~ have been mostly manufactured goods. Metal products accounted for a quarter of the exports, while textile yarn and fabrics (18.6 per cent) constituted the next important export item in 1980. However, in 1993 electric and electronic goods accounted for 34 per cent, textile yarn and fabrics 12.0 per cent, and metal products 11.6 per cent of the exports. Heavy industrial goods and chemicals constituted about 70 per cent of the exports that year. The most rapidly increasing export items from South Korea to ASEAN from 1980 to 1993 are electric and electronic goods and machinery (Tables 1.5 and 1.6). South Korea's imports from ASEAN were mainly resource-based primary commodities until the early 1980s, but by 1993 primary goods accounted for about 60 per cent, while manufactured goods constituted 40 per cent. South Korea's main import items from ASEAN are mineral fuels, raw materials, and electric and electronic goods. Mineral fuels are the most important single export item from ASEAN to South Korea, but manufactured exports increased

5

Overview of ASEAN-South Korea Economic Relations

TABLE 1.5 Changes in South Korea's Export Items to ASEAN (In US$ million) 1980 Value Agriculture, fishery, and dairy Raw materials and fuels Manufactured goods Light industry Textile yarn and fabrics Leather and related goods Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery Total NOTE:

1985

% Value

127 33 970 373 210 2 597 137 287 43 68 53 9

11.2 2.9 85.7 33.0 18.6 0.1 52.8 12.1 25.4 3.8 6.0 4.7 0.8

20 77 1,425 278 178 4 1,147 198 263 75 160 444 6

1,131

100.0

1,521

1990

% Value

1993

% Value

%

101 126 4,835 1,258 675 154 3,577 439 667 487 1,647 282 54

109 1.2 2.0 6.2 575 2.5 95.5 8,656 92.7 24.9 2,165 23.2 13.3 1,118 12.0 368 3.9 3.0 70.7 6,491 69.5 8.7 976 10.5 13.2 1,086 11.6 9.6 740 7.9 32.5 3,170 33.9 4.6 5.6 427 1.0 93 l.l

100.0 5,062

100.0 9,339 100.0

1.3 5.1 93.7 18.3 11.7 0.3 75.4 13.0 17.3 4.9 10.5 29.2 0.4

Standard International Trade Classification (SITC): Agricultme, fishery, dairy(0,1) 0 : Food and live animals chiefly for food 1 :Beverages and tobacco Raw materials and fuels(2,3,4) 2 : Crude materials inedible, except fuels 3 : Mineral fuels, lubricants, and related materials 4 : Animal and vegetable oils, fats, and waxes Manufactured goods(5-9) Light industry(61-66,68,81-85,89,9) 61 :Leather and related goods 62 : Rubber manufactures, n.e.s. 63: Cork and wood manufactures(excluding furniture) 64 : Paper and related goods 65 : Textile yarn, fabrics, and related goods 66 : Non-metallic mineral manufactures, n.e.s. 68 : Non-ferrous metals 81 : Sanitary, plumbing, heating, and others, n.e.s. 82 : Furniture and parts thereof 83 : Travel goods, handbags, and similar containers 84: Articles of apparel and clothing accessories 85 : Footwear 89: Miscellaneous manufactured articles, n.e.s. 9 : Commodities and transactions not classified elsewhere in the SITC Heavy and chemical(5,7,67,69,87,88) 5: Chemicals and related products, n.e.s. 7 : Machinery and transport equipment 67,69 : Metal products 71-74: General machinery 75-77 : Electric and electronic goods 78-79: Transport equipment 87-88 : Precision machinery

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

Yen Kyun Wang

6

TABLE 1.6 Changes in South Korea's Export Items to ASEAN (In US$ million)

1980

1985

1993 1980-93 1

SITC

0-4: 0: 1: 2: 3: 4:

Primary Goods Food and animals Beverages and tobacco Crude materials Mineral fuels and lubricants Animal and vegetable oils and fats

5-8: Manufactured Goods 5: Chemicals 6: Manufactured goods by materials 7: Machinery and transport equipment 8: Miscellaneous manufactured articles 9:

Miscellaneous Transactions

0-9

Value

%

Value

%

Value

%

160 123 3 14 19

14.1

96 15 4 23 53

6.3 1.0 0.3 1.5 3.5

683 103 5 135 439

7.3

10.8 0.3 1.3 1.7 0.1

0.0

0.1 1.4 4.7

ll.8 -1.4 4.0 19.0 27.3

0.0

0.0

l.l

936

82.8

1,418

91.6

18.5

12.2

198

93.2 13.0

8,547

137

976

10.5

16.3

585

51.8

497

32.7

2,829

30.3

12.9

164

14.5

679

44.6

4,328

46.4

28.6

50

4.4

44

2.9

412

4.4

17.6

34

3.0

7

0.5

102

l.l

8.8

9,332 100.0

17.6

1,131 100.0

1,521 100.0

NOTE: 1Average annual rates. SOURCE: Korea Institute for Industrial Economics and Trade, Trade statistics data base.

three times as fast as primary goods exports during 1980-93. In particular, heavy industrial and chemical products made up 24.3 per cent of ASEAN's exports to South Korea in 1993, compared to 5.9 per cent in 1980 (Tables 1.7 and 1.8). The trade pattern between South Korea and ASEAN shows that the two partners are moving towards a growing horizontal division of labour and growing intra-industry specialization. The share of heavy industrial and chemical products is increasing rapidly in both South Korea's exports to and imports from ASEAN. In particular, electric and electronic goods are becoming one of the most important intra-industry trade items. Next we consider South Korea's imports and exports from individual ASEAN countries (Tables 1.9 to 1.20). South Korea's main import items from Indonesia were mineral fuels, which accounted for 56.6 per cent, and cork and wood manufactured goods, which accounted for 22.4 per cent ofthe total

7

Overview of ASEAN-South Korea Economic Relations

TABLE 1.7 Changes in South Korea's Import Items from ASEAN' (In US$ million) 1980 Value Agriculture, fishery, and dairy Mineral fuels Raw materials Cork and wood 2 Crude rubber Manufactured goods Light industry Cork and wood 2 Textile yarn and fabrics Heavy and chemical Electric and electronics General machinery Total

228 150 969 660 180 134 45 3 12 88 44 7

1985

% Value 15.4 146 10.1 1,406 65.5 560 44.6 294 130 12.2 9.1 584 3.0 78 0.2 18 0.8 9 5.9 506 3.0 72 11 0.5

1990

% Value 5.4 52.2 20.8 10.9 4.8 21.7 2.9 0.7 0.3 18.8 2.7 0.4

350 2,164 1,031 518 220 1,539 528 291 33 1,011 592 92

1993

% Value 6.9 42.5 20.3 10.2 4.3 30.3 10.4 5.7 0.6 19.9 11.6 1.8

396 2,829 1,190 630 245 2,786 1,033 631 135 1,753 1,180 146

% 5.5 39.3 16.5 8.7 3.4 38.7 14.3 8.8 1.9 24.3 16.4 2.0

1,480 100.0 2,696 100.0 5,086 100.0 7,201 100.0

NOTES: 1Classification scheme is the same as in Table 1.5. 2 Cork and wood manufactures include SITC 63 (Cork and wood manufactures) and 82 (Furniture and parts thereof). SOURCE: Korean Foreign Trade Association, Trade statistics data base.

imports from Indonesia in 1993 (Table 1.15). On the other hand South Korea's main export items to Indonesia were light industrial goods, which accounted for 44.8 per cent, and heavy chemical goods, which accounted for 50.0 per cent of total exports to Indonesia in 1993 (Table 1.9). South Korea's main import items from Malaysia were mineral fuels and raw materials. Manufactured goods accounted for 24.5 per cent of the total imports from Malaysia in 1993 (Table 1.16). South Korea's main exports to Malaysia were heavy industrial and chemical products, which accounted for 88.0 per cent of the total exports in 1993, of which electric and electronic goods made up 46.9 per cent (Table 1.10). Singapore exported mainly fuels (27.0 per cent of the total) and electric and electronic goods ( 48.8 per cent) to South Korea in 1993 (Table 1.17). And South Korea exported mainly electric and electronic goods (55.4 per cent) and light industrial goods (15.9 per cent) to Singapore in 1993 (Table 1.11). Thailand exported mainly agricultural, fish, and dairy products ( 40.3 per cent) and raw materials (20.1 per cent) to South Korea in 1993. Heavy industrial and chemical products accounted for 27.1 per cent in the same year (Table 1.18). South Korea's main exports to Thailand in 1993 were electric

8

Yen Kyun Wang

TABLE 1.8 Changes in South Korea's Import Items from ASEAN 1 (In US$ million) 1980

1985

1993

SITC

0-4: Primary Goods 0: Food and animals 1: Beverages and tobacco 2: Crude materials 3: Mineral fuels and lubricants 4: Animal and vegetable oils and fats 5-8: Manufactured Goods 5: Chemicals 6: Manufactured goods by materials 7: Machinery and transport equipment 8: Miscellaneous manufactured articles 9: 0-9

Miscellaneous Transactions

1980-932 %

Value

%

Value

%

Value

1,346 227 0 942 150

90.9 15.4 0.0 63.6 10.1

2,113 146 0 492 1,406

78.4 5.4 0.0 18.2 52.1

4,415 395 0.3 1,070 2,556

59.8 5.7 0.0 15.4 36.9

24.4

27

1.8

69

2.5

120

1.7

12.2

132

8.9

584

40.2

26.4

0.3

49

21.9 1.8

2,783

5

257

3.7

35.4

43

2.9

87

3.2

983

14.2

27.2

78

5.2

442

16.4

1,339

19.3

24.4

6

0.4

6

0.2

203

2.9

31.1

2

0.2

0.3

0.0

3

0.0

3.2

7,201 100.0

12.6

1,480 100.0

2,696 100.0

9.0 4.4

l.O

NOTES: 1Excluding Brunei. 2 Average annual rates of increase. SOURCE: Korean Foreign Trade Association, Trade statistics data base.

and electronic goods (20.6 per ce.nt), chemicals (17.6 per cent), and metal products (15.9 per cent) (Table 1.12). The Philippines exported mainly agricultural goods (26.2 per cent), light industrial goods (22.6 per cent), and electric and electronic goods (21.5 per cent) to South Korea in 1993 (Table 1.19). South Korea's exports to the Philippines that year were mainly light industrial goods (28.0 per cent), chemicals (19.6 per cent), and electric and electronic goods (20.5 per cent) (Table 1.13). Brunei exported mineral fuels to South Korea and imported mainly electric and electronic goods (50.1 per cent) and transport equipment (36.7 per cent) from South Korea in 1993 (Tables 1.14 and 1.20). South Korea's direct investments (on the basis of net permits, excluding liquidation and invalidation, etc.) in ASEAN began to increase substantially in 1987 when South Korea began to have a current account surplus and its

Overview of ASEAN-South Korea Economic Relations

9

TABLE 1.9 Changes in South Korea's Export Items to Indonesia (In US$ million)

1980

Agriculture Raw materials and fuels Manufactured goods Light industry Textile yarn and fabrics Leather and related goods Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery Total

1985

% Value

Value

104 28.5 4 1.1 257 70.4 78 21.4 48 13.2 0 0.0 180 49.3 40 11.0 89 22.4 21 5.8 10 2.7 19 5.2 0 0.0 365 100.0

1990

% Value

1993

% Value

%

34 3.2 17 0.8 0.0 2.5 92 4.4 27 4.1 95.9 1,017 94.3 1,986 94.8 387 35.9 939 44.8 17.4 206 19.1 509 24.3 9.7 0.0 88 8.2 258 12.3 78.5 630 58.4 1,047 50.0 114 10.6 309 14.8 31.3 159 14.7 26.7 279 13.3 256 23.7 7.7 225 10.7 10.3 92 8.5 219 10.4 4 2 2.1 0.2 8 0.4 0 7 0.6 8 0.4 0.0 195 100.0 1,079 100.0 2,095 100.0 0

8 187 34 19 0 153 61 52 15 20

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

TABLE 1.10 Changes in South Korea's Export Items to Malaysia (In US$ million)

1980 Value Agriculture Raw materials and fuels Manufactured goods Light industry Textiles Non-metallic minerals Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery Total

4 1

179 53 18 3 126

7 76

7 20 16 0

1985

% Value 2.2 0.5 97.3 28.8 9.8 1.6 68.5 3.8 41.3 3.8 10.9 8.7 0.0

184 100.0

4 6 493 36 16 5 404 8 112 31 40 211 0

1990

% Value 0.9 1.3 97.8 8.0 3.6 1.1 90.0 1.8 24.9 6.9 8.9 47.0 0.0

449 100.0

4

7 697 81 43 4 616 41 111 51 348 61 4

1993

% Value

%

5 0.4 0.6 24 1.7 1.0 98.4 1,400 97.9 11.4 142 9.9 41 2.8 6.1 32 2.2 0.6 87.0 1,258 88.0 76 5.3 5.8 243 17.0 15.7 144 10.1 7.2 670 46.9 49.2 8.6 115 8.1 0.6 10 0.7

708 100.0 1,430 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

10

Yen Kyun Wang

TABLE 1.11 Changes in South Korea's Export Items to Singapore (In US$ million)

1980 Value Agriculture, fishery, and dairy Raw materials and fuels Manufactured goods Light industry Textile yarn and fabrics Non-metallic minerals Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery Total

1985

% Value

9 15 242 138 94 17 104 12 52 5 21 13

3.4 5.6 91.0 51.9 35.3 6.4 39.1 4.5 19.5 1.9 7.9 4.9 0.4 266 100.0

1990

% Value

1993

% Value

1,1 9 1.8 20 2.9 21 4.3 53 459 93.9 1,732 96.0 152 31.3 376 20.8 106 21.7 182 10.1 14 0.4 2.9 8 307 62.8 1,355 75.1 3.5 10 2.0 64 141 7.8 36 7.4 4.3 4.4 21 79 73 14.9 873 48.4 164 33.5 173 9.6 1.4 3 0.6 26 489 100.0 1,805 100.0

22 247 2,841 495 246 30 2,347 98 163 158 1,722 153 53 3,109

% 0.7 7.9 91.4 15.9 7.9 1.0 75.5 3.2 5.2 5.1 55.4 4.9 1.7 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base. TABLE 1.12 Changes in South Korea's Export Items to Thailand (In US$ million)

