GRAVITY MODEL BY PANEL DATA APPROACH:

IN WHICH WAY SHOULD SOUTH KOREA

(REPUBLIC OF KOREA) TURNS TO

THE REGIONAL INTEGRATION,

TPP OR ASEAN?

BY

CHAN MAN LEE

STUDENT NO. 09014608

A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE DREGREE OF

BACHELOR OF SOCIAL SCIENCES (HONOURS) DEGREE IN CHINA STUDIES

ECONOMICS CONCENTRATION

HONG KONG BAPTIST UNIVERSITY

APRIL 2013

HONG KONG BAPTIST UNIVERSITY

April 2013 We hereby recommend that the Project by Miss Chan Man Lee entitled “Gravity model by panel data approach: In which way should South Korea (Republic of Korea) turns to the regional integration, TPP or ASEAN?” be accepted in partial fulfillment of the requirements for the Bachelor of Social Sciences (Honours) Degree in China Studies in Economics.

Dr.Hung Wan Sing Dr. Project Supervisor Second Examiner

Acknowledgements

I would like to thank my supervisor Dr. Hung Wan Sing for suggesting the research topic and guiding me the entire study, assisting me in computing works, the use of Eview and providing me the needed data and materials. Thanks are also due to HKBU library for the online resources and necessary reference.

Student’s signature

China Studies Degree Course (Economics Concentration) Hong Kong Baptist University

Date:

TABLE OF CONTENT 1. Introduction – South Korea, Why TPP or ASEAN?..............................1 2. Background Information and Some Historical Background 2.1 Korea and FTA ……………………………………………………………….….….3 2.2 What is Trans-Pacific Partnership?...........................................4 2.3. What is ASEAN?.......................................................................7 3. Motivation of building Korean-China ASEAN FTA , TPP and advantages and disadvantages from the economic integration 3.1 Background of Economic Integration in Asia-Pacific Region ………………………………………………….………….11 3.2 Political Factor ………………………………………………………………….16 3.3 National Security and Geographical Factor………………………….17 3.4 Industrial and Social Factor……………………………………..………….20 3.5 Economic Factor 3.5.1 The Gravity model- Introduction ……………………………22 3.5.2 Data sources and Selection of Data……….………………...25 3.5.3 Estimation Methods and methodology ……………………26 3.5.4 Results and analysis…………………………………………….….. 31 4. Discussion (latest news) 4.1 Uncertainty raised by Japan………………………………………….…….42 4.2 Alternative plan- forming a China-Japan-Korea Free Trade Agreement……………………………………………………………………..…43 5. Conclusion…………………………………………………………………………………...44

6. Bibliography/Reference………………………………….………..........…….…….45

Abstract

As China becomes a great superpower in the global market and become

one of the largest exporting countries in world. We can find a lot related

research about miracle of the export growth in China. However, one

country cannot maintain its growth without the cooperation with the other

country. In order to have a more comprehensive picture for the world

economy, we should have a better understanding of our neighboring

country. In this paper, we are going to discuss how’s South Korea, one of

the major trading partner with China, should turn for the regional

integration. Trans-Pacific Partnership (TPP) tends to be a global economic

bloc that is under U.S influence while ASEAN is a more pro- China regional

integration bloc. South Korea's eagerness for an overall growth had impaled

it on the horns of a dilemma, forcing a choice between political and

economic benefit. Therefore, we will first give a brief introduction of ASEAN,

TPP and provide some background information of Korea Free Trade

Agreement. Then, we will analyze whether Korea should join ASEAN or TPP

in political, geographical sense, with full explanations and graphs. Then, the

gravity model of bilateral trade is adopted to predict and estimate the trade

flow. Finally, we will come to the discussion and conclusion part which

suggest that, in which way South Korea should go for her economic

integration.

1

1. Introduction – South Korea, Why TPP or

Asean?

