Economic Security and Geopolitics: Insights into Japan-Korea cooperation based on "Economic Security Indicators"

The Supply Chain Dominance Index: Assessing power and vulnerability

The economic security indicator to be presented was developed by the Economic Security Cluster at the Institute for Future Strategy of Seoul National University. This cluster was established to promote South Korea’s resilience and competitiveness in response to the fragmentation trend of the world trade order.

In order to prepare for turbulence that may occur, assessing the degree of strength and resilience of the South Korean economy is crucial. We examined power and vulnerability as two critical factors. Power is a country’s capacity to perturb or influence another country’s established status quo. The opposite concept is vulnerability, which is a country’s susceptibility to the disruptive actions of another country.

Supply Chain Dominance (SCD) means measuring these two concepts by using bilateral trade data. In this case, UN Comtrade data was utilized to look at each country’s trade flows.

We set the threshold of classifying expert power and import vulnerability as follows: (1) Country A is defined to have export power over Country B in a product if the share of its export of a product exceeds 10% of the world export of the same product; (2) Country B is defined to be subject to import vulnerability to Country A in the product if it imports more than 40% of the same product from Country B. For example, China accounts for more than 40% of South Korea’s total lithium imports, China possesses export power and South Korea is vulnerable. Another example would be Russia. In 2021, Russian exports of natural gas made up about 25% of total global natural gas exports, while at the same time 45% of the EU’s natural gas imports came from Russia. In this case as well, Russia had the power to control natural gas and the EU was vulnerable to any disruptive actions of Russia. The data on power and vulnerability is available on the website of the Institute for Future Strategy of Seoul National University.

Other institutions, such as the Harvard Growth Lab, compute economic complexity which is a related concept. Economic complexity usually means competitiveness. If a country produces highly complex products, it means that it is very competitive. However, nowadays, this kind of complexity can be also regarded as an indicator of vulnerability. Today’s world trade order is fragmented, and imports of parts, equipment, and materials that are necessary for the production of highly complex products may easily be disrupted. Unfortunately, these days it can be said that “big is beautiful” and being a large economic power is desirable, but Japan and South Korea are relatively small compared to the United States and China. The economic complexity ranking shows that Japan has consistently maintained the #1 ranking in terms of complexity from 2001 to 2021, while South Korea was 20th in 2001 and is in third place in 2021. For the United States, complexity decreased relatively while China actually climbed up in the ranking from 39th in 2001 to 18th in 2021, while also becoming more competitive.

Countries were ranked using the Supply Chain Dominance Index that was computed. China tops this SCD ranking in terms of export power. In 2001, China was number three, but now it is number one, followed by Germany and the United States. Japan is in sixth place. Meanwhile, the vulnerability China faces is fairly low as it ranks 56th in the vulnerability ranking. The total score of export power of China is about four times that of Germany and eight times that of the United States. This situation is very different compared to 2001, when the United States was number one in export power, while it is now in third place.

China’s rise in supply chain dominance and its implications

China’s export power score is formidable, and the gap is increasing over time. It increased by a factor of eight from 2001 to 2021, while the export power score of the United States decreased by 50%. On the other hand, China’s vulnerability is low, which means that China’s economy cannot be easily disrupted by other countries’ actions, such as sanctions.

What about other sorts of materials, especially critical materials? The government of the United States published a list of critical products, which includes products related to health and biological preparedness, ICT, energy, and critical minerals. These industries were translated into six-digit HS codes and the countries were examined and ranked. China is still number one in many sectors—minerals and materials, energy, public health, ICT.

In comparison, Japan and especially South Korea are much more vulnerable, ranking in the top five in every category. These countries, which enjoyed economic complexity in the era of globalization, are vulnerable to other countries’ actions in case of turbulence or disruptions. China is especially dominant in producing key minerals which are needed to produce a variety of products. Therefore, as an exporter of these critical materials China can use them to perturb other countries’ trade and economy, and possibly security. China has similar power in most industries.

Regarding the extent of this export power in terms of the democracy index, while non-liberal China’s GDP per capita and export power was low in 1995 as a non-liberal country, and liberal countries such as the United States, Germany, France, and Japan dominated global trade in the same year, nowadays, China remains a non-liberal country, but it is very dominant in world trade.

What kind of implications can be drawn from this analysis? Given the export power China possesses, decoupling is nearly impossible and would incur high costs. Some people argue that de-risking is a safe approach, but it may not fully serve the United States’ strategic interests. Perhaps the optimal policy from the perspective of the United States is a strategy that combines decoupling in the area of key advanced technologies with de-risking in other industries. But this situation is not favorable to South Korea and Japan, because these countries can be most easily disrupted by the rivalry between the United States and China, and also by China’s possible retaliation.

We must think about how long this rivalry will continue and what will happen afterwards. Regarding the question of how long this rivalry will continue, Dr. Feulner—the founder of the Heritage Foundation—replied simply by saying it would be an indefinite duration. Perhaps we can expect at least another decade of this rivalry. Since Japan and South Korea are two countries which are very advanced in key manufacturing areas, their strategy should focus on remaining key producers of technologies and manufactured goods.

