Strengthening Global Cooperation for IndustrialInnovation in the Era of the Great Transition
The significance of South Korean international economic and trade relations is accelerating amid supply chain disruptions due to the shock of the COVID-19 pandemic; the Russian invasion of Ukraine, which is causing a serious rethinking of Europe’s energy profile; and the trade conflict between China and the United States. Given the reshuffling of global value chains, South Korea confronts a unique opportunity to explore how it can deepen its economic and trade relationships with like-minded economies.
One of the main drivers of Korea’s robust economic growth over the last 50 years has been its innovation-based, export-led growth policy. South Korea’s successful industrial policy included robust investments in education; science, innovation, and technology (STI); research and development (R&D); and export promotion.
Export-led growth produces technological spillovers and further positive externalities because to keep operating in international markets, businesses must achieve increased efficiency and innovation of products and business processes; and they must endeavor to remain internationally competitive for a long period. Especially in the cases of countries with small domestic markets, entering global markets represents a key route for companies to achieve economies of scale and specialize in their strengths and competitive advantages.
In the meantime, partner countries of Korea may benefit from stronger economic cooperation. To attract Korean trade and investment, governments must ensure that both their economic activities and regulations are attractive for Korean partners.
More and more countries are beginning to open their economies to Korea, although it can be unclear what each country should focus on to achieve these goals.
Korea and its partner countries must follow the 10 shared principles of GTIPA to strengthen their development potential and maintain their global leadership position in STI. The principles are summarized as follows:
It’s time for a new approach to globalization and trade, one that is fundamentally grounded in the perspective that innovation—the creation of new or the improvement of existing production processes, products, services, and business models—fundamentally drives economic expansion and sustainable development; that markets should drive trade; and that nations should respond to international economic competition by ratcheting up their game and implementing policies designed to spur innovation and productivity across all industries and enterprises.
Expanded trade and cross-border investment represent key drivers of increased global innovation, which in turn plays a central role in solving the pressing challenges of our day: increasing living standards, improving and protecting public health, and protecting the environment. Expanding market-driven trade in goods, services, and data fosters innovation by exposing domestic firms to new knowledge and new competitors that entices them to respond by innovating faster. Expanding market-driven trade also gives companies access to larger markets to capture greater gains from their innovative activities, thereby supporting a virtuous cycle of further innovation.
Market-based trade benefits all countries by allowing each nation to specialize in the products or services in which they have comparative or competitive advantages. Yet this does not mean a slavish devotion to outmoded, 18th-century theories based on trade in “wine” and “cloth.” Nations can and should seek to boost comparative advantage—but by helping their enterprises boost productivity and innovation capacity, not by distorting trade. This does not mean countries should seek to specialize in every technology and industry; rather, they should specialize in markets where they can produce superior products and services, and then trade for the rest.
Trade and investment decisions should be made based on voluntary, competitively determined business considerations. Government policies designed to limit imports and investment, force foreign investment as a condition of market access, or discriminate against foreign firms distort global markets and are detrimental to global prosperity. In many cases, they are also detrimental to the prosperity of the nations that engage in them, in part because they either raise the prices or lower the quality of key capital goods inputs, such as information and communications technologies (ICTs).
Instead of resorting to trade-distorting measures, countries achieve far more robust and sustainable growth when they embrace productivity- and innovation-based economic development models. A foremost goal of these policies should be to boost productivity growth across the board in all industries—traded and non-traded alike—because most of the economic growth for almost all nations comes not from changing their existing sectoral mix from lower- to higher-productivity industries, but from all industries, even low-productivity ones, boosting their productivity.
Competitive domestic marketplaces are among the strongest drivers of innovation and productivity growth. Countries foster competitive marketplaces in two ways: by opening their markets to foreign competition and by limiting regulatory protections and financial subsidies for domestic incumbents, including small businesses. All players should be able to compete on equal terms; no enterprises should be penalized for being more productive, innovative, or larger than others.
Beyond open trade and competitive markets, success requires governments to get other key framework conditions right. These include the rule of law; a culture of entrepreneurial risk-taking; effective protection of intellectual property (IP); a competitive corporate tax code; flexible labor markets; zero tariffs and low taxes on capital goods, especially ICTs; and light-touch, performance-based regulations.