1TPP was first launched by Chile, New Zealand, Singapore, and Brunei in

2005 and it has become one of the most influencing economic integration

blocs in the Asia-Pacific. U.S, Australia, Malaysia, Peru, and Vietnam are

actively involved while Japan, Canada, and Mexico have expressed their

interest on TPP. South Korea is invited by joining TPP but is still under

consideration. Why it is the case? Since 2South Korea, as the world 15th

largest economy, should have a greater potential for trade development.

Any step made by South Korea will cast a great impact on the future of East

Asian economic integration. China, which shows an aggressive support to

ASEAN+3, is already turning its direction on negotiating the ASEAN+6.

These changes in the trade environment will have significant influence on

the future of the South Korean economy.

China has traded with 3South Korea since the 1970s and a remarkable

improvement of bilateral trade was shown since establishment of formal

diplomatic relations with South Korea in 1992. China, as the world's

second-largest economy in terms of nominal GDP and Nevertheless, the

1 New Zealand Ministry of Foreign Affairs & Trade (2005). The official TRANS-PACIFIC

STRATEGIC ECONOMIC PARTNERSHIP AGREEMENT (PDF document) .Retrieved from: http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/main-agreement.pdf 2 World Bank(2011). Gross domestic product 2011. (PDF document). Retrieved from:

http://databank.worldbank.org/databank/download/GDP.pdf 3 Ministry of Foreign Affairs- Countries and Region- Asia & Pacific-list of countries.

Retrieved April 9, 2013, from: http://www.mofat.go.kr/ENG/countries/asiapacific/countries/20070730/1_24408.jsp?me nu=m_30_10

2

establishment of FTA has attracted a lot foreign direct investment from

South. Korea. Under the assumption that ASEAN+6 and TPP centered on

the United States will clash, in the following sections, we will analyzes the

possible reasons and effects of this the two blocs on the Korean economy,

political and social aspect. We will then evaluate either TPP or ASEAN

would be more desirable. Since the major difference between TPP and

ASEAN is on their political standpoint, we will have an overall evaluation on

all areas. Before we start, we should be familiar with some of the

background information of these two economic organizations. The

following graph shows the trend of trade of South Korea from 1990 to 2011

and we can see that China is growing more and more important to South

Korea.

Figure 1:

export value from 1990-2010 (MEXICO, RUSSIA, INDONESIA, INDIA, CHINA,U.S, SINGAPORE,JAPAN, HK) Data Source: International Financial Statistics (IFS)

3

2. Background Information and Some Historical Background

2.1 Korea and FTA

2.1.1 What Is a Free Trade Agreement?

Free trade agreement (FTA) is a mutual economic agreement which two

countries (city/ economic organizations are also applicable) both agree to

waive most or all tariffs, quotas, taxes special fees or another barriers when

they are engaging trade services. The purpose of free trade agreements is

to increase the attractiveness for more business opportunity, and at the

same time, ensure a smooth and efficient transaction between the

countries/areas. It is rather important that both countries should benefit

from FTA and to encourage the counter export and economic growth.

2.1.2 Connection with South Korea

Until 2012, South Korea has conducted a list of bilateral free trade

agreement with the following countries or economic organizations,

including 4ASEAN, which is what we called ASEAN+3 agreements, Chile,

India, Peru, Singapore, Switzerland, United States, European Free Trade

Area (EFTA), European Union(EU).

Apart from the above countries, South Korea is now negotiating or is

planning to have bilateral trade agreements with the following countries

and blocs; they are including Mexico, Canada, China, Japan, Gulf

Cooperation Council (GCC). It is getting more and more attractive to

4 Ministry of Knowledge Economy (2013). Policies Issue, FTA. Retrieved April 9, 2013, from:

http://www.mofat.go.kr/ENG/policy/fta/status/overview/index.jsp

4

conduct FTA with South Korea, as we can see from Figure 2, Korea is having

a tremendous growth on both GDP and export value from 1990 to 2011

and it is predicted that it’s going to be more important in world economy.