1980 Value Agriculture Raw mat~rials and fuels Manufactured goods Light industry Textile yarn and fabrics Leather and related goods Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery Total

1985

% Value

10 6.1 10 6.1 145 88.4 69 42.1 31 18.9 0 0.0 75 45.7 8 4.9 42 25.6 6 3.7 9 5.5 3 1.8 7 4.3 164 100.0

1990

% Value

3 2.1 8 5.6 132 92.3 26 18.2 18 12.6 0 0.0 106 74.1 57 39.9 24 16.8 4 2.8 13 9.1 6 4.2 1.4 2 143 100.0

1993

% Value

%

3.8 37 62 3.5 2.9 27 122 6.9 905 93.4 1,577 89.5 326 18.5 270 27.9 159 16.4 187 10.6 4.6 45 53 3.0 635 65.5 1,250 71.0 311 17.6 153 15.8 280 15.9 168 17.3 6.4 165 9.4 62 362 20.6 227 23.4 2.2 118 6.7 21 5 0.5 14 0.8 969 100.0 1,761 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

11

Overview of ASEAN-South Korea Economic Relations

TABLE 1.13 Changes in South Korea's Export Items to the Philippines (In US$ million)

1980 Value

1985 1990 1993 % Value % Value % Value %

Agriculture Raw materials and fuels Manufactured goods Light industry Textile yarn and fabrics Leather and related goods Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery

1 3 148 35 19 2 113 70 28 5 7 2

0.7 2.0 98.0 23.2 12.6 1.3 74.8 46.4 18.5 3.3 4.6 1.3 0.7

Total

151 100.0

3 34 203 29 18 3 174 61 36 3 14 57

1.3 14.2 84.6 12.1 7.5 1.3 72.5 25.4 15.0 1.3 5.8 23.8 0.4

240 100.0

5 11 484 145 85 11 339 68 88 39 107 25 12

1.0 2.2 96.8 29.0 17.0 2.2 67.8 13.6 17.6 7.8 21.4 5.0 2.4

500 100.0

3 89 843 262 135 51 581 183 121 48 192 28 8

0.3 9.5 90.1 28.0 14.4 5.4 62.1 19.6 13.0 5.2 20.5 3.0 0.8

935 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base. TABLE 1.14 Changes in South Korea's Export Items to Brunei (In US$ million)

1980 Value

1985

% Value

1993 1990 % Value % Value %

Agriculture Raw materials and fuels Manufactured goods Light industry Textile yarn and fabrics Leather and related goods Heavy and chemical Chemicals Metal products General machinery Electric and electronics Transport equipment Precision machinery

0 0 0 0 0 0 0 0 0 0 0 0 0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0 0.0 0 0.0 5 100.0 2 40.0 0.0 0 0 0.0 3 60.0 0 0.0 3 60.0 0 0.0 0.0 0 0.0 0 0.0 0

0 0.0 0.0 0 1 100.0 0 0.0 0.0 0 0 0.0 1 100.0 0 0.0 0.0 0 0.0 0 0.0 0 100.0 0 0.0

0 0 10 1 0 0 9 0 0 0 5 4 0

Total

0

0.0

5 100.0

1 100.0

10 97.2

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

2.1 0.0 95.1 6.5 1.4 0.0 88.6 0.0 0.3 0.6 50.1 36.7 0.2

12

Yen Kyun Wang

TABLE 1.15 Changes in South Korea's Import Items from Indonesia (In US$ million) 1980

1985

% Value

Value Agriculture, fishery, and dairy Mineral fuels Raw materials Manufactured goods Light industry Cork and wood manufacture Textile yarn and fabrics Heavy and chemical

15 55 405 10 9 1 0

3.1 11.4 83.7 2.1 1.9 0.2 0.0 0.2

Total

484 100.0

30 555 50 34 24 7 10

1990

% Value 4.5 40 83.0 1,023 7.5 128 5.1 410 3.6 356 1.0 278 0.1 15 54 1.5

1993

% Value

%

2.5 72 2.8 63.9 1,465 56.6 8.0 207 8.0 25.6 844 32.6 22.3 754 29.1 17.4 579 22.4 100 3.9 0.9 3.4 90 3.5

669 100.0 1,600 100.0 2,588 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

TABLE 1.16 Changes in South Korea's Import Items from Malaysia (In US$ million) 1980 Value Agriculture, fishery, and dairy 3 Mineral fuels 16 430 Raw materials Cork and wood 266 Crude rubber 142 Manufactured goods 23 Light industry 18 4 Heavy and chemical Electric and electronics 3 Chemicals 1 Total

1985

% Value 0.6 3.4 91.3 56.5 30.1 4.9 3.8 0.8 0.6 0.2

5 572 422 267 102 235 17 218 26 1

1990

% Value 0.4 46.4 34.2 21.6 8.3 19.0 1.4 17.7 2.1 0.0

17 545 744 496 156 280 52 228 148 50

1993

% Value

%

15 645 810 556 127 477 89 388 271 72

0.8 33.1 41.6 28.6 6.5 24.5 4.6 19.9 13.9 3.7

1.1

34.4 46.9 31.3 9.8 17.7 3.3 14.4 9.3 3.2

471 100.0 1,234 100.0 1,586 100.0 1,946 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

13

Overview of ASEAN-South Korea Economic Relations

TABLE 1.17 Changes in South Korea's Import Items from Singapore (In US$ million)

1980

Agriculture, fishery, and dairy Mineral fuels Raw materials Manufactured goods Light industry Heavy and chemical Electric and electronics General machinery

2 78 37 43 7 37 13 4

1985

% Value

Value

1.2 48.4 23.0 26.7 4.3 23.0 8.1 2.5

161 100.0

Total

5 49 32 182 7 174 30 9

1990

% Value 1.9 18.4 12.0 68.2 2.6 65.2 11.2 3.4

267 100.0

7 256 54 579 32 548 314 66

1993

% Value

%

0.8 10 0.6 28.5 416 27.0 6.0 18 1.2 64.5 1,095 71.2 3.6 51 3.3 61.1 1,044 67.9 35.0 750 48.8 7.4 106 6.9

897 100.0 1,538 100.0

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

TABLE 1.18 Changes in South Korea's Import Items from Thailand (In US$ million)

1980 Value

1985

% Value

Agriculture, fishery, and dairy Mineral fuels Raw materials Crude rubber Manufactured goods Light industry Textile yarn and fabrics Heavy and chemical Electric and electronics General machinery

53 l 5

58.2

33 9 7 24 17 2

36.3 9.9 7.7 26.4 18.7 2.2

Total

91 100.0

l.l

5.5

u

83 0 25 17 44 13 4 32 5 1

1990

% Value 54.6 0.0 16.4 11.2 28.9 8.6 2.6 21.1 3.3 0.7

152 100.0

1993

% Value

%

53.7 4.7 13.4 8.6 28.2 7.3 1.9 20.9 12.7 4.1

217 40.3 0.1 108 20.1 75 13.9 213 39.6 68 12.6 15 2.8 146 27.1 81 15.1 33 6.1

464 100.0

538 100.0

249 22 62 40 131 34 9 97 59 19

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

Yen Kyun Wang

14

TABLE 1.19 Changes in South Korea's Import Items from the Philippines (In US$ million) 1980

1990

1985

% Value

Value Agriculture, fishery, and dairy Mineral fuels Raw materials Manufactured goods Light industry Non-ferrous metals Heavy and chemical Electric and electronics

155 0 92 25 2 2 22 11

57.2 0.0 33.9 9.2 0.7 0.7 8.1 4.1

Total

271

100.0

23 7 31 89 18 17 71 9

% Value 15.3 4.7 20.7 59.3 12.0 11.3 47.3 6.0

150 100.0

38 49 44 139 54 40 85 69

1993

% Value 14.1 18.1 16.3 51.5 20.0 14.8 31.5 25.6

270 100.0

83 30 47 157 72 52 85 68

% 26.2 9.5 14.9 49.5 22.6 16.4 26.9 21.5

317 100.1

SOURCE: Korean Foreign Trade Association, Trade statistics data base.

TABLE 1.20 Changes in South Korea's Import Items from Brunei (In US$ million) 1980 Value

1990

1985

% Value

% Value

1993

% Value

%

Agriculture, fishery, and dairy Mineral fuels Raw materials Manufactured goods Light industry Heavy and chemical

0 0 0 0 0 0

0.0 0.0 0.0 0.0 0.0 0.0

0 223 1 0 0 0

0.0 99.6 0.4 0.0 0.0 0.0

0 0.0 269 100.0 0 0.0 0 0.0 0 0.0 0 0.0

0 0.0 273 100.0 0 0.0 0 0.0 0 0.0 0 0.0

Total

0

0.0

224 100.0

269 100.0

273 100.0

SOURCE: Korean Foreign Trade Association. Trade statistics data base.

exchange rate appreciated. In 1990 South Korea's direct investment~ in ASEAN constituted 40.5 per cent of its total direct investments; this share declined to 6.0 per cent and 6.4 per cent in 1992 and 1993, respectively. The slowdown was due to, firstly, the slowdown in the South Korean economy in the two years and domestic elections for the congress and the presidency; and secondly, drastic increases in South Korea's direct investment~ in China, which amounted to US$222 million and US$639 million in 1992 and 1993, respectively. But in 1993 and 1994 South Korean investments in ASEAN increased more than twice as m~ch as in the previous years, reaching US$1.5 billion in outstanding direct

15

Overview of ASEAN-South Korea Economic Relations

TABLE 1. 21 Changes in South Korea's Direct Investments in ASEAN (In US$1,000) World(A) No. of Cases 1968-87 1988 1989 1990 1991 1992 1993 1994

578 215 321 463 489 515 935 1,553

Value 1,267,612 407,711 688,104 1,336,146 1,367,815 704,530 1,494,264 2,885,516

ASEAN(B) No. of Cases 59 51 102 178 136 63 97 252

Value 251,732 45,524 173,310 541,753 272,723 41,959 95,242 210,780

B/A(%) No. of Cases 10.2 23.7 31.8 38.4 27.8 12.5 10.4 16.2

Value 19.9 11.2 25.2 40.5 19.9 6.0 6.4 7.3

NOTE: Excluding Brunei. Approval basis, excluding liquidation and invalidation, etc. SOURCES: Bank of Korea, Overseas Direct Investment Statistics Yearbook, various issues.

investments as at the end of 1994, which was nearly 50 per cent higher than that in 1990. South Korea's direct investments abroad also doubled in 1993 and 1994 (Tables 1.21 and 1.22). But South Korea's direct investments in ASEAN as a percentage of its overseas direct investments increased from 6.4 per cent in 1993 to 7.3 per cent in 1994. Of South Korea's direct investments in ASEAN as at end-1994, the majority went to Indonesia (57 per cent), followed by Malaysia (23.2 per cent), the Philippines (15.8 per cent), Singapore (2.5 per cent), and Thailand (1.1 per cent). The share of South Korea's direct investments in Indonesia declined recently and showed negative figures in 1992 and 1994 (Tables 1.22 and 1.23). One of the reasons for the slowdown may be that more investments are being made in China and Vietnam. Another reason may be related to recently increasing labour disputes in South Korean plants in Indonesia. China is an attractive place to invest for South Korean investors. China is close to South Korea geographically and has a similar cultural background. Land prices and wages in northern China are relatively cheap. Furthermore, Koreans have some understanding of the Chinese language, and there is a large number of Korean-Chinese people in China who understand the Korean language. Until 1986, South Korea's direct investments in ASEAN were concentrated in the development of natural resources and forestry. However, in the late 1980s, not only did the total amount of direct investments in ASEAN increase tc a significant level, but also, most of the investments were directed at the

TABLE 1.22 South Korea's Direct Investments in ASEAN by Country (In US$1,000)

Outstanding at End of 1990

1991

1992

1993

1994

Outstanding at End of 1994

--

No. of Cases

Value

No. of Cases

Value

No. of Cases

Value

No. of Cases

Value

No. of Cases

Value

No. of Cases

Value

Indonesia Malaysia Philippines Singapore Thailand

189 69 46 22 64

714,744 129,104 87,540 12,120 68,888

47 22 45 10 12

166,486 22,691 37,999 15,220 30,340

3 16 36 3 5

-28,557 29,846 8,401 5,987 26,282

20 11 47 9 10

47,457 7,122 29,990 3,450 7,223

-12 6 229 5 12

-39,223 159,032 73,182 1,557 16,232

248 124 402 48 12

Total

390

1,012,396

136

272,723

63

41,959

97

95,242

240

210,780

834 1,499,921

NOTE: Excluding Brunei. Approval basis (net permit basis excluding liquidation, invalidation, etc.). SOURCES: Bank of Korea, Overseas Direct Investment Statistics Yearbook, various issues.

860,959 347,785 237,011 37,934 16,232

TABLE 1.23 Changes in South Korea's Direct Investments in ASEAN Manufacturing Sector (In US$1,000)

1973-85 No. of Cases Value Indonesia Malaysia Philippines Singapore Thailand Total

1986 No. of Cases

5 4 2 2 3

11,993 26,488 2,009 3,908 1,871

-

1

16

46,269

2

1988

Value

1

588

-

-

No. of Cases

Value

45

22 4 4 1 14

23,744 3,301 4,529 500 16,098

633

45

48,172

1990 No. of Cases

Value

1993 No. of Cases

1994

--Value

No. of Cases

Value

87 254,968 61,819 22 69,739 21 1 1,295 31,086 23

17 7 41 1 6

36,553 6,631 29,185 1,364 4,515

-7 3 218 -1 3

-1,316 151,963 50,847 -403 13,916

418,907

72

78,248

216

215,007

154

NOTE: Approval basis (net permit basis). SOURCES: Bank of Korea, Overseas Direct Investment Statistics Yearbook, various issues.

