Economics and the Japan-Korea Relationship: Adding Value

By David A. Parker & Mikael Lindfors

A Samsung ad appears in Akihabra, Tokyo taken with a Nikon. Source: mattdork's flickr photostream, used under a creative commons license.

A Samsung ad appears in Akihabra, Tokyo taken with a Nikon DSLR. Japan and South Korea’s strong economic ties are often overlooked. Source: mattdork’s flickr photostream, used under a creative commons license.

Few observers were surprised when Assistant Secretary of State for East Asian and Pacific Affairs Danny Russel noted that Japan-South Korea relations have been “strained” of late during remarks before the Senate Committee on Foreign Relations last week. Tensions over disputed territories and Japan’s wartime past have prevented any bilateral meetings between Japanese prime minister Shinzo Abe and South Korean president Park Geun-Hye since they took their respective oaths of office more than a year ago. But alongside worsening political frictions between America’s two key Northeast Asian allies, economic cooperation and competition have made both countries increasingly integrated and their relationship more equitable over recent years.

To be sure, this is not the narrative coming out of Seoul, where officials have been deeply concerned over the yen’s sharp depreciation since October 2012. Behind the Bank of Japan’s anti-deflationary rhetoric, many see an effort to boost Japan’s export competitiveness at the expense of South Korean industry. That South Korea has run a trade deficit with Japan for more than 30 years further underpins Seoul’s concern. In fact, the deficit was one of several factors cited in the decision to suspend talks with Tokyo over a bilateral economic partnership agreement a decade ago.

But conventional statistics conceal a fundamentally more balanced relationship than this narrative suggests. When trade is calculated in value-added terms – accounting solely for the “made in Japan” content in Japanese exports – the $28 billion bilateral deficit South Korea ran in 2009 falls by nearly 80 percent. The content of Japan-Korea trade has also grown more balanced with time, as South Korean companies have become increasingly competitive in high value-added industrial activities. Intra-industry trade in everything from hot-rolled steel sheets to semiconductors now accounts for a growing share of the goods flowing between Busan and Yokohama, and in some key sectors, such as LCD panel production, investments in Korea by Japanese companies have been a major factor behind this shift.

A key example of the maturing Japan-Korea economic relationship is their interactions within the global smartphone supply chain. Japanese firms have long been dominant in manufacturing high-grade materials, many of which are essential in making today’s high-definition smartphone screens crisp, colorful, and responsive. Filling a growing share of these firms’ order books is demand from Korean phonemakers, which has exploded in recent years as annual smartphone sales worldwide have skyrocketed into the hundreds of millions.

But as Tokyo has looked to Korea as an increasingly important source of demand for intermediate goods, Seoul’s aggressive free trade strategy and China’s growing economic heft have had the opposite effect, reducing Japan’s overall weight in Korea’s trade portfolio. While Japan remains one of Korea’s top three trading partners, the China-Korea trade relationship is roughly twice as large in gross terms, and even negotiations to establish a trilateral free trade agreement in Northeast Asia appear to be making little progress.

In spite of this, neither Tokyo nor Seoul should underestimate the positive effects of Korean-Japanese cooperation for both countries and the world. Estimates indicate that achieving a de facto bilateral free trade agreement between Japan and Korea through the Trans-Pacific Partnership would increase the value of that deal by roughly a third, boosting global gross domestic product in 2025 by more than $70 billion. As significant exporters of technology, culture, and innovation, both also share an interest in championing 21st century standards in other, Asia-only initiatives, such as the Regional Comprehensive Economic Partnership, where collaboration between Seoul and Tokyo could give a major boost to the quality and comprehensiveness of a final agreement.

This is not to say cooperation will come easily. Inevitably the Japan-Korea economic relationship will be as much about competition as cooperation, if not more so. But history shows this competition need not be zero sum. Former Malaysian prime minister Mahathir Mohammad used the spirit of rivalry between Korea and Japan to ensure that construction of the Petronas Towers, at the time the tallest buildings in the world, was completed on schedule. Mahathir’s secret for getting an eight year project done in six? He gave the contract for one tower to a Japanese company, and the other to a South Korean firm.

They both met the deadline – though, apparently, one tower leans…

Mr. David A. Parker is a research associate with the Simon Chair in Political Economy at CSIS. Mr. Mikael Lindfors is a researcher with the Simon Chair.

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2 comments for “Economics and the Japan-Korea Relationship: Adding Value

  1. Emie
    October 23, 2014 at 00:00

    I wonder if this positiveness in the economic front will help mend ties politically between the two countries. From what I have read, Japanese business lobbyists called for stronger economic ties between the two countries and the South Korean Ambassador to Japan agreed with them. Or is it that the chill in diplomatic relations do not pose a threat for overall amiable relationship between them? Since people to people interaction between the two has not slowed down either.

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