Figure 2:

Gross Domestic Products, Export Value, Population Data Source: International Financial Statistics (IFS)

2.2 What is Trans-Pacific Partnership?

2.2.1 What is TPP?

The 5Trans-Pacific Strategic Economic Partnership Agreement (TPP) is a U.S

lead Economic and trade integration organization that is intended to be a

high standard and broad-based free trade agreement that aims to

integrate the economies of the Asia Pacific in the 21st century. It is a

relatively newly developed regional cooperation and it is foreseeing that

TPP will act as a bridge to strengthen the control of the Asia-Pacific

economies by U.S government and at the same time, enhance the

Asia-Pacific-Global economic integration.

5 Office of the United States Trade Representative (2013). The United States in the

Trans-Pacific Partnership. Retrieved April 9, 2013, from: http://www.ustr.gov/about-us/press-office/fact-sheets/2011/november/united-states-trans-pacific-partnership

5

2.2.2 Aims of TPP

The aims of Trans-Pacific Partnership are as obvious as to show a

significant impact on both political and economic aspect. U.S wants to use

TPP as a mean for getting as much influence as in Asia. Eventually, the goal

is to include additional Asia-Pacific countries in an intensive way and to

cluster them in order to have at least 40 % of the world coverage and at

least half of the economic output so that U.S can maintain its power as the

“Dragon Head”. Moreover, as a high-standard regional agreement, it gives

the member states a superior statue that they are heading to the most

modern multi-national cooperation. For instance, one of the major

concerns for TPP is to have bilateral trade on protecting each other’s

intellectual property rights. With the global law, the member state can

trade freely and securely. Since property rights obtained the greatest share

of U.S export, the implementation of these rules will then change the trend

on the enforcement of property rights. Then, U.S can have further control

on the domestic laws and policies of its member states by both the

external and internal pressure.

2.2.3 Current member states:

The current members are 6Singapore, Chile, New Zealand, Brunei, Australia,

Peru, Vietnam, Canada, Malaysia, Mexico and United States. In addition,

South Korea expressed its interest on this economic integration bloc and

she was invited to join TPP in December 2010 by United States. Since Korea

6 Ministry of Trade and Industry Singapore(2013) On-going Negotiations at a Glance.

Retrieved April 9, 2013, from: http://www.fta.gov.sg/fta_ongoingneg_tpp.asp?hl=16

6

already has bilateral trade agreements with other TPP states, it is easier to

have mutual understanding and further bilateral trade agreements. We can

know the trend of the total FDI among the TPP member states form the

following table. Apparently, it doesn’t cast that much influence to the GDP

from the ratio.

Table 1:

Bilateral Investment Treaties and Flows for TPP Countries

Country Total FDI (Inward) Total FDI Aboard

(outward)

Total Investment(inward&

outward) To GDP ratio

Australia 41.317 19999 0.04

Brunei 1208 10 0.07

Canada 40932 49569 0.05

Chile 17299 11822 0.12

Malaysia 11966 15258 0.09

Mexico 19554 8946 0.02

New Zealand 3369 2856 0.04

Peru 8233 113 0.05

Singapore 64003 25227 0.34

United States 226937 396656 0.04

Vietnam 7430 950 0.07 FDI, FDI to GDP ratio United States International Trade Commission(ITC) Data Source: International Financial Statistics (IFS) & USITC Interactive Tariff and Trade Database Analysis: Congressional Research Service (CRS)

2.2.4 Problems of TPP

The U.S leaded TPP aroused critics in a sense that this regional cooperation

focuses more on political but not economic aspect. The FTA doesn’t really

benefit either U.S or its fellow members. With more and more voice for

anti-globalization, people accuse the TPP of going far beyond the area of

tax free and mutual trade cooperation, but giving power to U.S to influence

the local trade practice, labor, and environmental affairs. With more

intervention from U.S government, the autonomy will be greatly reduced.