TABLE 1.24 South Korea's Direct Investments in ASEAN by Industry Outstanding at End of 1993 (In US$1,000) Indonesia

Malaysia

Singapore

Philippines

Thailand

Brunei

ASEAN

--No. of Cases

Value

No. of Cases

Value

No. of Cases

Value

No. of Cases

Value

No. of Cases

Mining 4 Forestry 6 Fishery 8 Manufacturing 231 Construction 3 Transportation and storage 0 Trade 0 Real estate 0 Others 8

322,894 32,951 6,251 479,430 1,140

0 0 2 94 10

0 0 97 185,337 1,242

0 0 2 7 1

0 0 700 12,247 63

1 0 5 !56 2

100 0 1,429 158,454 156

0 0 0 57,461

0 9 0 3

0 970 0 1,107

2 28 1 3

517 22,506 530 344

0 6 1 3

Total

900,127

118

188,753

44

36,907

174

260

World --

Value

No. of Cases

Value

No. of Cases

0 0 73 8

3,684 0 0 122,917 1,907

0 0 0 0 1

0 0 0 0 5

6 6 17 561 25

0 615 101 3,075

0 6 0 3

0 850 0 3,375

0 0 0 0

0 0 0 0

2 49 2 20

163,930

91

132,733

1

5

NOTE: Approval basis (net permit basis). SOURCE: Bank of Korea, Overseas Direct Investment Statistics Yearbook, 1994.

l

Value

No. of Cases

Value

15 330,930 326,678 32,951 8 33,665 40 17,985 8,477 958,385 1,762 2,167,211 39 4,513 33,995 517 24,941 631 65,362

32 289 12 84

16,033 181,558 134,028 285,182

688 1,422,455 2,281 3,200,587

Overview of ASn"AN-South Korea Economic Relations

19

light manufacturing sector where South Korea is losing its comparative advantage due to rapid wage increases at home and the appreciation of the Korean won. South Korea's direct investments in manufacturing in ASEAN amounted to US$0.96 billion as at the end of 1993, accounting for 44 per cent of its total direct investments in manufacturing (Tables 1.23 and 1.24). South Korea's direct investments in ASEAN helped both parties move towards a greater horizontal division of labour.

III. Prospects for Future Economic Relationships

It is expected that there will be significant increases in trade and direct investments between South Korea and ASEAN. South Korea has been undergoing substantial structural adjustment due to rapid wage increases and real exchange rate appreciation since 1987. South Korea has been accelerating capital and foreign exchange liberalization since 1994. It will continue to do so, since it will become a member of the Organization for Economic Cooperation and Development (OECD) in 1996. In 1994 the Korean won began a new phase of continuous appreciation against the U.S. dollar, and in 1994 a rapid appreciation, due to the large foreign capital inflows. In addition, South Korea will raise its overseas development assistance (ODA) to developing countries, including ASEAN, to meet OECD standards. In 1994 South Korean ODA amounted to US$148 million, or 0.04 per cent of its gross national product (GNP), and in 1995 it is expected to rise to US$300 million to thirtyfive countries, reaching 0.06 per cent of the GNP. The annual interest rates on the loans range from 2.0 per cent to 5.0 per cent, depending on the GNP levels of the receiving countries. The average level of ODA from the OECD countries was 0.3 per cent of the GNP in 1994. The target of the South Korean ODA in the late 1990s is 0.2 per cent to 0.3 per cent of the GNP, which is more than three times the present level. The above factors will push the South Korean economy to speed up the upgrading of its industrial structure, and cause trade and South Korea's direct investments in ASEAN to expand rapidly. In addition, the growing regionalism in other parts of the world will lead South Korea and ASEAN to co-operate more closely.

IV. Conclusion

Asian NICs and ASEAN have constituted the most rapidly developing regions in the world in the past three decades and the pace of growth in these areas is expected to continue in the coming decade. The growth and dynamism of the regions are being further reinforced by the fact that China and other Asian socialist countries are becoming market economies. South Korea's trade with ASEAN is increasing very rapidly, and the trade pattern reflects the rapidly

20

Yen Kyun Wang

changing industrial structures of both South Korea and ASEAN. Metal products and textile yarn and fabrics were the most important export items of South Korea to ASEAN in 1980, but in 1993 electric and electronic goods constituted more than the combined value of metal products and textile yarn and fabrics. Mineral fuels form the most important export item from ASEAN to South Korea, but exports of manufactured goods increased three times as fast as those for primary goods from 1980 to 1993. Electric and electronic goods are the most rapidly increasing trade items between South Korea and ASEAN, which are both moving towards a growing horizontal division oflabour and growing intra-industry specialization. South Korea's direct investments in ASEAN had been increasing very rapidly until 1991, slowed down in 1992, but have been increasing very rapidly again since 1993, with direct investments in manufacturing assuming increasing importance. Owing to the rapid wage increases and high land prices in South Korea and continuous appreciation of the Korean won, it is expected that South Korea's direct investments overseas, including ASEAN, will increase rapidly. A substantial increase in South Korean ODA to the developing countries as South Korea joins the OECD will also be an important factor to boost its direct investments in ASEAN.

REFERENCES Asian Development Bank. Key Indicators ofDeveloping Asian and Pacific Countries. Manila, 1990. Bank of Korea. Overseas Direct Investment Statistics Yearbook. Seoul, various issues. Chon Sang Duk, Song Ha Yool, and Chu Dong Ju. Direct Investment Patterns and Management Performances of Korean Firms in ASA'AN. Seoul: KlET, 1993. Kim In june. "Potential of Korea's Trade with ASEAN over the Next Decade". In KoreaASEAN Economic Co-operation towards the Year 2000. Seoul: KlET, 1991. Korean Foreign Trade Association (KFTA). Export and Import Statistics. Seoul, various Issues. Lee Young Sae. "The Prospect of Economic Relations between Korea and ASEAN and Some Suggestions for Economic Co-operation for the 21st Century". In KoreaASEAN Economic Co-operation towards the Year 2000. Seoul: Korea Institute for Industrial Economics and Trade (KlET), 1991.

2

ASEAN, South Korea, and the Asia-Pacific Region Lee Poh Ping and Hong Seok Jeong

This chapter on South Korea-ASEAN relations has two parts. The first traces South Korea-ASEAN relations in the post-World War II period. The second considers the roles both entities can play in a post-Cold War Asia-Pacific region. This will include a discussion of the nature of big power relations, the role of small states in the region, and the process of enlargement of both entities.

I. South Korea-ASEAN Relations

South Korea-ASEAN relations are different from most other bilateral relationships. 1 In the first place, South Korea is a part of a divided nation, the other half being North Korea. While most observers, and indeed nations, consider South Korea as the much more respectable of the two, and perhaps more qualified to represent the Korean people, North Korea by no means concedes this, especially as to who best represents the Korean people. The rivalry thus generated has greatly affected, particularly in the earlier post-war years, South Korean (and indeed North Korean) relations with other countries, including the countries of ASEAN. On the other hand, ASEAN in itself is not a state but a collection of six Southeast Asian countries. It first began in 1967 with five members, namely Indonesia, Singapore, Malaysia, the Philippines, and Thailand. Subsequently Brunei joined in 1984 after it obtained its independence from Britain. While ASEAN does collectively interact with many countries, including the big powers (and indeed is so recognized as a group by these big powers, particularly for the purpose of dialogue), 2 nevertheless the individual members of ASEAN do conduct their own foreign policies though attempts are made to prevent such policies from clashing with ASEAN policy as a whole and with each other. 3 Hence, this brief history covers not only South Korea's relations with ASEAN as a whole but also its relations with the individual members of ASEAN. It also touches on North Korea-ASEAN relations.

22

Lee Poh Ping and Hong Seok Jeong

Unsurprisingly, South Korean relations with ASEAN or the countries that were to constitute ASEAN had been marked by ideological considerations from the beginning. In the 1950s both North and South Korea engaged in an extensive, world-wide competition for international recognition and legitimacy. Southeast Asia became one arena of this competition. Except for Indonesia, the odds were stacked against North Korea among the other members of ASEAN, primarily because of American support for South Korea. The Philippines and Thailand, for example, were then under an American defence umbrella; the Philippines had a mutual security agreement with the United States (and indeed was host to very important American military bases) while Thailand was an important member of the American-led Southeast Asian Treaty Organization (SEATO), the headquarters of which was in Bangkok. Indeed, both countries had participated in the Korean War on the side of the United States and South Korea. It was, therefore, not surprising that both countries recognized South Korea instead of the communist North. Malaysia and Singapore, previously British colonies, remained anti-communist, if not pro-West, after independence. In the initial stages, Malaysia recognized South Korea in 1960, and only when its foreign policy took a more non-aligned turn," did it also recognize North Korea in 1973. Singapore, however, recognized both Koreas only in 1975. Indonesia, on the other hand, because of its professed non-alignment policy, did not recognize South Korea in the 1950s. It viewed the two Koreas as pawns in a superpower political chess game. However, as its foreign policy turned left in the early 1960s, it recognized the North Korean regime in April 1964 as the legitimate government of Korea, a policy which was diametrically in conf1ict with those of the other countries which later formed A'IEAN. These other countries maintained diplomatic relations with only South Korea. Table 2.1 shows the dates of recognition of the two Koreas by the individual countries ofASEAN.

TABLE 2.1 ASEAN Nations' Diplomatic Normalization with South and North Korea

Thailand Malaysia Singapore Indonesia Philippines Brunei

South Korea

North Korea

1 October 1958 23 February 1960 8 August 1975 18 September 1973 3 September 1949 1 January 1984

8 May 1975 2July 1973 8 November 1975 18 April 1964 :--.Jo No

SOURCE: Korean Overseas Information Service, A Handbook of Korea (Seoul, 1990), p. 304.

ASE4N, South Korea, and the Asia-Pacific Region

23

Thus before 1965, almost all the future founding members of ASEAN, with the exception of Indonesia, leaned more towards South rather than North Korea. But things began to change in Indonesia with the abortive coup of 1965. The replacement of President Sukarno by President Suharto led to a different Indonesian perception of the world (and also to the formation of ASEAN). Indonesia began to focus on the Southeast A~ian region, moving away from Sukarno's flirtation with Mro-Asian groups, and to a generally more pro-Western stance, even if it still insisted on a policy of non-alignment in the Cold War. Thus in 1968, in contrast to its previous policy of recognizing only North Korea, Indonesia opened a consulate in Seoul and subsequently established full diplomatic relations with South Korea in 1973, 5 in effect recognizing the two Koreas. On the other hand, the other ASEAN states except for the Philippines- in pursuance of a more even-handed policy, also began to recognize the North Korean regime. Thailand did so in May 1975 while Malaysia was earlier, recognizing it in July 1973. Singapore held out a bit longer, recognizing the two Koreas only in 1975.1i Up to 1975, South Korea's relations with ASEAN had been marked by rivalry with North Korea and by primarily bilateral relations with individual ASEAN countries. A new chapter in relations opened from around the mid1970s with an increase of ranking South Korean officials visiting ASEAN and ASEAN officials reciprocating by visiting South Korea. 7 Political relations, however, did not develop much. South Korea was more concerned with the problems of the Korean peninsula where the relevant actors were the big powers while ASEAN was then primarily concerned v.ith Southeast A~ian issues, especially Indochina problems where South Korea could not have a significant input. Nevertheless, both shared a common anti-communist stance. ASEAN countries generally supported South Korea in the United Nations and also in the non-aligned movement while South Korea backed the ASEAN position on Cambodia. Howeyer this common stance was not so deep as to lead to the forging of an anti-communist alliance (ASEAN was always mindful of not openly taking sides in the Cold War). There were also no important bilateral political issues such as border problems (as some ASEAN countries have with China over the Spratlys)R or a sense of historical wrongs (which some ASEAN countries may have about Japan for its occupation of Southeast A~ia during the war). Economic relations, however, developed more deeply after 1975. For one thing it was clear by the mid-1970s that both South Korea and ASEAN countries were experiencing impressive economic growth. For example, from 1969 to 1974 the real gross national product (GNP) growth rates for the ASEAN countries were the Philippines 34 per cent; Thailand 37 per cent; Malaysia 41 per cent; Indonesia 42 per cent; and Singapore 72 per cent. South Korea also achieved a remarkable 58 per cent. 9 The figures in Table 2.2 show the increase in South Korean trade with ASEAN after 1975, both in absolute figures and

24

Lee Poh Ping and Hong Seok Jeong

as a percentage of South Korea's global trade. Total trade between ASEAN and South Korea in 1980 came to US$2,611 million, five times more than in 1975 which was US$518 million. And as a percentage of South Korea's global trade, it came to 6.58 per cent, an increase of more than 1.5 per cent over the figure for 1975. Naturally such high growth rates in regions not too far from each other led to mutual attraction. This attraction was deepened by economic complementarity. Except for Singapore, ASEAN possesses vast resources of raw materials and constitutes a not inconsiderable market for a resource-poor but technologically more advanced South Korea. Also around that time both ASEAN and South Korea were confronted with problems such as the spiralling costs of energy (particularly for South Korea), the slackened demand for exports and the threat of global protectionism. All these factors led to ASEAN awareness of South Korea as a possible partner in economic development. Trade relations thus increased and in fact dominated the economic relations up to 1986, from when South Korean direct investment in ASEAN began to increase rapidly. Since 1975 ASEAN relations with South Korea have been motivated mainly by economic considerations, and the resulting mutual complementarity prompted the two parties to consider their institutional ties seriously though it was not until 1989 that ASEA[\1 and South Korea agreed to establish a socalled sectoral dialogue partnership, which subsequently led to a full dialogue partnership in 1991. Economic co-operation, however, remains the key in this relationship so far, and indeed developed to such an extent that by the end of the Cold War, there was more economic interaction between South Korea and the ASEAN countries than among some of the ASEAN countries themselves.

