| Korea has raised rather than ease its mounting trade deficit with Japan. The cumulative current account deficit with Japan between 1999 and last year was 174.9 billion U.S. dollars. This translates into 19.6 trillion won based on the average won-dollar exchange rate of 1,121 over the period. Korea thus effectively used up almost all of its current account surpluses of 99.3 billion dollars with the European Union and 81.6 billion dollars with the U.S. over the period to compensate for its chronic deficit with Japan.
Korea’s current account deficit has continued to grow because the more Korea exports, the more it must buy parts and materials from Japan. The bilateral trade deficit in parts and components increased from 10.5 billion dollars in 2001 to 15.6 billion dollars in 2006 and to 20.9 billion dollars last year. Parts and materials accounted for 64 percent of the deficit with Japan last year of 32.7 billion dollars. Considering the growth of income and imports, Korea will see its trade deficit increase further, according to a study.
An economic commentator in Japan described Korea’s situation as a “cormorant’s economy," metaphorically comparing Korea to a bird that catches a fish but loses it to a fisherman. Even if Korea exports assembled products, it benefits from exports limitedly since it heavily depends on Japan for parts, materials, machinery and patents. Korea has also failed to benefit from growth and employment resulting from exports. The trade deficit with Japan has taken its root since Korea introduced Japanese machinery with money it received in 1965 from Tokyo in compensation for Japanese colonial rule.
If Korea is to overcome its cormorant’s economy and advance the establishment of an independent economy, economic players must renew their commitment and make concerted efforts. The president must take the lead in expressing a strong commitment to reduce Korea’s trade deficit with Japan in his Liberation Day speech, and urge others to take action. Early this year, a government blueprint urged “raising Korea’s ranking from the world’s seventh-largest producer of parts and materials to fifth by 2012.” A specific strategy is needed to overcome Korea`s comparative disadvantage versus Japan and present an action plan, rather than being complacent with mere rhetoric.
For Korea to enhance its competitiveness in the parts and materials industry, it needs to proactively seek mergers and acquisitions with foreign companies up for sale in the wake of the global economic crisis. If it stumbles, it will fail to narrow the gap in the industry versus Japan and lose its lead over China. Korea needs preemptive investment in the growingly competitive green technology to gain the upper hand. Far-reaching efforts are needed through a campaign to advance into the Japanese market and increase the surplus in the services account balance by attracting Japanese tourists.
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