7

And for the U.S local, they don’t support this scheme either. One complaint

is that more than three million U.S. jobs with middle-class wages have been

outsourced to foreign countries since 1994 (Gordon M. Lewis, 2011). With

more economic advantages and welfare, it is predicted that it will worsen

the employment situation in U.S. With more and more controversial issues

leaked out of more during negotiation, a lot people or even countries show

distrust on TPP.

2.3. What is ASEAN?

2.3.1 What is ASEAN

The Association of Southeast Asian Nations, or ASEAN, was 7established on

8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN

Declaration by the founding countries of ASEAN, including Indonesia,

Malaysia, Philippines, Singapore and Thailand. Brunei joined on 1984,

Vietnam on 1995, Lao and Myanmar on 1997, and Cambodia on 1999.

These ten countries together making up the today’s ASEAN. The formation

of ASEAN were due to the common interest on concentrating on nation

building, the common fear of communism, mistrust of western powers in

the 1960s, and a desire for economic development and integration to

strengthen its regional competiveness.

2.3.2 Expansion with ASEAN+3 or ASEAN +6

During the 1990s, ASEAN experienced an increase in both membership and

7 ASEAN Official Website (2013). About ASEAN- Overview. Retrieved April 9, 2013, from: http://www.asean.org/asean/about-asean

8

the request of having further integration appeared. 8In 1990, Malaysia

once proposed the creation of an East Asia Economic Caucus, together with

the existing members of ASEAN as well as China, Japan, and South Korea,

purposing on counterbalancing the growing influence of the U.S in

the Asia-Pacific Economic Cooperation (APEC) and in the Asian region as a

whole. This proposal turned out to be a failure due to the opposition by U.S

and Japan. Yet, the negotiation didn’t stop and finally in 1997, a revival of

the Malaysian proposal was established in Chiang Mai, so we called

the 9Chiang Mai Initiative, establish a formal integration for ASEAN member

states as well as the ASEAN Plus Three countries , that is China, Japan, and

South Korea.

2.3.3 Aims of ASEAN

ASEAN aims at accelerating economic growth, social progress, and cultural

development among its members. Also, protection of regional peace and

stability, and provide a flat form for its member countries to discuss

contrast in a peaceful way. In another words, it has emphasized regional

cooperation through three aspects that are security, social cultural

integration, and economic integration. 10The ASEAN members has shown a

significant economic growth, for example, the average economic growths of

ASEAN's member during 1989–2009 were, Singapore with 6.73%, Malaysia

8 ASEAN Official Website (2013). About ASEAN- ASEAN member states. Retrieved April 9,

2013, from: http://www.asean.org/asean/asean-member-states 9 T Richard Stubbs (2002). ASEAN PLUS THREE Emerging East Asian Regionalism?

University of California Press ,449 10

ASEAN official website (2013). Resources, ASEAN statistic. Retrieved April 9, 2013, from: http://www.asean.org/resources/category/asean-statistics

9

with 6.15%, Indonesia with 5.16%, Thailand with 5.02 %, and the

Philippines with 3.79%. In general, the economic growth for ASEAN

members due to the economic integration, is far more success than the

other economic bloc like APEC.

2.3.4 Current Member States

The11 Current members are Indonesia, Malaysia, the Philippines, Singapore

and Thailand, Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. +

China, Japan and South Korea, ASEAN +3. The following table shows the

volume of trade value and share to the total trade.

Table 2:

Intra-ASEAN trade Extra-ASEAN trade Total trade

Country Value Share to

total trade Value

Share to total trade

Brunei 2912.1 19.6 11910.2 80.4 14822.3

Cambodia 3003.8 23.4 9840.3 76.6 12844.1

Indonesia 99353.2 26.1 281579.1 73.9 380932.3

Laos 2530.3 64.0 1425.5 36.0 3955.9

Malaysia 108139.7 26.0 307582.2 74.0 415721.9

Myanmar 7207.7 48.3 7717.4 51.7 14925.1

Philippines 23675.6 21.2 88076.0 78.8 111751.6

Singapore 205670.9 26.5 569481.7 73.5 775152.6

Thailand 111450.8 24.3 347453.5 75.7 458904.4

Vietnam 34298.1 17.2 165284.0 82.8 199582.1

ASEAN 598242.2 25.0 1790350.0 75.0 2388592.3 Data source: ASEAN Finance and Macro-economic Surveillance Unit Database, ASEAN Merchandise Trade Statistics Database, ASEAN Foreign Direct Investment Statistics Database (compiled/computed from data submission,publications and/or websites of ASEAN Member States' national statistics offices, central banks and relevant government agencies, and from international sources)