II. Small Powers and the Fluid Power Structure With the end of the Cold War, South Korea and ASEAN face a fundamentally new situation in the Asia-Pacific region. Where hitherto both faced an international structure marked by ideological rivalry between the USSR and the United States, they now face a USSR splintered into various nations, with Russia as the dominant one. In addition, the United States is no longer the overwhelmingly dominant nation while powers such as China and Japan have emerged to help shape the new structure of relations in the Asia-Pacific. What roles can either ASEAN or South Korea play either singly or in co-operation? To consider this, we need to discuss the nature of the new relationship among the major powers, and the new roles small states can play in the Asia-Pacific region. We advance the argument that the present international structure is fluid, with a balance yet to be achieved by the big powers. In this connection,

TABLE 2.2 South Korean Trade with ASEAN and the World (In US$ million)

-1965

1970

1975

1980

Import Export Import Export Import Export

1993

Import Export Import Export Import Export Import Export

0.0 2.5 0.9 11.0 1.2 5.4

ASEAN (A) Total

21.0 8.7 29.7

139.6 21.07 160.67

356.45 152.46 508.91

1,480 1,130.2 2,610.2

2,696 1,521 4,217

5,086 5,062 10,148

7,205 9,338. 7 16,543.7

463.4 175.1 638.5

1,984 835.2 2,819.2

7,274.4 5,081 12,355.4

22,219 17,488 39,707

31,042 30,261 61,303

69,844 65,016 134,860

83,800 82,236 166,036

4.65

5.70

4.19

6.58

6.88

7.52

World (B) Total

Total A/B(%)

19.9 57.8 13.5 41.7 1.7 5.0

2.70 1.25 11.00 1.10 5.00 0.02

51.40 12.30 58.30 9.90 20.50 0.06

1990

Indonesia Malaysia Singapore Philippines Thailand Brunei

0.2 0.3 2.2 1.4 4.3 0.3

146.30 123.00 13.70 28.30 44.80 0.35

1985

484.0 471.0 161.0 271.0 91.0 0.2

365.0 184.0 266.0 151.0 164.0 0.2

669 1,234 267 152 150 224

195 449 489 240 143 5

1,600 1,586 897 464 270 269

1,079 708 1,805 500 969 2

2,588 1,94 7 1,540 318 539 273

2,095.0 1,430.0 3,109.0 935.0 1,760.0 9.7

9.96

SOURCES: Korean Foreign Trade Association, Export and Import Statistics (Seoul, various issues); Office of Customs Administration, South Korea.

26

Lee Poh Ping and Hong Seok Jeong

small entities like South Korea and ASEAN, if they understand the true situation, can contribute significantly to shaping a new structure. There are many reasons why a new balance will not be achieved soon. One pertains to the nature of the powers involved. Russia and China are no longer revolutionary states. Japan obviously has no ideology of any kind (unless one considers 'economism' an ideology) to spread. Hence, these three states can be considered traditional, or non-ideological, states that are susceptible to balance-of-power considerations. The United States, on the other hand, considers itself different from other states in the sense that it was conceived in liberty. It is an evangelical state that has as a primary aim the spreading of democracy and human rights throughout the world. Any balance-of-power policv is inimical to this underlying idealistic American tradition. For a balanceof-power scheme to work, a big power, particularly one as big as the United States, cannot inject 'irrational' considerations like human rights and democracy into the equation. This V\ill work no better than the efforts of China and the USSR in pushing revolutionary ideals like communism during the Cold War. This was illustrated in the Clinton administration's earlier insistence on linking Most Favoured Nation (MFN) status for China with human rights, which made dialogue between the two countries very difficult. 10 Without such dialogue that allows for rational consideration of the national interests of all powers concerned, the balance cannot be achieved. This is not to say morality is not important for the success of a balance. 11 But it is a morality of shared Yalues, ofwhat the relevant powers agree are the rules of the game. Second, the different power capacities of the big powers make it very difficult to make the balance work. Henry Kissinger, the noted practitioner and scholar of realpolitik, has himself stated that calculations of power are a very complex exercise. 12 If calculation of conventional military strength is so complex, how much more so when economic power, which has become increasingly important in international relations, has to be taken into account. It is common knowledge, for instance, that at presentJapan does not count for much as a military power because of its constitutional constraints against the full development of its military capacity. But it is an economic superpower. How does Japan relate to a power balance when it cannot deploy troops abroad and is dependent on another power for its protection? Or Russia which possesses a large military capacity and a mighty nuclear arsenal but is economically in shambles? Is its influence on the power balance greater or less than Japan's? Thus of all four, only the United States is a complete superpower in that it possesses military, political, and economic strength while China is a rising superpower. The other two are only, for lack of a better word, 'partial' superpowers. How then does one reconcile the partial with the complete? A third related reason consists of the economic interdependence of the big powers in the region, particularly between the United States and Japan

A SEAN, South Korea, and the Asia-Pacific Region

27

and increasingly between the United States and China. Such interdependence, together with the fact that power is increasingly defined in economic terms, makes it very difficult for a big power actually to tilt for or against another to preserve a balance without also affecting itself. A good example is the American and Japanese economic intertwining. Henry Kissinger and many others suggest that the United States should ensure that neither China nor Japan dominates A~ia. But how would the United States do this if, for instance, Japan's power rises and needs to be curbed to keep the balance? A very important element of rising Japanese power will be economic in nature, but the United States will have difficulty in acting against Japanese economic interests because in the process it will also hurt itself. What does such fluidity bode for the smaller powers in the region? A fluid power situation, however, like a stable one. is not without its ambiguity for small powers. A stable structure, as seen in European history, can be profoundly unjust to small powers, as when Poland was partitioned by the big powers of Russia, Austria, and Prussia, as it can be a blessing to some. Belgium, for example, had its independence (obtained in 1830) guaranteed as the big powers agreed to leave it aloneY On the other hand, big powers busily trying to accommodate each other in a fluid situation could step, intentionally or unintentionally, on the smaller powers. As the Southeast Asian saying goes, when elephants fight or make love, the grass underneath them gets trampled. At the same time a fluid power situation gives room for small powers to manoeuvre and to influence to some extent the final structure. The Asia-Pacific region today, for better or worse, is in a fluid situation. The dangers are evident. The United States-Japan economic dispute, for example, could get out of control, with negative consequences for the small powers in the region. Also the American attempt to impose its political agenda on an unwilling China could see a return of tensions, something not conducive to the interests of the small powers. Fortunately, such negative developments have not occurred so far, but they cannot be totally ruled out. Can this fluid situation also be exploited by the small powers? To answer this, some definition of small powers is in order. According to the classic concept, a big power is one with a big military establishment and with the capacity to deploy its military might far from its borders. This, however, would exclude Japan, for example, though it is an economic superpower. Nevertheless most scholars adopt the simple expedient of considering the big powers as comprising Russia, China, the United States, and Japan. Hence those countries in the region that are not in this category can be deemed as small powers. However, because of the disparate sizes of these small powers, some have a better capacity to influence events than others. Mter all, land-locked Laos with a tiny population cannot be judged to be as consequential in AsiaPacific affairs as the continent of Australia! Only four entities, namely South Korea, ASEAN, Australia, and Canada, seem to have such a capacity. We will

28

Lee Poh Ping and Hong Seok Jeong

focus here on South Korea and ASEAN, which fulfil three criteria that enable them to play a meaningful role. One is their relative size compared to some of the other small powers in the region. South Korea has a population of over 40 million while ASEAN has over 300 million. Indeed it may be more appropriate to describe them as medium powers. But more important are their economic and political attributes. They have fairly substantial economies and are countries that have shown impressive economic performanc e, which has earned them internationa l respect. Thus South Korea and Australia could take the initiative to launch the Asia-Pacific Economic Co-operatio n (APEC) forum, and be taken seriously, as APEC's eventual establishme nt shows. Similarly, ASEAN's proposal for a regional security forum, the ASEAN Regional Forum (ARF) created great interest, with all the big powers attending it~ first meeting. It is highly unlikely that any economic or security proposal of an Asia-Pacificwide nature coming from unimpressiv e economic performers like the Indochinese countries or North Korea would be given serious consideratio n. Third, South Korea and ASEAN have a reasonable record of governance, an important achievemen t given the internationa l spotlight on human rights and democracy. While their record may not be perfect, these two powers are relatively free of the egregious violation of human rights which occur in certain other parts of the Asia-Pacific region. Thus they cannot be ostracized or labelled as pariah nations to be excluded from the 'civilized' discourse of nations as may be the case for Myanmar. Thus in this fluid power situation ASEAN, South Korea, and Australia are able, as seen in the establishme nt of APEC and ARF, to influence the A~ia­ Pacific-wide security and economic structures. It has to be emphasized , however, that the actions taken by such small powers, in order to be effective, cannot go against the vital interests of the big powers. This may not be as tautological as it sounds. Given the times, the vital interests of the big powers are now often defined in more narrow terms, such as the threat of invasion of their countries or deep damage to their economies or threat to vital allies. The days may have gone when big powers would send ground troops, as the nineteenth century European big powers did, away from their own homelands to enforce a balance of power except when the most vital interests are affected. 14 The case of the former Yugoslavia vividly demonstrate s that a big power like the United States was not prepared to send ground troops for a contingency it regarded as less than of vital national interest, even though the credibility of NATO was to some extent involved. Also the big powers would take time to redefine their interests in the post-Cold War world. This means that for some time they would be uncertain of the regional security and economic structures they desire. And amidst this uncertainty, small powers have room to manoeuvre and to provide some input. They have shown it with APEC and the ARF. And they can do more if they play their cards right.

A SEAN, South Korea, and the Asia-Pacific Region

29

III. The Enlargement Process At the same time, both South Korea and ASEAN can further enhance their positions against the big powers by making themselves bigger. Thus ASEAN aims to incorporate in the future the Indochinese states and Myanmar and become a truly Southeast Asia-wide grouping, in accordance with its goal since its inception. South Korea has a even deeper yearning for unity of the Korean peninsula. In this connection, a comparison of the two processes would be interesting. There are some similarities. Both divisions were greatly influenced by the Cold War. It was the Korean War that sealed the division of the Korean peninsula, which had first been set into motion by the United States and the Soviet Union immediately after World War II. Similarly in the Southeast Asian case (Myanmar excepted) the division was between a communist-dominated Indochina and a non-communist ASEAN 15 in the context of the Cold War. This split was greatly accentuated in the late 1970s and the 1980s with the Vietnamese invasion of Cambodia. Secondly, in the cases of both South Korea and ASEAN, prosperous noncommunist entities face a less prosperous if not impoverished North Korea and the Indochinese countries and Myanmar respectively. While ASEAN is willing to take in at least Vietnam as a member, it initially showed some hesitation, because of the still considerable remains of a command economy, perceived to be the cause of economic backwardness in Vietnam, which may not be easily reconciled with the more market-oriented ASEAN countries. This problem is even more acute in the case of South Korea, for ultimately the incorporation of Korth Korea means the creation of a unified state, whereas Southeast Asia will probably not advance into anything more than a grouping of states with some common international political and economic aims. Many South Koreans are aware of the enormous drain on West German resources caused by the unification with East Germany, even though there are 60 million West Germans to less than 20 million East Germans, a ratio of more than three to one. The Korean ratio by comparison is about two to one! Thus the enthusiasm for reunification among South Koreans, after seeing the German experience, has diminished somewhat. 16 Many South Koreans are looking for solutions other than the outright absorption of the communist half as happened in the German case. Third, the circumstances are much more conducive to enlargement than before. With the Cold War's end, the big powers no longer insist on ideologically divided entities though this does not mean they would be against the continuing divisions if it is to their interests. Thus, it remains to be seen whether China or Japan would be happy with Korean reunification, though the United States is likely to be supportiveY However, should the two Koreas genuinely intend to unite, the big powers will probably not oppose this time.

30

Lee Poh Ping and Hong Seok Jeong

But there are also differences. A profound one is that Korea was a nation for many hundreds of years before the post-World War II partition. Koreans speak a common language, have a common culture, emanate from the same ethnic stock, and share a common history. One cannot deny this, any more than one can deny that West and East Germans are the same people justly united in a new Germany. On the other hand, Southeast A~ia is a very diverse grouping, consisting of people of different ethnic origins, languages, religions, and cultures (not to mention of different states). There has never been historically a supranational state that covered all of Southeast Asia. Even the internal composition of many of the present Southeast Asian states is marked by ethnic, linguistic, and religious diversity. Thus even if a sense of unity in Southeast Asia were achieved today, it is extremely unlikely to culminate in a supranational state, which the two Koreas would probably be if united. Then, unlike North Korea which continues to appear as an intransigent Stalinist-type state, the Indochinese countries, particularly Vietnam, have already begun a reform process. They recognize that the command economy is no longer economically viable. Thus Vietnam and the other Indochinese countries no longer have ideological obstacles against economic co-operation with ASEAN,Japan, and the West. Vietnam is now host to an increasing amount of in\'estment from ASEAN and the Asian newly industrializing countries (NICs). Not much economic interaction exists, however, between the two Koreas, leading to the possibility that unity may only be achie\'able under dramatic circumstances, such as South Korea absorbing a North Korea with a collapsed economy. The Southeast Asian process will be more gradual. Finally, the problem is much more acute and potentially destabilizing in Korea. Only an armistice, not a peace treaty, was signed at the end of the Korean War. This means that technically both sides are still hostile to each other. This unstable situation has been compounded by the North Korean intention of developing nuclear arms and missiles. The Southeast Asian case is not without its problems. Cambodia, for example, is still unstable despite a United Nations-brokered peace settlement; and there is always a possibility of refugees swarming ASEAN shores if the reforms fail in Indochina. However, they do not pose as serious a threat to the stability of the area. Moreover, a war involving the big powers is unlikely to break out in Southeast A~ia over Cambodia or the other countries of Indochina.

IV. Conclusion To conclude, South Korea-ASEAN relations have developed economically to a great extent since 1975. Political co-operation has not matched the growth of economic links. With the end of the Cold War and the consequent fluidity of the power structure in the Asia-Pacific, South Korea and ASEAN now have

ASEAN, South Korea, and the Asia-Pacific Region

31

more leeway to decide their own destiny if they read the situation correctly. Such independence will be further enhanced by unification of the two Koreas and the emergence of a larger ASEAN.

NOTES 1.

2.

3.

4.

5.

6.

7.

8.

9. 10. 11.

12.

