Export Relationships Among China, Japan, and South Korea

Review of Development Economics, 14(3), 547–562, 2010 DOI:10.1111/j.1467-9361.2010.00570.x

Export Relationships among China, Japan, and South Korea

rode_570 547..562

Muqun Li, Wei Liu, and Shunfeng Song*

Abstract

This paper examines trades and trade relationships among China, Japan, and South Korea. It shows that China possesses a large comparative advantage in labor-intensive products, while Japan and Korea maintain large comparative advantages in capital-intensive products. Using quarterly data from 1981 to 2001, the paper evaluates the effect of yen depreciation on the exports of China and South Korea. Our empirical results prove a positive impact of depreciation of yen on China’s exports but a negative impact on Korea’s exports. This finding suggests that Japan is competing with South Korea in terms of exports, but not with China.

1. Introduction

Over the past two decades, especially since the normalization of diplomatic relations between China and Korea in 1992, trades between China, Japan, and Korea have been active and significant. From 1992 to 2003, China’s exports to Japan increased from $11.68 billion to $59.42 billion, and its imports from Japan increased from $13.68 billion to $74.15 billion. Japan is China’s largest trade partner (Ministry of Commerce of the PRC, 2004). During the same period, Korea’s exports to China increased from $2.65 billion to $35.11 billion and its imports from China increased from $3.72 billion to $21.91 billion. In 2003, China became the largest export destination for Korea, and Korea’s trade surplus with China amounted to $13.2 billion, representing about 80% of its total trade surplus (Nam, 2004). Still, Japan remains the largest source of Korea’s imports. In 2003, imports from Japan accounted for around 20% of Korea’s total imports, followed by the USA (14%) and China (12.3%) (Nam, 2004). It is important to further examine the trade patterns and relationships between the three nations. Is China a competitive or...