2.3.5 Problems of ASEAN

ASEAN was criticized by Western countries for just focusing on economic

interest but forgone to promote human rights and democracy in

11

ASEAN official website (2013). About Us. Retrieved April 9, 2013, from: http://www.asean.org/asean/about-asean

10

Asia-Pacific region. For example, at 2010, the world, especially the western

countries blamed the Miyama’s military government for cracking down on

those peaceful protesters in Yangon. Yet, ASEAN has refused to suspend

Myanmar as a member and also rejects proposals for economic sanctions.

Thus, European Union, the potential member states, had certain dubious

and refused to conduct free trade negotiations at a regional level for these

political reasons. In other words, ASEAN is not that trust-worthy and they

never really take real action on enhancing the democracy or moral standard.

This violates its aim that is not only focusing on trade but also cultural

development.

11

3. Motivation of building Korean-China ASEAN FTA , TPP and advantages and disadvantages from the economic integration

3.1 Background of Economic Integration in Asia-Pacific Region

Figure 3:

Source: Motoshige Itoh (2012) “ Why Choose the TPP? A consideration of the Issues from the Perspective of the System of International Trade” Nira Opinion Paper (No.6) March 2012

The above figure is the world map showing the concentration of the

different economic integration blocs. They tend to diverse or spread their

cooperation with each other. One of the important reasons why Asia-Pacific

region speeded up the regional integration is that among all these countries,

they suffered a lot from the Asia-Pacific crisis in 1997. The weak linkages

12

among all the nations intensify the seriousness of the crisis. In order to

recover from the hardship, regional cooperation seems to be the optimal

solution; especially they take a reference from the European Union, which

is regarded as a success in recovering the European Economy. Since then, in

2001 the “East Asian Vision Group,” suggested that Asia-Pacific regional

integration can be based on these three aspects that are economic, security,

and society (MUNAKATA Naoko, 2002). Due to various political and

economic reasons, including the need to keep up with trade liberalization,

cooperation while didn’t violate the political rules, it seems that economic

or trade integration is the least controversial and easiest to start over and

developed.

Figure 4:

Import Value (ASEAN, ASEAN+3, TPP) Data Source: International Financial Statistics (IFS)

Why all the East-Asian countries are now focusing on not only regional

integration on economics, but also the global economic cooperation,

apparently with U.S, E.U or China? We can conclude them into the

following reasons. As far as we know, in nowadays society, globalization is

13

a trend which no one can avoid. Outsourcing from the developed countries

is a common practice and at the same time, the less-developed countries in

Asia-Pacific regions are trying to absorb their technology and improve its

infrastructure for further development. Colonial Empire is in a form of

economic competition, not solely by the political influence. Closer

economic ties between Korea, Southeast Asia, and the United States and

China can be pursued within regional and trans-Pacific frameworks. No

nations will against integration in the view point of economic means, as

well as China. If you just refuse to join or take part in, you will be leaving

behind. Economic integration is the most mature developed for both East

Asian and trans-Pacific integration. The closer economic ties means that no

nations can make a step for its own interest without the others’ consent

and these structures offer a formal excuse but a private space for

unpublicized meetings, which can be fit easily within this framework. And

for China, since she is also a member of both APEC and the various

ASEAN-centered groupings, she cannot complain about being excluded. If

Korea, Southeast Asia, and the United States are to take advantage of

regional and trans-Pacific frameworks to cooperate more fully, there must

be a high degree of convergence in their goals. Table 3 shows the economic

situation of ASEAN, ASEAN+3, ASEAN +6 and TPP and we can know their

economic scale as well as their purchasing power. From the figure, it

seems like TPP members are having the largest economic scale, in terms of

GDP. However, is it really the case? Or is it because of U.S and Japan? Or

how important it is in APEC group?