Other comparable examples may he the foreign relations of a divided China (People's Republic of China and the Republic of China in Taiwan) and a divided Germany before its unification. ASEAN as a group convenes annual dialogues with the big powers at ministerial level. These are normally conducted after the ASEAN foreign ministers have met among themselves. It stands to reason that it is not often easy to forge a collective foreign policy stand. After all, an entity as integrated as the European Union is unable to prevent its member states acting differently in the former Yugoslavia. In this respect the ASEAN common stand on Cambodia was an impressive achievement. When Tun Razak took over from Tengku Abdul Rahman as prime minister of Malaysia in 1970, he developed a more neutral policy from the staunchly proWestern Tengku. See A.R. Sutopo, "The ASEAN-South Korean Relations: Political Aspects", in A5'EAN-South Korean Relations: Problems and Prospects, edited by Lau Teik Soon and Bilveer Singh (Singapore: Heinemann Asia, 1990); andjoon Young Park, "Korea's Return to Asia: An Analysis of New Moves in South Korean Diplomacy in the 1960s and 1970s", Korea Observer12, no. 2 (Autumn, 1981). Nixon's visit to China in 1972 created an atmosphere whereby almost all the ASEAN states cou:d develop new relations with Asian communist countries such as China and North Korea. In July 1977 South Korea, attempting to forge for the first time institutional ties with ASEAN as a whole, suggested an ASEAN-Korea 'dialogue', but ASEAN did not accept. See Sejin Kim, "Korea's Role in Inter-Regional Cooperation between Northeast and Southeast Asia", in Community-Building in the Pacific Region: Issues and Opportunities, edited by Han Sung Joo (Seoul: Korea Computer Press, 1981), p. 227. There is no unanimous agreement as to how such issues should be treated. Some argue that the Korean problem should only be discussed in a sub-meeting of the ARF by relevant actors. So with the Spratlys. At any rate, on the Spratlys, the most important actor, China, is not basically in favour of a multilateral dialogue. See Lloyd R. Vasey and George J. Viksnins, eds., The Economic and Political Growth Pattern of Asia-Pacific (Singapore: Institute of Southeast Asian Studies, 1977), p. 5. President Bush did not link the two because he believed in a balance-of-power approach towards China. Even Henry Kissinger, a leading advocate of balance of power, is aware of this, as can be seen in his latest book. See Henry Kissinger, Diplomacy (New York: Simon and Schuster, 1994). Ibid.

32

Lee Poh Ping and Hong Seok Jeong

13. For an illuminating book on the role of small states, see Robert L. Rothstein, Alliances and Small Powers (New York and London: Columbia University Press, 1968). 14. For an interesting argument concerning the reluctance of great powers today to sacrifice lives, see Edward N. Luttwak, "Now that Great Powers Are Gone", International Herald Tribune (Singapore), 6 July 1994, op-ed. page. 15. This by no means suggests that Southeast Asia was a unified state or had any institutional unity before this. 16. A recent report by the Korean Development Bank states that US$1.53 trillion would be needed over the next ten years to bring North Korea up to par with South Korea! See "Report: Trillions if Koreas Unite", The Star (Kuala Lumpur), 9 September 1994. 17. Chalmers Johnson, a noted American authority on Asia, wrote that he would seek "a balance among China, Japan and ASEAN, with the United States shifting its strength in order to achieve and maintain it, while supporting Korea and Vietnam as the two most important buffer states in East Asia". Thus, among many other things, small states can serve as buffers for big powers. He continued by saying that "Korea needs particular attention. While it no longer needs American ground forces, it may require American assistance in managing unification with the north, including reassuring China, the power with the greatest stake in the Korean peninsula, that a unified Korea will not adversely affect it". See Chalmers Johnson, "Rethinking Asia", The National Interest, Summer 1993, pp. 27 and 28.

3

A Comparative Analysis of South Korean and Japanese Foreign Direct Investments in ASEAN Lee Kwang-chul

I. Introduction

Japanese direct investment world-wide has been increasing steadily since the oil shock in the late 1970s. However, the yen appreciation of 1985 saw a dramatic change in pace. Japan responded to the yen appreciation by relocating production bases overseas to reduce production costs. Japanese foreign direct investment (FDI) world-wide reached US$3,867 million in 1992, and ASEAN has become more attractive as an offshore production site. Based on the Japanese Ministry of Finance figures (Table 3.1), Japanese FDI in ASEAN peaked at US$4,684 million in 1989. From the Japanese viewpoint, ASEAN is not a major location for its FDI. The ASEAN share of total Japanese FDI was only 9.1 per cent by the end of 1992. From the perspective of ASEAN, however, the value ofJapanese FDI is highly significant. For most of the post-war period up to now Japan was the biggest source of FDI in the ASEAN region. The impact of Japanese FDI on the process of industrialization in ASEAN is even more substantial. Japanese investors have been attracted to invest in resource-oriented sectors in the ASEAN countries, particularly in Indonesia and Malaysia. Exportoriented investment in manufacturing has been made because of the advantages oflow-cost labour. Structural changes within the Japanese economy have been the major factor which has accounted for the large outflow of Japanese direct investment to ASEAN countries. The second half of the 1980s saw an increase in foreign investment in the ASEAN region, not only from Japan but also from Asian newly industrializing countries (NICs), including South Korea. Indeed one of the noticeable phenomena during this period was the acceleration of South Korean investments in ASEAN. The first South Korean investment in Southeast Asia was made in 1969 by Nambang Development Co. in the forest industry in Indonesia. South Korean

34

Lee Kwang-chul

FD I in the region increased gradually after that and accelerated after 1986. It can be said that economic interdependence between South Korea and ASEAN was intensified by the won's appreciation in 1987. Since then South Korea has entered an era of horizontal integration with ASEAN through FDI. The trend of intensified interdependence is likely to continue in the near future. As can be seen in Table 3.1, South Korean investment in ASEAN peaked in 1990 and has remained stable. Until 1992 South Korean investment in ASEAN accounted for 31 per cent of its total FDI world-wide. Though its weight in South Korean FDI is declining with the surge of South Korean investment in China since 1992, ASEAN still accounts for one-third of cumulative South Korean FDI world-wide. Moreover, South Korean firms that have invested in the region are quite satisfied with the performance of their investment and they regard the future of the ASEAN market with optimism.

TABLE3.1 South Korean and Japanese FDI in ASEAN (In US$ million) Japanese FDI

Annual Amounts 1

Ratio (%)

1988

1989

1990

1991

1992

Cumulative Total

2,713

4,684

4.082

3,697

3,867

35,001

5.8

6.9

7.2

8.9

11.3

2

Ratio (%)

9.1

NOTES: 1Annual FDI amounts in ASEAN/ Annual FDI amounts world-wide. 2 Cumulative FDI amounts in ASEAN (1992) /Cumulative FDI amounts worldwide (1992). SOURCE: Japanese Ministry of Finance. South Korean FDI

Annual Amounts* 1

Ratio (%)

1988

1989

1990

1991

1992

56

187

419

145

69

24.1

40.6

51.9

33.9

16.2

2

Ratio (%)

Cumulative Total 880

31.0

NOTES: 1Annual FDI amounts in ASEAN/ Annual FD1 amounts world-wide. 2 Cumulative FDI amounts in ASEAN (1992) /Cumulative FDI amounts worldwide (1992). *Annual amounts do not include figures for non-manufacturing industries. SOURCE: The Bank of Korea.

35

A Comparative AnaZvsis of South Korean and Japanese FDI in A SEAN

The purpose of this chapter is to examine what similarities and differences exist between South Korean and Japanese FDI in ASEAN in terms of their characteristics and behaviour. The investment characteristics of South Korean and Japanese FDI in ASEAN are examined in Section II and the management behaviour in Section III. Section IV attempts to explain their characteristics and behaviour by utilizing FDI theories such as Kojima's hypothesis and Dunning's eclectic paradigm. Section V embodies the main conclusions of the chapter.

II. Investment Characteristics 1. Regional Distribution Table 3.2 presents the regional distribution of Japanese and South Korean FDI in ASEAN. Notable points are as follows: TABLE 3.2 Regional Distribution of South Korean and Japanese FDI in ASEAN (In US$ million) Japanese FDI

Indonesia Singapore Thailand Malaysia Philippines Total

1989

1990

1991

1992

631 1,902 1,276 673 202 4,684

1,105 840 1,154 725 258 4,082

1,193 613 807 880 203 3,697

1,676 670 657 704 160 3,867

Cumulative Total Weight(%)

14,409 7,838 5,887 4,815 1,943 35,001

41.3 22.4 16.9 13.8 5.6 100.0

SOURCE: Japanese Ministry of Finance. South Korean FDI

Indonesia Singapore Thailand Malaysia Philippines Total

1989

1990

1991

1992

138 0 12 27 10 187

190 0 51 67 61 419

63

16 5 3 29 16 69

SOURCE: The Bank of Korea.

l

28 23 30 145

Cumulative Total Weight(%)

443 11 118 179 129 880

50.4 1.2 13.5 20.3 14.6 100.0

36

Lee Kwang-chul

First, Indonesia is the most preferred country of both Japanese and South Korean firms. Due to its vast size, South Korean and Japanese companies regard the Indonesian domestic market as their long-term goal. But South Korean companies seem more likely to view Indonesia as an export platform from the short-term perspective. The potential of the Indonesian market may also be seen from the trend of rising demand for consumer durables. The investment environment, including infrastructure, is also expected to improve gradually. Second, Malaysia and Thailand are considered as strategically important locations. Numerous Japanese electronics manufacturers have set up operations in Malaysia. Malaysia is expanding its role as a regional and global centre for the assembly of colour television sets, video cassette recorders, and semiconductors. On the other hand, investment in Thailand has mostly focused on the domestic market. The rapid growth of the Thai economy in recent years has enhanced the country's attractiveness as a market. There has also been an increase in the percentage of Thai households that own consumer durables. The labour situation is relatively favourable. Moreover, there has been a sharp increase in exports of electronic appliances to developed countries. Third, Japanese firms have invested heavily in Singapore, while South Korean firms have not. The most attractive point about Singapore as an investment site may be that parts and materials can be sourced easily through Singapore, particularly for the electronics industry. Another factor is the Singapore Government's provision of incentives to encourage companies to set up international procurement offices in Singapore. Accordingly, Singapore is becoming a centre for the supply of parts and products to ASEAN.Japanese multinational electrical machinery companies are using Singapore as a hub for a global network. 1 Fourth, the Philippines has not attracted Japanese investment as much as the other ASEAN countries. Although the Philippines offers opportunities for higher earnings, investors have been discouraged by its political instability, which has been a persistent barrier to investment in the past. In addition, the Philippines has lagged behind the other countries in the development of infrastructure. For instance, during the period of electric power shortages, many foreign firms bought self-generation facilities. However, a number of companies are expanding their presence in the Philippines as they develop networks in the ASEAN region. 2

2. Industry Distribution The ind•Jstry distribution ofJapanese and South Korean investments in ASEAN is shown in Table 3.3. Notable features of Japanese and South Korean investments in ASEAN are as follows:

TABLE3.3

Industry Distribution of South Korean and Japanese FDI in ASEAN

(In US$ million) Japanese FDI

Indonesia

Industry

Malaysia

Philippines

Thailand

Singapore

Total

Ratio (%)

Food products Textile Wood, pulp Chemical Metal, non-metal Machinery Electric Transportation Others

93 693 299 766 1,463 63 176 384 298

48 156 106 401 379 185 1,200 224 318

63 30 11 118 143 20 278 233 96

272 401 48 246 414 554 974 233 412

489 136 43 821 121 410 599 127 368

970 1,415 510 2,352 2,518 1,233 3,226 1,201 1,493

6.5 9.5 3.4 15.8 16.9 8.3 21.5 8.1 10.0

Manufacturing

4,235

3,016

992

3,554

3,114

14,919

100.0

-

NOTE: Total investment amounts of manufacturing industries: Those of non-manufacturing industries= 48:52. SOURCE: Japanese Ministry of Finance. South Korean FDI

Industry

Indonesia

Malaysia

Philippines

Thailand

Singapore

Total

Ratio (%)

Food products Textile, apparel Wood, furniture Paper, printing Chemical Non-metallic Primary metallic Electric, machinery Miscellaneous

85 113 26 5 115 8 6 53 32

1 2 24 3 26 31 1 89 2

50 5

20 7 1 8 53 16

Manufacturing

443

179

129

118

1 36 1 2 30 3 I

4 9

-

-

-

91 160 51 30 184 47 16 246 55

10.3 18.2 5.8 3.4 20.9 5.3 1.8 28.0 6.3

II

880

100.0

6 4

1

NOTE: Total investment amounts of manufacturing industries: Those of non-manufacturing industries= 66:34. SOURCE: Th

z

400,000

200,000

1986

1987 1988

1989 1990 Year

1991

1992

1993

South Korea is also becoming an important source of tourism revenues for the Philippines. Between 1986 and 1993, tourist arrivals in the Philippines from South Korea grew by an annual average of 32.2 per cent even as total tourist arrivals in the Philippines grew by an average rate of only 9. 7 per cent (Figure 6.3). In 1986 South Koreans accounted for only 1.6 per cent of total tourists in the Philippines; this figure increased to 5.1 per cent in 1993.

2. Investments South Korea is emerging as a significant source of foreign direct investments for the developing countries of Southeast Asia, including the Philippines. This trend started in the mid-1980s, as South Korean manufacturing firms, particularly the export-oriented ones, transferred their production facilities abroad due to rapid wage increases at home, the appreciation of the South Korean won, and the imposition of trade restrictions on their exports by South Korea's major trading partners. 4 Between 1985 and 1992, South Korea's foreign direct investments grew by an annual average of 65 per cent, from US$50 million in 1984 to US$1.2 billion in 1992. Southeast Asia has become the major destination of these new investments, with its share of total South Korean direct investments abroad increasing from an average of 16.3 per cent from 1980 to

Emerging Trends in South Korea-Philippines Relations

95

FIGURE 6.4 South Korea's Direct Foreign Investments, 1980-92

600

500

Southeast Asia North America Central America Europe

400

Others

c

~ .E tment

Share in

Projects Total(%) (LlS$ million) Total(%) Projects Total(%) (US$ million) Total(%) Projects Total (%) (l1S$ million) Total (%) Light industries

No. of

Share in

lm-cstmcnt

Share in

Projects Total(%) (US$ million) Total(%)

6

28.6

9.2

7.6

6

33.3

4.0

8.4

5

41.7

17.2

42.2

6

46.2

8.8

30.1

4

19.0

34.9

28.7

7

38.9

30.5

64.9

4

33.3

12.5

30.6

5

38.5

17.9

61.6

1

Electric and electronic products Metal products

1.3

2

11.1

7.1

15.1

3

25.0

11.1

27.2

1

7.7

0.8

2.8

4

'1.8 19.0

1.6

Agricultural products

12.2

10.1

2

11.1

5.3

11.2

0

0.0

0.0

0.0

1

7.7

1.6

5.5

Textiles

4

19.0

34.1

28.1

0

0.0

0.0

0.0

0

0.0

0.0

0.0

0

0.0

0.0

0.0

Services

1

4.8

26.5

21.8

0

0.0

0.0

0.0

0

0.0

0.0

0.0

0

0.0

0.0

0.0

Chemicals and paper

0

0.0

0.0

0.0

1

5.6

0.2

0.4

0

0.0

0.0

0.0

0

0.0

0.0

0.0

Minerals and ceramics 1

4.8

3.0

2.5

0

0.0

0.0

0.0

0

0.0

0.0

0.0

0

0.0

0.0

0.0

100.0

121.5

100.0

18

100.0

47.1

100.0

12

100.0

40.8

100.0

13

100.0

29.1

100.0

and machinery

Total

21

SOURCE: Board of Investment, Thailand.

