July 1, 2006｜Korean Peninsula
Chang Jae Lee
Director, Center for Northeast Asian Cooperation, Korea Institute for International Economic Policy
The Chinese economy is growing rapidly. Between 1990 and 2004, the Chinese economy demonstrated an annual average growth rate of 10.4%; in addition, during this period, the total value of Chinese trade and inward direct investment both recorded high rates of increase, with annual average increase rates of 18.1% and 22.6% respectively.
As a result, as of 2004, the Chinese economy accounted for 4.9% of the global economy and, although this figure is small compared with that of Japan (13.9%), it is clearly larger than that of the ROK (1.7%). Furthermore, in the field of direct investment, China (9.4%) accounts for a much larger share of total investment than do Japan (1.2%) or the ROK (1.2%); in addition, attention should be paid to the fact that China (6.5%) has already overtaken Japan (5.5%) in terms of the scale of trade.
As a consequence, the dependence of the ROK and Japan on trade with China rose As of 2004, China was the ROK’s largest export partner and second-largest import partner, while for Japan it has emerged as its second-largest export partner and largest import partner. In addition, the dependence of the ROK and Japan on foreign direct investment in China has increased, and China is the top destination for foreign direct investment from the ROK, and the third-largest destination for foreign direct investment from Japan.
The ascent of the Chinese economy is a threat not only to the economies of the ROK and Japan, but also to the economy of the whole world, but it could also prove to be an opportunity. With the emergence of the markets of Japan and the ROK and China’s rise as a competitor in global markets, there is a risk that it will result in industries in the ROK, Japan and other countries collaborating with each other. On the other hand, with China providing a vast, rapidly growing market and attractive areas in which to invest, we must not overlook the fact that it could prove to be an opportunity for other countries.
In fact, between 1990 and 2004, while the share of the US market accounted for by China rose from 3.1% to 13.8%, the shares of the ROK and Japan declined from 3.7% to 3.1%, and from 18.2% to 8.7% respectively. On the other hand, during the same period, the share accounted for by China in total exports from the ROK and Japan rose from 0.0% to 22.2%, and from 2.1% to 13.1% respectively.
As both the ROK and Japan are adjacent to the epicenter of change that is China, there is a strong possibility that the ascent of the Chinese economy will have a relatively significant impact on them, so it is likely that the establishment of measures to deal with this will be emphasized. While devising appropriate measures to deal with the threat posed by the Chinese economy, the ROK and Japan should, by seizing the opportunities offered by the ascent of the Chinese economy, use this situation to trigger the upgrading of their own economies, as well as sustained growth.