Restore Korea-Japan relations through economics

Kim Byung-yeon
The author is a professor of economics and head of the Institute of Future Strategy at Seoul National University.

Most people attribute the deterioration of Korea-Japan relations to political circles bent on hurling insults at one another. But the main reason can be found in the weakening of economic connections in supply chains between the two neighbors. In a 2021 report on the ripple effect of production and trade on Korea, China and Japan, the Korea Institute for International Economic Policy found that Korea’s ripple effect on Japan was 2.5 times its effect on China in 2000, but it dwindled by more than half in 2018. Japan’s impact on Korea also diminished to half the level of the impact on China in 2018. That represents a drastic shrinkage in the interdependence of the Korean and Japanese economies.

That stemmed from a lack of complementarity between the two economies. The Chinese economy could be smoothly connected to the Korean economy thanks to the gap in their economic development. The relatively low production cost and the availability of mass production in China certainly offered many benefits to Korean companies. However, between Korea and Japan whose economies are on a similar level, the gap in production cost was not only small but it was also difficult to find a certain level of economic division in design, production, and upstream or downstream.

But a strengthened economic connectivity between the two countries can benefit both. Korea has mass production capacity in all areas of the 21st century technologies for chips, second batteries and biochemicals. It also has global companies for car-making, steel-making and shipbuilding — a rare country with top-level production capability across the board. Meanwhile, Japan is a global leader in the material, parts and equipment sector, armed with a number of SMEs with excellent technology. While Korea has strength in technology fusion and commercialization, Japan has excellence in developing original technology and maturing it.

Industrial cooperation between the two could start with combining Japanese SMEs’ top-caliber technology with Korea’s powerful production capability. A small company in Osaka produces flexible industrial tubes that can withstand extremely low and high temperatures — as low as minus 200 degrees Celsius (minus 328 degrees Fahrenheit), for instance — and sell them to large companies or universities after receiving orders. I asked the CEO if he trades with Korea, and he said his company barely meets domestic demand due to a dearth of skilled workers in Japan.

The problem is that Korea has trouble finding information on the technology of Japanese SMEs. The Korean government or the corporate sector can collect such information and provide it to Korean companies with the cooperation from economic organizations in Japan and the Japan International Cooperation Agency (JICA).

Korea also needs to pay attention to Japanese companies developing technologies demanded by a future society. Omron, a Kyoto-based company, has been producing automated censors, control equipment and healthcare devices. Since developing the world’s first subway ticket gate in 1967, the company has been foreseeing a future society and developing needed technologies with advice from the late futurist Peter Drucker.

Japan has many companies looking ahead and developing technology. Its companies dominate the list of the top 100 global innovators, which is annually announced by Clarivate, a leading global information services provider. This year, 37 Japanese companies, the biggest number, were included among the 100, followed by the U.S. at 19, Korea at 5 and China at 4. Whereas Korea focuses on the present, Japan is looking to the future. While Korea and China cooperated by dividing production process into supplying intermediary goods from Korea for the production of final products in China, Korea and Japan can cooperate by combining present production ability and future technology to maximize their competitiveness.

The economic relations between Korea and Japan should develop into an advanced manufacturing network (AMAN). In an era of upheaval, cutting-edge production capability holds the key. It could be better if Germany can be included in the endeavor to create bigger synergy for the development of sophisticated technology. The Institute of Future Strategy at Seoul National University has introduced the concept of “supply chain leadership,” which applies to a country whose products take up a high global share and are absolutely demanded by many trade partners. A study by the institute shows that Korea, Japan and Germany have the strongest influence in the command over global supply chains except for China and the U.S.

The Korea-Japan relations can be restored by escalating their economic connections. Both sides must develop the relationship by creating a complementary community of cutting-edge manufacturing enterprises. The secrets to weathering geopolitical and geo-economic challenges can be found right there.

Translation by the Korea JoongAng Daily staff.