TABLE 8.12 South Korean Investment Projects in Thailand Approved by Board of Investment, Classified by Sector, 1990-93 1991

1990 Sector

1992

1993

t\o. of Share in lmestment Share in No. of Share in Investment Share in t\o. of Share in Imestmenl Share in No. of Share in Investment Share in Projects Total(%) (US$ million) Total(%) Projects Total(%) (US$ million) Total (o/c) Projects Total(%) (US$ million) Total(%) Projects Total(%) (liS$ million) Total(%)

13 Light industries Electric and electronic products 5

43.3

25.4

9.2

9

40.9

11.3

22.8

4

33.3

1.6

5.8

6

42.9

9.2

28.8

16.7

59.1

21.5

9

10.9

29.8

60.0

4

33.3

1U

39.9

6

42.9

20.5

63.8 2.5 5.0 0.0 0.0 0.0

Metal products and machinery Agricultural products Textiles Services Chemicals and paper Minerals and ceramics

1 4 3 1 3 0

3.3 13.3 10.0 3.3 10.0 0.0

46.8 13.0 91.1 26.5 13.7 0.0

17.0 4.7 33.1 9.6 5.0 0.0

1 2 0 0 1 0

4.5 9.1 0.0 0.0 4.5 0.0

1.6 3.9 0.0 0.0 3.0 0.0

3.2 7.9 0.0 0.0 6.0 0.0

4 0 0 0 0 0

33.3 0.0 0.0 0.0 0.0 0.0

15.4 0.0 0.0 0.0 0.0 0.0

54.2 0.0 0.0 0.0 0.0 0.0

1 1 0 0 0 0

7.1 7.1 0.0 0.0 0.0 0.0

0.8 1.6 0.0 0.0 0.0 0.0

0.0

Total

30

100.0

275.6

100.0

2~

100.0

49.6

100.0

12

100.0

28.3

100.0

14

100.0

32.1

100.0

SOURCE: Board of Investment, Thailand.

Thailand and South Korea

145

3. Tourism Another area of bilateral economic relations that has experienced solid growth is tourism. Tourism between South Korea and Thailand has flourished in recent years. In 1993, 268,000 South Koreans visited Thailand, making South Korea the eighth largest source of foreign tourists to Thailand. Thailand has become the third most popular choice of destination for South Korean tourists after the United States and japan. It has become a common scene at Kimpo airport to see a large group of newly wed couples waiting for an evening flight to Bangkok. Many of them are still wearing wedding make-up and costumes. Their honeymoon destinations are Pattaya, Chiengmai, and Phuket. Meanwhile, the number of Thais who visited Korea in 1993 totalled 76,000.

IV. Thailand-North Korea Economic Relationship Thailand and North Korea signed a trade agreement on 2 December 1978 and Pyongyang established its trade office in Bangkok in December 1979. Unlike the Thailand-South Korea trade, the volume of Thailand-North Korea trade has been very small and has shown a declining trend. In 1979 the amount of Thailand-North Korea two-way trade was only US$8.8 million. The volume of trade then declined to US$8.3 million and US$6.5 million in 1980 and 1981 respectively. During 1985-91 it increased rapidly to reach its peak in 1990 with the value ofUS$40.6 million, with the balance of trade mostly in favour of North Korea (see Table 8.13). But after 1990, the two-way trade

TABLE 8.13 Thailand: Exports to, Imports from, and Balance of Trade with North Korea, 1984-92 (In US$) Year

Exports

Imports

Trade Balance

1984 1985 1986 1987 1988 1989 1990 1991 1992

179,587.4 9,642,590.2 13,598,244.5 4,489,232. 7 5,299,880.4 7,316,533.0 12,635,277.8 22,141,608.5 7,608,912.2

2,342,650.8 12,386,713.4 8,451,351.9 10,733,685.9 32,011,378.3 19,748,427.1 28,001,273.5 16,994,401.0 1,720,394.4

-2,163,063.4 -2,744,123.2 4,746,892.6 -6,244,453.2 -27,110,697.9 -12,391,878.1 -15,405,995.7 5,147,207.5 6,288,517.8

SOURCE: Customs Department, Finance Ministry, Thailand.

146

Surachai Sirikrai

began to decline again. Ninety per cent of Thailand's exports to North Korea are minerals and agricultural products while North Korea exports industrial products and raw materials to Thailand (see Tables 8.14 and 8.15). TABLE 8.14 Thailand's Imports from North Korea 1. Machine tools and tools 2. Electrical appliances 3. Vessels 4. Farming machinery and spare parts 5. Ferrous metals 6. Non-ferrous metals 7. Minerals 8. Cement 9. Chemical products 10. Light industrial products 11. Textiles and textile products 12. Foodstuffs 13. Corn starch 14. Native products 15. Aquatic products 16. Medicine 17. Others

TABLE 8.15 Thailand's Export\ith the transitional economies of Southeast Asia, that is, Vietnam, Laos, and Cambodia, have been attracting more attention because they provide fresh opportunities for South Korea in international trade and investment. Having relatively abundant natural and human resources, they are considered to be good potential partners in trade and investment for South Korea. So far, South Korea's economic relations with these transitional economies are limited virtuallyl to Vietnam.

168

Koo Sung- Yea!

This chapter is confined to South Korea's relations with Vietnam. It looks at the current economic situation of the two countries and trends in diplomatic relations which are fostering a more favourable environment for mutual economic co-operation. Current economic relations between the two countries are then reviewed mainly in terms of commodity trade and FDI. Future prospects and policy suggestions are outlined in the conclusion.

II. Economic Situation and Bilateral Diplomatic Relations 1. South Korea South Korea experienced three decades of rapid economic growth through the open-door policy. The growth had been driven by exports and fuelled by imports of raw materials, capital, and technology from abroad. The long-term growth resulted in a fundamental restructuring of the South Korean economy in terms of its factor endowments and saw its relative advantage change from labour to capital and towards technology-intensive production. The pattern of South Korea's international trade in both commodities and factors has been drastically changed in the process. As a result, the pattern of South Korea's commodity trade became more competitive against developed countries while it became more complementary with developing countries. Major products of South Korean exports became increasingly diversified from labour-intensive to capital- and technologyintensive ones. The export market was diversified accordingly from developed to developing countries. In sum, there has been substantial change in the composition of export commodities and in terms of trading partners. The structure of imports also changed. Imports of natural resources and labour-intensive products increased while those of machinery and intermediate products decreased in relative terms, as gradually more of them were substituted by domestic production. Changes occurred inevitably in the composition of merchandise imports and in trading partners. The opening of agricultural markets through the Uruguay Round will enhance this tendency further. More recently, as South Korea began to suffer from an acute labour shortage, 2 it experienced a new phase in its international economic relations. Factors of production began to move inward and outward in greater volume and in more diversified forms. While South Korea seeks from more developed countries foreign capital and new technologies in order to restructure its industry, which suffers from the changing domestic factor endowment, it seeks from developing countries outlets for domestic capital and technologies which have limited domestic applicability. Thus, FDI, both inward and outward, is encouraged with renewed enthusiasm. So far, outward FDI, amounting to

South Korea and the Transitional Economies of Southeast Asia

169

US$1.14 billion in 1994, are almost equal to inward ones, amounting to US$1.26 billion in the same year. South Korea's FDI is not only increasing in amount but also going to more countries. And, as mentioned above, Southeast Asian countries are very attractive destinations for South Korean investors. Import of foreign workers can be an alternative to FDI, inward or outward. The South Korean Government has been hesitant to allow an inflow of foreign workers. But owing to repeated requests from business and industry and the prevalence of illegal foreign workers, the import of foreign workers has been legalized in the form of technical training on an annual basis, which is extendable to a second year. At present the annual quota is set at 20,000 but it is very probable that the quota will be increased because of demands from industry. Thus, South Korea's foreign economic relations are becoming wider and more complex and the competitive pressure is becoming more intense as South Korea approaches a developed country status. South Korea's growth potential is limited because of poor endowment of natural resources and manpower shortages on the one hand and constraints in technological development on the other. In addition, because of bottle-necks in the factors of production, capacity utilization tends to be chronically low. In order to relieve these problems, South Korea needs complementary trading partners among developing countries. A transitional economy like Vietnam is a good potential partner for South Korea to relieve its domestic shortage in resources and labour, to provide outlets for its labour-intensive industries and to provide new markets, direct or indirect.

2. Vietnam Vietnam pursued an open 3 planned economy after unification in l 975. But following 1ts invasion of Cambodia in 1978, its foreign economic relations were limited to the former USSR4 because of the American embargo. Within this limited foreign relationship, Vietnam pursued economic growth in the context of a planned economy. But inefficiencv of the command economy taught Vietnam to introduce, by trial and error, the market mechanism. Changes in the Council for Mutual Economic A~sistance (COMECON) countries hastened Vietnam to declare doi moi (renovation) in 1986," which oriented the Vietnamese economy towards an open market economy in separation from politics. The constitution was amended to allow private ownership of capital, guaranteeing private business management and investment of foreign firms. The foreign investment law was enacted in December 1987 and was amended in June 1990 and in December 1992 to attract FDI under a more favourable legal environment. The open-door policy of Vietnam became more fruitful as the United States allowed International

170

Koo Sung-Yeal

Monetary Fund (IMF) loans to Vietnam in July 1993 and finally lifted the embargo in February 1994. Thus the Vietnamese economy has recently performed better: high growth, low inflation, and more favourable balance of payments. Its future prospects seem to be rosy so long as its political stability, which is a strong positive factor for its economic growth, is maintained and the principle of 'separation of economy from politics' is maintained as promised.r; Recently, the international status of Vietnam has improved noticeably in the East Asian region. It has joined the A~sociation of Southeast A~ian Nations (ASEAN), is considered a potential member of the baht economy by Thailand, and is a member of the southwestern economic circle to China. The A~ian Development Bank (ADB) is promoting a master plan for Mekong region economic co-operation for the Indochina countries, including Vietnam. Vietnam is thus a potentially good complementary partner for South Korea. It is endowed with what South Korea lacks: natural and human resources. It is in need of what South Korea can help provide: capital, technology, infrastructure, growth experience, etc. Korea and Vietnam are similar in size of population and land area and share similar historical and cultural backgrounds. Moreover, Vietnam is familiar to many South Koreans, directlv or indirectly, through the Vietnam War.

3. Bilateral Relations South Korea's bilateral economic relations with Vietnam date back to 1962 when it signed a treaty nn trade with South Vietnam. Trade with South Vietnam then increased so much that South Vietnam became the fourth largest trading partner for South Korea. But the relationship was cut off following the unification of Vietnam in 1975 until some indirect trade was resumed on a small scale after 1983. South Korea's bilateral relations with unified Vietnam were resumed in the latter half of the 1980s, when South Korea pursued the Northern Politics (the strategy of reaching out to socialist countries like the USSR, China, and North Korea) while Vietnam adopted the doi moi policv. Some direct trade between the two countries resumed in 1988. Diplomatic relations were formally established in December 1992 and along v1·ith it came treaties on investment, trade, technology, tax, aviation, etc. and an agreement on official development aid for training and on capital and technology transfer. In February 1993 Vietnamese Foreign Minister Nguyen Manh Cam visited South Korea, signing an agreement on economic and technological co-operation, which set up a bilateral economic committee. In May 1993 Premier Vo Van Kiet of Vietnam visited South Korea and signed an agreement on trade, investment, and aviation. The South Korean Government

South Korea and the Transitional Economies of Southeast Asia

171

promised US$50 million from the Economic Development Co-operation Fund (EDCF) for construction of road and water systems, and US$9 million aid 7 for the construction of a vocational training centre and hospital. In May 1994 Foreign Minister Han Seung Joo of South Korea visited Vietnam and signed a tax agreement. In August 1994 Prime Minister Lee Young Duk visited Vietnam and promised early disbursement ofEDCF money (US$50 million) and the US$9 million aid and an increase in co-operation for appropriate public projects. Also promised were the launching of a committee for co-operation in resource development, assistance in the construction ofroads (US$30 million) and a communications network (US$40 million), and an increase in the annual import of Vietnamese workers from 2,400 to 3,400. An early signing of a treaty on science and technological cooperation was also agreed on and an agreement on cultural exchange was signed. Vietnam, in return, agreed to the construction of three South Korean industrial complexes in Vietnam by Korea Land Development Co. and the opening of branch offices in Vietnam by South Korean banks. Vietnam also promised to support the South Korean approach of peaceful and autonomous solution of the nuclear issue with North Korea and unification of the Korean peninsula. Reciprocal presidential visits were also agreed on.

