China’s rapid growth and emergence as one of the major industrial and trading nations have had great impacts on Korean industry. Since the establishment of diplomatic relation in 1992, Korea and China have developed a closer economic relationship with Korean companies enjoying large gains from exports and investment to China. There is, however, a general concern in Korea that the rapid development of Chinese industry will pose a serious threat to Korean industry in the near future.
In this study, we try to assess the current status and future direction of Chinese industry by presenting extensive data and analysis focusing on leading industries. The main findings are as follows.
First, China’s main source of competitive advantage is moving from its vast pool of cheap labor toward its large and sophisticated capital and technology base. As a result, China’s producers and exporters are rapidly climbing the value added ladder, and the gap between them and their Korean counterparts is being narrowed.
Second, leading Chinese exporters in high technology sectors are foreign affiliates of advanced countries, including Korea, and indigenous Chinese companies have a long way to reach this globally competitive level. In this respect, industrial policies in the 11th five-year plan of the Chinese government are focusing on fostering large indigenous companies with technological capability and global competitiveness. It is expected that more products developed with local Chinese own brands will appear, especially in apparel, electronics and automotive industries.
Third, China’s trade specialization pattern is not expected to show substantial change by 2010. This implies that the basic structure in the division of labor between Korea and China will be maintained for sometime. It is likely, however, that the number of Chinese products competing with Korean products in the global market will increase incrementally through sophistication of export processes in China. In addition, Korea’s trade surplus with China is expected to decrease gradually as imports of low-end products from China such asgarments, steel, and electronic parts increase rapidly.
These findings and predictions imply significant challenges to Korean industry. At the moment, great efforts are needed by Korean industry to take advantage of opportunities as well as address threats and risks from those challenges. Above all, policy coordination should be strengthened to facilitate trade and investment between Korea and China. A Korea-China FTA, intellectual property protection and R&D cooperation will be key issues to confront in the coming years. Korean companies should hurry to improve their competitiveness and adjust their “China strategy" to the changing business environment. In particular, further efforts are needed to penetrate China’s rapidly expanding domestic market and utilize China as an R&D base.