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Since the normalization of the relationship in 1992, trade between Korea and China has increased rapidly, an annual average growth rate standing at 27.4%. As a result, China is now Korea’s largest trade partner. As of 2005, the total trade volume between the two stood $100.6 billion, substantiating a magnificent growth from $3.4 billion in 1991. China’s portion of Korea’s total exports has also naturally risen from 3.6% in 1992 to 21.8% in 2005. Growth in trade volume also generated some significant changes in the trade structure. In 2005, for instance, 53% of the total trade volume and 55.8% of Korea’s export to China are generated by processing trade. Consequently, intermediate goods now makes up 82.0% of Korea’s export to China. And 70% of the total trade volume between the two countries and 76.4% of Korea’s exports to China are generated by foreign firms investing in China. Highlighting the complementary nature of the trade structure of the two countries, this paper attempts to analyze how China’s export, China’s industrial production, and Korea’s investment in China have determined the structure of Korea’s exports to China. With the respect to the question of how Korea’s export pattern differed by manufacturing industries, it also varied by China’s export volume, size of China’s domestic market, and Korean investment in China, all contribute to an increase in China’s import from Korea. This study shows that there is a positive correlation between Korea’s investment in China and Korea’s export to China and also that Korea’s export induction effect as a result of Korean investment in China is far greater than export substitution effect. The results put together demonstrate that Korea and China have maintained a complementary division of labor and that Korean investment in China is an important factor behind the rise in Korea’s exports to China. However, as China’s industrial and trade structure becomes more sophisticated, Korea faces fierce competition from China in the final goods market, and China’s import substitution rate is becoming faster with the improvement of China’s product competitiveness. Korean enterprises in China will also increase their usage of intermediate goods and materials purchased within the Chinese market. In the mid and long-term perspectives, given the overall changes, a negative impact may well be delivered to Korea’s intermediate goods-driven export to China.


Since the normalization of the relationship in 1992, trade between Korea and China has increased rapidly, an annual average growth rate standing at 27.4%. As a result, China is now Korea’s largest trade partner. As of 2005, the total trade volume between the two stood $100.6 billion, substantiating a magnificent growth from $3.4 billion in 1991. China’s portion of Korea’s total exports has also naturally risen from 3.6% in 1992 to 21.8% in 2005. Growth in trade volume also generated some significant changes in the trade structure. In 2005, for instance, 53% of the total trade volume and 55.8% of Korea’s export to China are generated by processing trade. Consequently, intermediate goods now makes up 82.0% of Korea’s export to China. And 70% of the total trade volume between the two countries and 76.4% of Korea’s exports to China are generated by foreign firms investing in China. Highlighting the complementary nature of the trade structure of the two countries, this paper attempts to analyze how China’s export, China’s industrial production, and Korea’s investment in China have determined the structure of Korea’s exports to China. With the respect to the question of how Korea’s export pattern differed by manufacturing industries, it also varied by China’s export volume, size of China’s domestic market, and Korean investment in China, all contribute to an increase in China’s import from Korea. This study shows that there is a positive correlation between Korea’s investment in China and Korea’s export to China and also that Korea’s export induction effect as a result of Korean investment in China is far greater than export substitution effect. The results put together demonstrate that Korea and China have maintained a complementary division of labor and that Korean investment in China is an important factor behind the rise in Korea’s exports to China. However, as China’s industrial and trade structure becomes more sophisticated, Korea faces fierce competition from China in the final goods market, and China’s import substitution rate is becoming faster with the improvement of China’s product competitiveness. Korean enterprises in China will also increase their usage of intermediate goods and materials purchased within the Chinese market. In the mid and long-term perspectives, given the overall changes, a negative impact may well be delivered to Korea’s intermediate goods-driven export to China.