14

Table 3:

Economic Indicator of major Economic Blocs in the

Asia-Pacific Region Economic

Bloc States

Population (million)

Econmic Scale (GDP) million USD

GDP per capita

ASEAN+3

South Korea 48.39 1116247 23067.7206

Japan 126.5 5867154 46380.66403

China 1347.56 7318499 5430.926267

Sub total 1522.45 14301900

Brunei 0.41 16360 39902.43902

Cambodia 14.31 12830 896.5758211

Indonesia 242.33 846832 3494.540503

Laos 6.29 8298 1319.236884

Malaysia 28.4 287937 10138.62676

Myanmar 48.34 45000 930.9060819

Phillipines 94.85 224754 2369.57301

Singapore 5.19 239700 46184.9711

Thailand 69.52 345672 4972.266974

Vietnam 88.79 123600 1392.048654

Sub total 341.38 1274961

Total 1863.83 15576861

ASEAN+6

India 1241.49 1847977 1488.515413

Australia 22.61 1379382 61007.60725

New Zealand 4.42 159706 36132.57919

ASEAN+3 1863.83 15576861

Total 3132.35 18963926

TPP

Brunei 0.41 16360 39902.43902

Chile 17.27 248585 14394.0359

New Zealand 4.42 159706 36132.57919

Australia 22.61 1379382 61007.60725

Malaysia 28.4 287937 10138.62676

Peru 29.4 176925 6017.857143

USA 313.09 14991300 47881.75924

Vietnam 88.79 123600 1392.048654

Canada 34.35 1736051 50540.05822

Japan 126.5 5867154 46380.66403

Mexico 114.79 1153343 10047.41702

Singapore 5.19 239700 46184.9711

Total 785.22 26380043 Export Value (ASEAN, ASEAN+3,ASEAN+6, TPP) Data Source: International Financial Statistics (IFS)

15

The second feature that we can observe is that throughout these twenty

years, South Korea are getting a closer and stronger relations with most

countries in Asia-Pacific, or East Asian in both political and economic aspect.

This trend draws attention from both U.S and China, in which they want to

rope in South Korea, and the other South East Asian nations to maintain

their political influences. From the standpoint of most of the East-Asian

countries, including South Korea, They want to enjoy the benefit share by

these big nations and thus regional and Trans-Pacific organizations provide

a convenient, open-ended space which closer relations with U.S can be

achieved. Yet, China’s fierce criticism on U.S act on TPP may exacerbate

China’s next step. We can foresee that the income gap of ASEAN may be

enlarged and the risk of those non TPP members will fall further behind.

Grasping this point, China can have a good propaganda by involving the

untied of East Asian regionalism without Western control and in the future

there may even be room for North Korea, that is something South Korea is

afraid of. Therefore, South Korea is now facing a challenges, how to balance

with U.S and China. Undoubtedly, The Korea-US free-trade agreement

(KORUS FTA) is being implemented and South Korea should join the TPP

and get a closer relationship with U.S. Meanwhile, ASEAN members are

speeding up of economic reform and trade liberalization with China’s

support that is also beneficial for South Korea to sustain its political and

economic status as the future head of Asia.

16

3.2 Political Factor

The Asia-Pacific region is becoming more important to U.S in political view,

and in fact she is driving to have political influence in connection with TPP.

Obviously, in nowadays Asia, China is the greatest potential risk to U.S, no

matter in political, economic, military or even national security. China is

influencing the Asia-Pacific, as well as the global economy by actively

participating in ASEAN. If U.S want to fight against China, establishing and

consolidating the trade relations with other countries so that China starts

feeling more pressure about fulfilling all kinds of western standards,

including the basic rights and increase its transparency.

