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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Korea-China FTA: Its Meanings and Major Issues

Korea-China FTA: Its Meanings and Major Issues

PARK Bun-Soon

June 14, 2011

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Originally released on April 11, 2011

China's ascension at the turn of the 21st century will change the world economic order as did the emergence of superpower, the US, at the dawn of the 20th century. With tremendous economic potential, China is making its mark on the world market. The size of China's economy in 2010 stood at the world's second largest after the US. If China, being more like a huge continent in terms of population, natural resources and land mass, could maintain its exceptional growth for the next 20 years, the nation is expected to be the world's No. 1 economy by 2030, even in terms of the market exchange rate.

China's steady rise to economic prominence will have a great impact on the rest of the world, but it will be especially great on the Korean economy due to the geographical proximity. It is imperative for Korea to maintain an open economy due to its poor supply of natural resources. Hence, economic cooperation with China will be a crucial factor in determining Korea's future for the next 50 to 100 years. Korea has so far taken full advantage of the Chinese market, however, if Korea fails to effectively utilize China's continuous growth, it could be absorbed into the neighboring country's enormous production capacity and reduced to a small satellite state in terms of economy.

To measure the economic effects of a Korea-China FTA for both sides, this study analyzed the Revealed Comparative Advantage (RCA) index. According to the results, Korea appears to have secured an overall competitive advantage in manufacturing. And despite Korea's high agricultural tariffs and barriers, China has a relatively stronger competitive advantage over Korea in 24 agricultural export items, including grains and vegetables. In particular, China enjoys a competitive advantage in fisheries, vegetables, fruits and oilseeds.

Compared with other FTAs, trade expansion as a result of a Korea-China FTA will be far larger as its impact on GDP growth, which varies in the range of 2.02 to 4.00% according to various assumption scenarios and models, is expected to be relatively greater. Since preliminary negations on a Korea-China FTA have begun, official negotiations cannot afford any further delay. In order to minimize the possible shocks from a Korea-China FTA, it is desirable to kick off negotiations after the KORUS FTA enters into effect.

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