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Reassessing Korea-China-Japan Trade Structure

Reassessing Korea-China-Japan Trade Structure

RHEE Tae-Hwan

Oct. 14, 2013

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The globalization of the value chain has rapidly intensified since 2000. Considering how often intermediate goods crisscross borders these days before final assembly is completed, a more appropriate label for them is "Made in the World" rather than "Made in Korea" or "Made in China."

This international dispersal of production also affects traditional trade statistics, which record the total value of goods passing through customs. Trade of intermediate goods exaggerates the statistics because value-added is double counted. For example, if Korea imports US$400 worth of intermediate goods from Japan, and turns them into a finished good that is sold to China for US$1,000, the initial US$400 is counted again for a trade total of US$1,400. However, in terms of actual value-added the total is US$1,000 -- US$400 in Japan and US$600 in Korea. As a result of this redundant counting, world trade is outpacing GDP. While the world's nominal GDP increased to 3.2 times that of 1990 by 2012, world exports swelled 5.3 times.

GDP refers to the aggregate value-added that a country produces during a specified period of time. When a country exports, only value-added that it produced itself contributes to GDP. The value of intermediate goods imported is excluded. Existing input-output tables show the flow of intermediate goods within a country, but not the origin of the goods. To fill the information void, the OECD and World Trade Organization (WTO) in May released tables that integrated input-output and trade data. By using these tables, intermediate goods can be identified by industry and country of origin, enabling analysis of the flow of international value-added moving through the value chain.

China became the world's factory after it joined the WTO on December 11, 2001. Between 2001 and 2012, China's trade with the world grew at an annual average rate of 20.2% and trade within Northeast Asia benefited handsomely.

Korea's trade with China rose 6.8 times from US$31.5 billion in 2001 to US$215.1 billion in 2012. In 2004, China replaced the US as Korea's No. 1 trade partner. Trade between Korea, China and Japan ballooned from US$124.1 billion in 1995 to US$650.9 billion in 2012. During this period, Korea's trade surplus with China sharply increased and its trade deficit with Japan expanded. This implies that the region's division of labor -- Japan's core components + Korea's intermediate goods + China's labor -- is intensifying. However, this stream of value-added cannot be easily identified with conventional trade statistics. This paper analyzes it with the new OECD-WTO Trade in Value-Added (TiVA).

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