Current geopolitical challenges and the issue of North Korea

Today’s geopolitical challenges are very serious. Nowadays the world is divided into liberal and non-liberal countries, not only in terms of politics, but also in the economic sector. China’s export power has been directed more toward non-liberal countries than liberal countries. While its export power toward liberal democracies has increased by 15 times from 2001 to 2021, exports toward non-liberal countries increased by 21 times. This indicates a fragmentation of trade into two blocs.

Concerning North Korea, which is relevant considering Putin’s recent visit to the country, two areas need to be looked at: economy and geopolitics. South Korea and Japan face a similar challenge from North Korea. While challenges from China may be more important in terms of the global impact, challenges from North Korea could be more urgent and perhaps more unpredictable for the two nations.

Based on estimates, North Korea’s GDP declined by 25% from 2017 to last year as a result of sanctions and the impact from the country’s COVID-19 policies. Also, North Korean authorities shifted economic policies from pragmatic ones to self-reliance in 2019, after the North Korea-United States Hanoi Summit. Now, geopolitics are changing, perhaps in favor of North Korea, due to an improvement of relations with Russia and China. This could help North Korea to resist pressure from other countries economically, diplomatically, and militarily. Current estimates show that North Korean economic conditions are very poor which may have implications for Kim Jong-Un controlling the society, as the income of elites may have dropped by as much as 50% for the last seven years due to the sanctions and policies mentioned above. The Institute for Peace and Unification Studies at SNU surveys newcomers from North Korea who settle in South Korea asking questions about popular support for their leaders. Kim Jong-Un’s popularity was highest in 2018 at 73%. It declined in 2019 and 2020, perhaps because positive outcomes expected from the Hanoi Summit were not achieved. It can be assumed that this decline continued in 2021 and 2022, so his popularity may be below 50%, lower than his father’s popularity.

In the long run, another problem Kim Jong-Un may face is marketization. North Korean households survive by trading and gaining an income at markets. This informal marketization nurtures a capitalist mindset among North Koreans. Analysis shows that among North Korean refugees living in South Korea, those who experienced market activities while they were still living in North Korea tend to support the market economy over socialism. This indicates that even though they have been living in North Korea—a socialist country—their mindset is half capitalist.

Cooperation between South Korea & Japan: Similar values and challenges

Keeping this background and the resulting challenges in mind, greater cooperation between South Korea and Japan in the realms of economy and security is both prudent and sensible. While Europe is united economically through the European Union (EU) and also in terms of security through the North Atlantic Treaty Organization (NATO), Asia is divided. South Korea and Japan are both democratic countries but we are now facing potential issues originating from non-democratic countries like China. If South Korea and Japan are divided, effectively countering geopolitical challenges or economic challenges will not be possible. It is time for the two countries to exert dual leadership to initiate joint actions before we are unable to do so and new, unshakable frameworks for cooperation that will irreversibly improve our relations are essential for our continued prosperity.

Not only do the two countries face similar challenges, but they also share similar values. Our core values are reflected in our constitutions and the market economy is a core foundation of our respective institutions. Closer cooperation could affect elections as well because young people in South Korea—the so-called MZ generation—are very responsive to change. Given the existing challenges, cooperation is not an option, but a must.

Japan and South Korea are also economically complementary. For both South Korea and Japan, the largest source of vulnerability as producers are China, followed by the U.S., and the third source of vulnerability is each other.. If South Korea and Japan engage in greater cooperation, this third source of vulnerability would be eliminated. A similar situation exists in terms of country sources of vulnerabilities as consumers for both countries.

Regarding supply chain dominance, it is a fact that China’s power has increased greatly between 1995 and 2021. However, if we look at the trade power network of 12 new emerging industries in 2021, while China’s export strength is the largest, if we combine the United States, Japan, the Netherlands, Germany, and the Republic of Korea, the export strength of these five like-minded countries is larger than China’s. It is important to maintain competitiveness in these key industries by having a network between these five like-minded countries. One example for a possible area of cooperation between South Korea, Japan, and other countries, which we call Korea-Japan Plus, would be in semiconductors. Looking at recently published figures from the Wall Street Journal, we can observe that South Korea is strong in the area of memory chips, while Japan is strong in terms of equipment, and Taiwan in logic dies. These three countries can cooperate in making the supply chain safe and reliable, in particular by ensuring appropriate division of labor.

To achieve this, four aims of cooperation are proposed. Co-hedging, co-opetition, co-development, and co-responsibility. The term “co-opetition” was coined at the Davos Forum held earlier this year and is a combination of the two words “cooperation” and “competition.”

There are many areas where the two countries can engage in these forms of cooperation. Co-hedging can be done by taking joint actions and mutual investments against geopolitical disruptions that spill over to economy and supply chains. The concept of co-opetition would be applicable to the semiconductor industry, for example. Cooperation through division of labor can be beneficial, but at the same time maintaining competition is also necessary to ensure best results. To ensure resilience, South Korea and Japan invest in each other in response to possible disruptions. This suggested approach, called the “Korea-Japan Plus Economic and Security Framework,” has two pillars: an economic pillar and a security pillar. The economic pillar includes advanced industry cooperation, economic security cooperation, science and technology cooperation, and regional regeneration cooperation, while the security pillar comprises maritime cooperation, bilateral cooperation, and mini-lateral cooperation.