III. Bilateral Trade between South Korea and Vietnam 1. Vietnam as a Trading Partner of South Korea Before 1988, South Korea's exports to Vietnam were indirect and insignificant. From that year they became direct and significant. Table l 0.1 shows that South Korea's annual exports to Vietnam rose more than ten times from US$62 million in 1988 to US$728 million in 1993. During the same period, South Korea's total annual exports increased from US$60.7 billion to US$82.2 billion. Export products are being diversified substantially and almost all the items exported are on increasing trends in absolute terms. In relative terms, however, chemicals, electrical and electronic goods, and metal and machinery products show slower increase. Previously, chemical products were dominant, but recently textiles became more dominant in South Korea's exports to Vietnam. Thus, South Korea's exports to Vietnam are rather diversified and include textiles, chemicals, paper and non-metal goods, metal products, electrical and electronic goods, and machinery. The trend reflects the increasing demand for steel and chemical products in the process of economic development of Vietnam and the increasing demand for textiles and machinery from South Korea due to the increase in South Korea's FDI and the subcontracts with Vietnamese producers.

172

Koo Sung-Yeal

TABLE 10.1 South Korean Exports to Vietnam, 1988-94 1988

1989

1990

1991

1992

Amount (US$1,000) Primary products 0 Chemicals 38,356 Plastic, rubber 52 Paper, non-metal 5,797 Textiles 2,007 Consumer goods 44 Steel, metal 2,056 Electrical goods 8,117 Machinery 5,025 Miscellaneous 429

66 9,697 156 678 9,031 41 1,615 14,529 8,764 314

416 44,892 1,503 14,283 20,493 183 3,210 11,382 19,952 510

554 59,441 5,404 19,501 53,415 897 10,279 12,223 35,077 2,153

3,048 91,330 16,524 41,566 122,775 2,173 56,310 50,697 44,408 7,353

2,249 9,106 87,901 62,520 22,082 20,779 124,899 68,544 187,171 146,568 7.684 8,631 102,625 52,878 91,684 65,255 92,243 70.819 9,731 11,232

Total

61,883

44,891

116,826

198,944

436,184

728,269 516,332

0.0 62.0 0.1 9.4 3.2 0.1 3.3 13.1 8.1 0.7

0.1 21.6 0.3 1.5 20.1 0.1 3.6 32.4 19.5 0.7

0.4 38.4 1.3 12.2 17.5 0.2 2.7 9.7 17.1 0.4

0.3 29.9 2.7 9.8 26.8 0.5 :).2 6.1 17.6

0.7 20.9 3.8 9.5 28.1 0.5 12.9 11.6 10.2

1.1

100.0

100.0

100.0

100.0

Composition(%) Primary products Chemicals Plastic, rubber Paper, non-metal Textiles Consumer goods Steel, metal Electrical goods Machinery Miscellaneous

Total

1993

1994*

1.7

14.1 12.6 12.7 1.3

1.8 12.1 4.0 13.3 28.4 1.7 10.2 12.6 13.7 2.2

100.0

100.0

100.0

0.3 12.1 3.0 17.2 25.7 l.l

*January to July. SOURCE: Korea Trade Association. Table 10.2 shows that the share of the Vietnamese market in South Korea's total exports increased from 0.1 per cent in 1988 to 1.0 per cent in 1994. For South Korea, Vietnam is the second fastest growing market after China. The importance of the Vietnamese market for South Korean exports differs among the product groups, which can be classified into three categories. The first category comprises products which have gained more than the share of the Vietnamese market in South Korea's total exports. These are chemical, paper, and non-metal products, and their market shares are consistently above the

173

South Korea and the Transitional Economies of Southeast Asia

TABLE 10.2 Share of Vietnam-Bound Exports among Total South Korean Exports, 1988-94 (In percentages) 1988

1989

1990

1991

1992

1993

1994*

Primary products Chemicals Plastic, rubber Paper, non-metal Textiles Consumer goods Steel, metal Electrical goods Machinery Miscellaneous

0.00 2.34 0.00 0.41 0.01 0.00 0.03 0.05 0.06 0.08

0.00 0.53 0.01 0.04 0.06 0.00 0.02 0.08 0.12 0.06

0.01 1.91 0.05 0.96 0.14 0.00 0.05 0.06 0.23 0.07

0.02 1.99 0.16 0.85 0.35 0.01 0.15 0.06 0.32 0.34

0.09 2.15 0.43 1.63 0.78 0.04 0.72 0.23 0.37 1.22

0.07 1.90 0.54 4.40 1.18 0.19 1.18 0.38 0.66 1.56

0.45 2.05 0.79 4.34 1.49 0.40 1.21 0.39 0.81 2.83

Total

0.10

0.07

0.18

0.23

0.57

0.89

1.00

*January to July. SOURCE: Korea Trade Association.

TABLE 10.3 South Korea: Composition of Exports to Vietnam by Market Share, 1994 Product Category

Above the Vietnamese Market Share in South Korea's Total Exports

Below the Vietnamese Market Share in South Korea's Total Exports

Primary

Agricultural products

Fishery, forestn, products

Chemicals Plastic, rubber Paper. non-metal

Chemicals, pharmaceuticals

Textiles Consumer goods Steel, metal Electrical Machinery Miscellaneous

Paper, ceramics, petro-materials Textile material Handicrafts Steel, metal products Cables General machinery Printed products, miscellaneous products

mining

Plastic, rubber, leather products Pulp, jewellery Clothing Shoes, furniture, utensils, toys Electrical, electronic products Precision machinerv, tools Sanitarv goods, wigs, eyeglasses

174

Koo Sung-Yeal

average. Textiles, steel and metal products, and miscellaneous items have belonged to this category since 1992. The second category consists of products whose Vietnamese market share is below the Vietnamese share in South Korea's total exports. These are primary products, plastics and rubber, nondurable consumer goods, and electrical and electronic products. Machinery belongs to the third category, showing about average market share. The composition of South Korean exports to Vietnam in 1994 by market share is shown in Table 10.3. From the classification in the table, it is clear that South Korea iS exporting intermediate products from heavy manufacturing industry relatively more to Vietnam than to other countries. Final consumer goods are sold relatively less to Vietnam than to other countries. TABLE10.4 South Korean Imports from Vietnam, 1988-94

Amonnt (US$1,000) Agricultural products Mining products Chemicals, plastic, non-metal Textiles Steel, metal Machinery Electrical goods Consumer goods Miscellaneous Total

Composition(%) Agricultural products Mining products Chemicals, plastic, non-metal Textiles Steel, metal Machinery Electrical goods Consumer goods Miscellaneous Total

1988

1989

1990

1991

1992

1993

1994*

2,499 9,914

10,262 12,533

6,959 10,388

15,097 12,996

19,425 16.987

32,517 20,805

21,542 7.513

225 12 1,202 0 0 0 0

672 191 17,895 0 0 323 2

536 1,060 13,893 0 181 358 4

480 4,457 6,233 1 4 1,880 8

809 11,276 3,875 5 520 4,419 19

1,258 24,902 5,231 :)5 1,023 4,822 19

1,742 25,830 2,238 471 848 3,997 43

13,852

41,878

33,379

41,156

57,335

90,632

64,224

18.0 71.6

24.5 29.9

20.8 31.1

36.7 31.6

33.9 29.6

35.9 23.0

33.5 11.7

1.6 0.1 8.7 0.0 0.0 0.0 0.0

1.6 0.5 42.7 0.0 0.0 0.8 0.0

1.6 3.2 41.6 0.0 0.5 l.l 0.0

1.2 10.8 15.1 0.0 0.0 4.6 0.0

1.4 19.7 6.8 0.0 0.9 7.7 0.0

1.4 27.5 5.8 0.1 l.l 5.3 0.0

2.7 40.2 3.5 0.7 l.3 6.2 0.1

100.0

100.0

100.0

100.0

100.0

100.0

100.0

*January to July. SOURCE: Korea Trade Association.

South Korea and the Transitional Economies of Southeast Asia

175

Imports from Vietnam were negligible before 1988 but have become more significant since then. Table 10.4 shows that the amount of South Korea's annual imports from Vietnam rose more than six times from US$14 million in 1988 to US$91 million in 1993. Since South Korea's imports from Vietnam, as compared to its exports to Vietnam, grew less rapidly and started from smaller amounts in the base year (1988), South Korea has been recording an increasing surplus in its balance of trade with Vietnam. However, South Korea's total world-wide annual imports increased from US$51.8 billion to US$83.8 billion during the same period. As a result, the Vietnamese share in the total imports of South Korea rose from a negligible 0.03 per cent in 1988 to 0.12 per cent in the first half of 1994 (see Table 10.5). South Korean imports from Vietnam rose for most products except for steel and metal products, which declined from a peak of US$18 million in 1989 to US$5 million in 1993. As a result, the share of steel and metal products in South Korea's imports from Vietnam declined to a negligible 5.8 per cent in 1993 from the peak of 42.7 per cent in 1989. The share of mining products also declined. In contrast, shares of agricultural products, textiles, and consumer goods increased substantially. Thus, South Korean imports from Vietnam recently show a switch from mining, steel, and metal products to textiles and agricultural products. The relative importance of Vietnamese products in South Korea's total imports differs among the product groups. The share of agricultural and

TABLE 10.5 Share of Imports from Vietnam among Total South Korean Imports, 1988-94 (In percentages)

Agricultural products Mining products Chemicals, plastic, non-metal Textiles Steel, metal Machinery Electrical goods Consumer goods Miscellaneous Total

1988

1989

1990

1991

1992

1993

1994*

0.04 0.15

0.12 0.15

0.08 0.11

0.16 0.11

0.2 0.13

0.33 0.15

0.34 0.1

0 0 0.02 0 0 0 0

0.01 0.01 0.27 0 0 0 0

0 0.05 0.21 0 0 0 0

0 0.16 0.07 0 0 0 0.01

0.01 0.4 0.06 0 0 0 0.02

0.01 0.83 0.07 0 0.01 0 0.02

0.02 1.17 0.04 0 0.01 0 0.07

0.029

0.068

0.048

0.051

0.070

0.108

0.115

*January to July. SOURCE: Korea Trade Association.

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TABLE 10.6 South Korea: Composition of Imports from Vietnam by Market Share, 1994 Product Category

Above the Vietnamese Market Below the Vietnamese Market Share in South Korea's Total Share in South Korea's Total Imports Imports

Primary

Agricultural, fishery, and forestry products Non-metal products Leather goods

Mining Chemicals, plastic Textiles Steel, metal Machinery Electrical Miscellaneous

Fuel, metal products Plastic, rubber, non-metal mine products

Clothing, thread, textiles

Daily consumer goods

Steel, metal products Precision machinery Electrical, electronic products Miscellaneous

mining products in South Korea's total imports has consistently been above the average Vietnamese share. Textiles have also belonged to this category since 1991. Other products have lower than the average Vietnamese share in South Korea's total imports. The composition of South Korean imports from Vietnam in 1994 by market share is shown in Table 10.6. The table confirms that South Korea is importing primar; and textile products relatively more from Vietnam than from other countries.

2. South Korea as a Trading Partner of Vietnam Vietnamese exports quadrupled in the five years after doi moi while imports remained the same. As a result, the trade balance improved substantially. Trading partners have also been diversified, especially from the nonconvertible to the convertible area. As of 1987, the non-convertible area absorbed 9 per cent of Vietnam's exports and was the source of 80 per cent of imports. But by 1991, the situation was reversed and trade with the nonconvertible area became negligible. Within the convertible area, Japan, Singapore, and Hong Kong are the largest trading partners ofVietnam. Until 199l,Japan was the largest importer ofVietnamese products while Singapore was the largest exporter to Vietnam. As of 1991, trade with South Korea made up 2.7 per cent ofVietnamese exports and 9.6 per cent ofVietnamese imports, making South Korea an increasingly important trading partner of Vietnam (Table 10.7).

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177

TABLE 10.7 Trade Balance and Composition of the Major Trading Partners of Vietnam in the Convertible Area, 1986-92 1986

1987

1988

1989

1990

1991

1992

Trade balance* (US$ million)**

-1,601 -135

-1,719 -281

-620 298

-348 -311

-251 -60

-31 n.a.

Exports* (US$ million)**

854 366

1,039 448

1,946 1,138

2,404 1,293

2,087 1,890

2,475 n.a.

12.1 42.3 18.6 6.5

30.2 27.9 22.1 5.8

34.8 30.1 12.0 5.6

7.2

1.4

2.6

22.9 6.2 6.9 7.0 0.4 2.2

26.3 15.0 18.8 8.9 2.2 2.1

38.1 22.4 11.8 4.4 3.1 2.7

n.a. n.a. n.a. n.a. n.a. n.a.

2,455 501

2,757 728

2,566 840

2,752 1,604

2,338 1,950

2,506 n.a.

11.2 30.3 29.7 5.8

13.2 4.6 5.6 36.8 11.8

4.9 12.2 1.9 12.5 6.3

30.9 12.3 3.3 10.5 7.7

37.0 10.0 9.6 8.1 7.6

n.a. n.a. n.a. n.a. n.a.

Composition ( %) Japan Singapore Hong Kong France Taiwan South Korea

Imports* (US$ million)** Composition ( %) Singapore Hong Kong South Korea Japan France

8.8 1.1 29.8 2.2

* Both convertible and non-convertible areas in rouble dollars. **Only convertible area in U.S. dollars. SOURCE: The Economist Intelligence Unit, "£1U Country Report (London, 1st quarter 1994).

In 1991 Vietnamese exports comprised mainly primary products: agricultural products, 30 per cent; fishery products, 14 per cent; and forestry products, 8 per cent (Table 10.8). Exports of heavy industry products are increasing while those of light industry products are declining. Vietnamese imports, on the other hand, comprised mostly raw materials, which tended to increase over time. Imports of consumer goods made up about one-seventh of total imports. In contrast, machinery imports showed a decreasing trend. Table 10.9 shows the major Vietnamese commodities which are exported to South Korea. These commodities are mostly primary goods, as classified in Table 10.10, based on the market share in South Korea of total Vietnamese exports, which ranges between 2.1 and 2.7 per cent. From the table, it is

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Koo Sung-Yea[

TABLE 10.8 Trade Composition of Vietnam by Commodity Groups, 1986-91 (In percentages)

Exports Heavy manufactured products Convertible area Light manufactured products Convertible area Agricultural products Convertible area Forestry products Convertible area Fishery products Convertible ar·ea Imports Machinery Convertible area Raw materials Convertible area Consumer goods Convertible area

1986

1987

1988

1989

1990

1991

9.0 5.1 34.8 0.7 38.9 13.9 8.1 4.4 8.8 8.8

5.8 1.8 38.0 1.4 37.8 ll.8 6.6 3.5 ll.5 11.5

5.9 2.6 44.9 1.7 31.8 11.5 4.9 2.5 12.4 12.4

20.8 17.7 37.4 1.6 31.0 15.6 3.8 1.9 7.1 7.1

25.7 12.6 26.4 2.2 32.6 8.7 5.2 1.1 9.9 4.1

33.4

34.7 5.2 51.9 11.2 13.4

40.0 3.5 53.7 10.2 15.6 8.6

34.8 4.9 49.9 11.3 15.3 9.4

70.0 6.1 53.7 17.2 12.8 9.4

27.4 6.0 57.7 28.9 14.9 12.5

24.4

6~ .!J

SOURCE: The Economist Intelligence Unit, 1994).