The embrace of market-based trade should not come with an ideological bias against governments actively implementing policies to promote innovation and competitiveness. It is not enough to simply open markets to trade and investment or to establish other key framework conditions. To maximize growth, governments need well-articulated, distinct strategies addressing competitive-ness, innovation, and productivity. This can involve supporting key factor inputs such as robust physical and digital infrastructures, education and training, and R&D. But it also involves more active innovation policies, such as tax incentives for investments in R&D and new capital equipment; entrepreneurial support programs; technical assistance programs for small and medium-sized enterprises (SMEs) engaging in manufacturing; university technology transfer programs; and support for digital transformation (for example, e-government, broadband support, and digital literacy).
Nations should put productivity and innovation growth first, along with investing in the education and skills that will equip citizens to better contribute to and benefit from a more-innovative economy. Nations getting these conditions right, including flexible labor markets and stable macroeconomic policies, robust productivity growth will generate robust job growth.
For these reasons, the first and central task of global economic policy and global institutions—including the World Bank, the World Trade Organization (WTO), and the International Monetary Fund, among others—should be to encourage all nations to make boosting innovation and across-the-board productivity growth their top economic priority, while also discouraging innovation mercantilism.
The principles of GTIPA provide detailed guidance for Korea on its ideal trade policy to progress in STI performance and growth. However, some key questions remain unanswered about the specific actions Korea could take to achieve the goals described previously. For instance, it is yet uncertain how the Ministry of Foreign Affairs in South Korea should prioritize its objective—which is necessary, because of limited resources—to improve benefits from trade with specific countries. There are several tools at the Ministry's disposal, e.g., decreasing tariffs and non-tariff barriers to trade, adjusting the regulation of foreign firms for conducting business in Korea, negotiating free trade agreements, promoting trade fairs, and facilitating political partnerships.
The largest trade partners of Korea in 2020 in terms of exports were China ($137 billion, accounting for 27 percent of Korea’s total exports), the United States ($65 billion, 13 percent of total exports), and Vietnam ($49 billion, 10 percent of total exports), which three countries account for 49 percent of Korean exports. As a consequence of the strong concentration of trade, these countries represent an essential focus of Korean trade policymakers. Furthermore, Korea’s export-dependent economy, particularly in advanced technology industries like semiconductors and other ICTs, mean Korea faces a challenge in navigating the deepening trade conflicts that have arisen between China and the United State in recent years. Korea must shift from reactive to proactive trade policies while building close relationships with middle powers like Australia and Japan, among others with shared interests and identities (i.e., liberal, democratic, market-based economies).
Korea has developed strong trading relationships with its primary trading partners, notably China and the United States. In line with the proliferation of free trade agreements (FTAs) globally, FTAs represent perhaps the most-used mechanism to advance Korea’s trade relations. Korea has concluded 21 FTAs, which guide trade relations between Korea and 59 countries. Beyond this, Korea is considering pursuing additional FTAs with other emerging in an effort to secure stable access to overseas markets and to strengthen the competitiveness of the Korean economy through openness. The list of Korean trade partners with FTAs includes the Association of Southeast Asian Nations (ASEAN), Australia, Canada, Central America (Partial), Chile, China, Colombia, European Free Trade Association (Norway, Switzerland, Iceland, and Liechtenstein), European Union, India, New Zealand, Peru, Regional Comprehensive Economic Partnership (RCEP), Singapore, United Kingdom, United States, Turkey, and Vietnam.)
This report aims to provide information and to support Korea and its partner countries in helping them decide how to position their economic partnership strategies with each other, resolve barriers to trade, and solve the international challenges ahead. The key metrics to understand economic cooperation between Korea and its partners include the flow of talented individuals, foreign direct investment (FDI), tariff levels, exports, imports, non-tariff barriers to trade, and other trade indices. The next chapter provides a collection of papers regarding specific countries’ trade policies and economic environments conducted by leading international think tanks (members of the Global Trade and Innovation Policy Alliance) respective to the analyzed countries. This report covers 13 countries, namely Argentina, Australia, Bangladesh, Brazil, India, Indonesia, Italy, North Macedonia, Peru, Philippines, Poland, South Africa, and the United States. These articles mostly analyze the above-mentioned key metrics for economic cooperation, the macroeconomic environment of their countries, details of their FTAs or prospective FTAs, current challenges, and opportunities to develop deeper trade and economic relations with these countries and Korea. After the collection of articles, the report concludes with the most important findings of each article and summarizes key insights for policymakers of Korea and its 13 assessed partners.