Comment

KWON Hyeog Ug:
During the past 60 years since the normalization of diplomatic relations between Japan and South Korea, economic relations between both countries have steadily deepened and developed despite historical conflicts and political upheavals. Today’s presentation reaffirms that Japan and South Korea need each other economically; both countries benefit greatly from trade. The only way for Japan and South Korea to be safer, to grow, and to remain major leaders in the global economy is through co-hedging, co-opetition, co-development, and co-responsibility.

There are two new trends that require taking the Japan-South Korea relationship to a new stage. First, cultural and artistic activities are removing psychological barriers between the people of Japan and South Korea as can be seen in collaborations in music, movies, and TV shows. This contributes to Japanese and South Koreans deepening their understanding of each other. Second, there is a threat of a winner-take-all situation that will affect the global economy, with large American companies such as GAFA (Google, Apple, Facebook, and Amazon) leading the digital transformation. If Japan and South Korea lose the competition for digital transformation, there is a high possibility that both countries will fall into the category of developing countries in the near future. Co-opetition and co-development are the only way left for Japan and South Korea to achieve sustainable economic growth without losing the fierce technological competition. A joint industrial policy between Japan and South Korea is essential to respond to digital technologies that have strong network externalities and economies of scale, as France and Germany have successfully done with Airbus.

KIM Byung Yeon:
Promoting cultural exchanges and collaboration between South Koreans and Japanese in cultural events so young people can get acquainted with each other is indeed important. Joint industrial policy is also a very good opportunity, for example in terms of R&D activities and nurturing future entrepreneurs.

Q&A

Q:
Regarding the agreement between Russia and North Korea, how will it affect the security framework in Northeast Asia?

KIM Byung Yeon:
It is still too early to understand the whole picture of this economic security agreement between the two countries. In economic terms, there is less need for concern because economic complementarity between Russia and North Korea is limited. 95% of North Korea’s trade is done with China, so this relationship is far more important. Perhaps most important for North Korea is the assistance of energy and food from Russia and gaining income in other currencies.

Regarding the aspect of military and security cooperation, the content seems to be very similar to the treaty between China and North Korea. This is more concerning than economic complementarity, but it is still too early to say whether this situation will persist or if it is only a short-term arrangement.

Q:
Are there plans for the South Korean government to present the index developed by your team at the G20, for example, and discuss possibilities of broader collaboration, not only between Japan and South Korea, but also with other democratic countries?

KIM Byung Yeon:
That could be a possibility. We have been making efforts to closely communicate with policymakers in South Korea. Once we have a fuller picture with more detailed information including expanding the index into investment and finance and value added and with details on AI, semiconductor and other critical supply chains, it would be the right time to present the detailed results at big government events or G20 meetings.

Q:
Are the supply chain dominance index and other indexes developed mainly for government use or can private companies also utilize them to get insights about their vulnerability?

KIM Byung Yeon:
They are suitable for both. The government is very important in making policies, but nowadays private companies also face bigger challenges related to geopolitical disruptions and have to be prepared. We try to match our index with data for individual countries, for example democracy indexes. Based on this, a CEO of a company who considers investing in a foreign country may gain an understanding of whether making foreign direct investment in this country would be beneficial or if the country represents a dangerous investment. The aggregate results of this index are already in the public domain and can be accessed from anywhere in the world.

Q:
China is often seen as a leader in green technology, while Japan and South Korea are both said to be behind. It is often argued that Japan and South Korea depend too much on imported fossil fuels. Are there opportunities for collaboration on green technology and clean technological development, or supply chains related to energy issues?

KIM Byung Yeon:
Yes, that is one area for possible fruitful cooperation. Japan and South Korea are very complementary in this field. South Korea is very strong in terms of small modular reactors (SMR), while Japan has expertise when it comes to other non-fossil energy generation.

Q:
If North Korea becomes more connected with the economic network of non-democratic countries, what will be the implications for East Asia?

KIM Byung Yeon:
Briefly said, this depends mostly on China-North Korea relations, as Russia-North Korea relations are limited in the economic area. If North Korea wants to overcomes the sanctions, it requires cooperation not only from Russia, but also from China. Meanwhile China’s tightening or loosening of sanctions depends upon its relationship with the United States. Therefore, in a way this is a trilateral relation, not a bilateral one. Everything depends largely on China’s actions, which are again influenced by China-United States relations. It is more complex than we typically imagine.

Q:
There are significant possibilities for collaboration between Japan and South Korea regarding soft power such as music, film, and manga. What potential do you see for governmental cooperation in these sectors?

KWON Hyeog Ug:
I think that it would be possible to have governmental support for joint ventures of both countries in the entertainment business.

KIM Byung Yeon:
One proposal could be a sort of fund to support mutual creation of films, dramas, or music events by South Korea and Japan as a promising way to move forward in this area.