~'IU

14.4 30.1 8.4 13.7

65.5 13.9

Country Report (London, lst quarter

apparent that Vietnam exports coal, tin, cotton, and rice proportionately more to South Korea than to other countries. Table 10.11 shows the major commodities which are imported by Vietnam. Vietnamese imports from South Korea are mostly raw materials and intermediate products of heavy manufacturing industries, especially steel and fertilizers. TABLE 10.10 Vietnam: Composition of Exports to South Korea by Market Share Product Category

Above the Share of the South Korean Market in Total Vietnamese Exports

Below the Share of the South Korean Market in Total Vietnamese Exports

Agricultural

Rice, cotton

Fishery Mining Manufacturing

Rush, rattan, bamboo, rubber, cinnamon Dried shrimp, squid

Coal, tin Apparel, sandals, embroidery, fine art, carpet

TABLE 10.9 Exports of Vietnam, 1986-91 (In US$1,000) 1986

1987

1988

1989

1990

South K/T Total Korea (%)

South K/T Total Korea (%)

South K/T Total Korea (%)

South K/T Total Korea (%)

South KIT Total Korea (%)

Il,467 3,719

I 4,398 6,450 44.79

Coal 34,450 20,217 58.68 Tin Apparel Cotton, synthetic yarn Sandals Embroidery Rush products Fine art product~ Rattan, bamboo Woollen carpet Rice Rubber Cinnamon Frozen shrimp Frozen squid

32.43

SOURCE: General Statistical Office, Socialist Republic of Vietnam.

23,842 9,007 141,764 18,970 16,519 44,765 41,629 22,202 54,375 10,767 290,018 46,948 8,669 109,361 11,973

1991

South K/T Total Korea (%)

8,554 35.87 32,662 7,992 24.46 47,692 9,810 20.56 382 4.24 12,802 1,353 10.56 12,568 1.915 15.23 215 0.15 214,666 295 !.56 20,170 1,112 5.51 28,002 0.02 6 0,01 50,907 3 0.11 12,148 13 0,02 23,879 5 0.01 2 9,192 8 0.09 202 0.37 43,989 15 0.03 0.()4 6,974 29 0.27 3 304,637 187,620 21,446 11.43 66,370 55 0.08 53,314 33 0.38 5,691 64 3,161 1.12 152,076 69,426 498 0.71 13,079 407 3.11 8,777

TABLE 10.11 Imports of Vietnam, 1986-91 (In US$1 ,000) 1986

1987

1988

1989

1990

South KIT Total Korea (%)

South KIT Total Korea (%)

South KIT Total Kore.g China and Vietnam. Under this scheme 2,400 workers from Vietnam had been allowed but the quota was raised by another I ,000 when South Korean Prime Minister Lee visited Vietnam.

V. Prospects and Limitations I. Prospects for Bilateral Economic Relations

South Korea exports capital-intensive intermediate manufacturing products to Vietnam and imports agricultural products, natural resources, and labourintensive manufacturing products. This pattern of international division of labour between the two countries will become deeper and wider in the process of industrialization of Vietnam and industrial restructuring of South Korea. South Korea's FDI in Vietnam, motivated by the low production costs and the potential market of Vietnam and attracted to the labour-intensive manufacturing sector of Vietnam, accelerates this pattern of international

194

Koo Sung- Yea/

division by taking out production equipment and facilities from the labourintensive sector of South Korea to that of Vietnam. In the process, it tends to increase the import of material inputs from South Korea, employment oflocal employees, and transfer of production technology and marketing techniques which South Korean investors regard as their initial competitive advantage over the local Vietnamese competitors. The bilateral economic relations between South Korea and Vietnam are expected to continue to expand as the majority of South Korean investors plan to expand their business in Vietnam, having evaluated their business performance in Vietnam rather satisfactorily in terms of profit and growth prospects. Moreover, a new dimension in bilateral economic relations vrill emerge when the plans of the South Korean business groups are realized in diverse areas of investment. South Korea's invisible trade with Vietnam is also expected to increase significantly in the near future as a result of South Korea's FDI in Vietnam, its firms' participation in SOC projects, and its intake of Vietnamese trainees. Although the import of Vietnamese labour will tend to reduce 14 the basis of bilateral trade, direct and positive effect of it will more than offset the indirect and negative effect. The bilateral economic relationship has the capacity to develop further as Vietnam has extensive development requirements in the field of SOC and resources. Vietnam's need for SOC investment is estimated to be US$30 billion up to the year 2000. It is estimated that 105,000 kilometres ofroads and l ,475 railway bridges are in need of expansion and/or repair. Only half of Vietnam can currently receive television transmission and electricitv is in regional disequilibrium between the north and south. The shortage of electricitY needs to be met by construction of more power plants.

2. Limitations and Directions for Improvement There are limitations too. Imbalance in trade and the restraints on the import of consumer goods on the part of Vietnam will become constraints in the near future on the promotion of bilateral trade between South Korea and Vietnam. South Korean preference for dominant ownership, 15 the prevalence of South Korean firms without legal permission, and the concentration of South Korean firms in Ho Chi Minh City will become limiting factors for the expan~ion of South Korean firms in the future. On the other hand, Vietnam needs to make improyements, for im'estors in general, in various areas such as banking, the tax system, and manpower training in addition to physical infrastructure. The export-processing zone in Vietnam aims to remedy this weakness but it still lacks electricity, water, and roads despite its limited eligibility for corporate tax exemption. 11i

South Korea and the Transitional Economies of Southeast A.sia

195

South Korea is not the only country which enjoys economic complementarity with Vietnam. Taiwan, Hong Kong, and Singapore are all good complementary partners to Vietnam. Each of these countries, including South Korea, has special areas of relative strength in their complementarity with Vietnam. South Korean relative strength lies in the area of construction and heavy manufacturing industries. In this area, South Korea can provide intermediate technology to which Vietnam can easily adapt. Being about the same in land area and population size, South Korea can be a good reference point for Vietnam. The plans and policies and the actual path of economic development of South Korea can serve as relevant data for policy guide-lines for Vietnam. Vietnam is now pursuing privatization of public enterprises. For this, the privatization process of public enterprises and business groups (chaebol) in South Korea could be good references for devising the best strategies.

NOTES 1. As at 31 Mav 1994, South Korea had two projects ofFDI in Cambodia permitted in manufactming, totalling US$3,419,000. The amount of investment in each is below US$2 million and they are owned 100 per cent by South Koreans. So far, US$1,919.000 has been actuallv invested. South Korea's investment in Laos, as at 31 May 1994, was permitted in four projects totalling US$3,090,000. Three of them are in manufacturing with less than US$1 million in each and the fourth is in construction with US$1 ,468,000. They are all owned 100 per cent bv South Koreans. So far, US$620,000 has been actually invested in manufacturing. 2. South Korea began to experience labour shortage in the latter half of the 1970' in some sectors. But labour shortage became a problem in all sectors from the latter half of the 1980s. 3. Vietnam became a member of the International Monetary Fund in 1976 and of the United Natior,s in September 1977. It promulgated a foreign investment law in April 1977. 4. Vietnam joined COMECON in June 1978 and signed a Friendship and Cooperation TreatY with the former USSR in November 1978. 5. The doi rnoi line was reaffirmed in June 1991. 6. Realistically speaking. there is good prospect that economic progress through opendoor policy and liberalization will not threaten political stability. 7. The South Korean Government initiated the Economic Development Co-operation Fund in 1987 and the Korea International Co-operation Agency (KOICA) in 1991 to prm·ide international aid and to promote technological co-operation with developing countries. 8. Vietnam exports crude oil mostly to Japan and imports petrol and other refined oil from Singapore.

196

Koo Sung-Yeal

9.

Actually, the biggest investor in Vietnam is Russia, which invested US$2 billion in Vietsovpetro in 1981. Since the official FD I figures count investment with 198 7 as the base year, when the foreign investment law was enacted, this figure is not included. 10. Figures in Table 10.15 are provided by the Bank of Korea and so do not necessarily match with the figures provided by the State Committee for Co-operation and Investment (SCCI) of Vietnam. According to the SCCI, South Korea's FDI in Vietnam reached US$606 million in sixty-seven projects in March 1994, ranking third in number of projects and fourth in amount. By August 1994, it had risen to US$762 million and seventv-six projects. 11. Three in Dongnai and one each in Haiphong, Songbe, and Binphu. 12. Hyundai, Samsung, Daewoo, Hyosung, Lucky Goldstar, and Ssangyong have branch offices in both Hanoi and Ho Chi Minh City. 13. Transfer payment is included, which has been increasing over time, fwm US$932,000 in 1992 to US$1,588,000 in 1993 and to US$1,260,000 in the first quarter of 1994. In contrast, only US$80,000 is recorded in the first quarter of 1994 as transfer income from Vietnam. Payment for insurance is not included. 14. Labour mobility will dilute the international division of!abour through commodity trade for both countries, as South Korea tries to revive the moribund labourintensive sector by using cheaper foreign workers and Vietnam tries to accelerate the speed of development through technological transfer. 15. This is in part due to legal factors. For joint-venture companies in Vietnam unanimous decision is required in the executive board in nine important areas, such as amendment of statute, appointment of executive members, increase of capital, etc. 16. Firms in the export-processing zone of Vietnam are eligible for corporate tax (normally 20 per cent) exemption for four years after the first profit. After four vears, they have to pay 10 per cent corporate tax. But the eligibility is limited to those who invest more than US$1 million in capital and occupy 2,500 square metres. Annual rent at US$100 per square metre is rather expensive.

REFERENCES Bank of Korea. Investment Environment and Management Situations of Korean Firms in ViPtnmn (in Korean). Seoul, 1994. Choi Bong Hyun. Industry of Vietnam and Korea-Vietnam Eronomic Co-operation (in Korean). Seoul: Korea Institute for Economics and Technology, 1994. Frost, Frank. 1/ietnam 's Foreign Relations: Dynamics of Change. Singapore: Institute of Southeast A~ian Studies, 1993. General Statistical Office, Vietnam. Economy and Tradr of Vietnam 1986-1991. Hanoi: Ministry of Trade and Tourism, 1992. Institute of Southeast Asian Studies. Regional Outlook: Southeast Asia 1994-95. Singapore, 1994.

South Korea and the Transitional Economies of Southeast Asia

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International Monetary Fund. Direction of Trade Statistics Yearbook 1993. New York, 1993. _ _ . Balance of Payments Statistics Yearbook 1993, pt. 1. New York, 1993. James, William E., Hee-Sik Kim, and Natsuki Fujita. "Interindustrial Linkages and Employment in Korean Industry, 1975-85". The Developing Economies 31, no. 2 (June 1993), pp. 241-53. Jamieston, Neil L., Nguyen Manh Hung, and A. Terry Rambo, eds. The Challenges of Vietnam's Reconstruction. Ajoint publication with the East-West Center Indochina Initiative, Honolulu, Hawaii, The Indochina Institute, George Mason University, Fairfax, Virginia, 1992. Kang Young Jin. Survey of Vietnam Bound Enterprise (in Korean). Issue Report on the Northern Region 94-3. Seoul: Korean Trade Promotion Agency, 1994. Kwon Yul. FDI Inducement Policies and System in Vietnam (in Korean). Seoul: Korea Institute for International Economic Policies, Regional Information Centre, 1993. Lee Chung H. "Korea's Direct Foreign Investment in Southeast Asia". ASEAN Economic Bulletin 10, no. 3 (March 1994). Maskus, Keith E., Catherine D. Sveikauskas, and Allan Webster. ''The Composition of the Human Capital Stock and Its Relation to International Trade: Evidence from the US and Britain". Weltwirtshaftliches Archiv, pp. 51-76. Murakami, Atsushi, Le Thanh Nghiep, and Chira Hongladarom, eds. Vietnam, Laos and Cambodia in Transition: Reconstruction and Economic Development: Overview and Summary. Tokyo: The Sasakawa Peace Foundation, 1993. Park Eul Yong. "Role of Korea in the Economic Development in Vietnam, Laos and Cambodia". In Vietnam, Laos and Cambodia in Transition: The Path to Economic Development: Overview and Summary, edited by Osamu Yasuda, Chira Hongladarom, and Mya Than, pp. 75-87. Tokyo: The Sasakawa Peace Foundation. 1993. Socialist Republic of Vietnam. Vietnam: A Development Perspective. Prepared for the donor countries. Hanoi, September 1993. Than, M)'a and Joseph L.H. Tan, eds. Vietnam's Dilemmas and Options: The Challen[!;e of Economic Transition in the 1990s. Singapore: Institute of Southeast Asian Studies, 1993. Thayer, Carlyle A. The llietnam People's Army under Doi Moi. Singapore: Institute of Southeast Asian Studies, 1994. The Economist Intelligence Unit. Indochina: Vietnam, Laos, Cambodia. Countrv Report. London, 2nd quarter 1994. _ _ . Vietnam Market Atlas. London, 1992, United Nations. Foreign Trade Statistics of Asia and the Pacific 1986-1990. New York: Economic and Social Commission for Asia and the Pacific, 1991. _ _ . 1992 International Trade Statistics 'Yearbook. New York, 1992. _ _ . Statistical Yearbook for Asia and the Pacific 1993. New York, 1993. World Bank. "Vietnam Stabilization and Structural Reforms". Report no. 8249-VN. 30 April 1990.

THE EDITORS Daljit Singh and Reza Y. Siregar are Fellows at the Institute of Southeast A