TPP is strongly criticized by China as another continuous example of Cold

War. (Bonnie Glaser, 2012). However, we cannot deny the truth that ASEAN

may also regard as a tool to fight against U.S or prevented that China will be

surrounded by the U.S power. In general, TPP is regarded as a “open-door”

regional integration bloc. If any country agrees to meet certain standards or

carry out reform in order to obtain the approval of joining it, they are

welcomed and can enjoy the privilege of the membership. Although at this

initial stage, China is not invited to join and at the same time, China refused

to join TPP too. ASEAN is more or less like a competitor with TPP in a

political sense. ASEAN has a long history on encouraging regional

cooperation and China continues to carry out domestic economic reform

steadily for further integration with ASEAN. Yet, if TPP grows up and

succeeds, non-TPP members of ASEAN may take the risk of leaving behind.

17

Afraid of losing the political status, most Asian countries are now

considering enjoying both benefits from TPP and ASEAN. However, it may

not be that easy and that’s the problem exactly South Korea is facing now.

South Korea is an important trading partner with both U.S and China.

However, South Korea is having a closer diplomatic relationship with U.S as

the South Korean government was established with the help of U.S in 1954

after the Korean War. The basic assumption of the Korean government is to

adopt a very democratic system is election and all areas. This act is to

strengthen its political power in the world, especially in Asia-Pacific region

during the cold war period. However, we are now at the 21the century and

the former strategy doesn’t work. All the government is now trying to

adopt a comprehensive economic means, for example, reduce the trade

barriers or forming economic integration bloc to lurking control the other

nations. And of course, China as the largest trading partner and with the

greatest potential growth, South Korea is now observing the winds blow, in

order to get ties with the future strongest nation in the world. Therefore, in

this aspect, it seems joining ASEAN and form a big family with China is

much more beneficial in all aspect.

3.3 National Security and Geographical Factor

South Korea is situated at the southern part of the Korean peninsula, on the

northern part of this peninsula, it is the communist empire ruled by the

18

Kim-Jeong-en, which is what we called North Korea. 12These two countries

are split into two in 1953.Its neighbor includes China that is on the west

and directly connected with North Korea; Japan, which is on the east. South

Korea covers a total area of 99,392 square kilometers and lies in the North

Temperate Zone with a continuous mountainous terrain with limited

natural resources.

Figure 5:

Source: GOOGLE MAP

China is always an ally with North Korea of their same background of

communism. During the cold war and the Korean War, China provided all

kinds of military support to N. Korea and indirectly help split up of Korean

Peninsula. Due to the support of North-Korea, South Korea and China are in

a tense condition for the past twenty years and a formal diplomatic

relationship is finally established in 1992. Their relations have improved

12

Seoul Museum of History (2013). Exhibition, Development of Seoul . Retrieved April 9, 2013, from: http://www.museum.seoul.kr/eng_new/exh/permanent.jsp

19

steadily and these two countries are improving bilateral relations by lifting

the trade embargo. What China focusing now is to use economic interest to

expand its influence to the world, and ASEAN is the best bloc to get

involved.

U.S and South Korea have strong economic, diplomatic, and military ties

and South Korea is one of the most developed alliance countries in Asia.

The alliance between the U.S and South Korea remains a key factor in

controlling the security in Northeast Asia. This alliance has served well to

counter the threats from North Korea, but also China and Russia. Their

comprehensive strategic partnership is based on enjoying the common

values, which is the free market mechanism. Furthermore, they have

shared interests and common fear of the again rise up of communism. U.S

showed great support to South Korea, especially on military offenses and

they always stage a joint military drill in order to stop North Korea for its

provocative act. TPP is another mean to get more influence in Asia.

Figure 6:

Republic of Korea (SOUTH KOREA) Major diplomatic condition

No diplomatic relations Allies

Cuba United States

Macedonia Japan ( implicit)

North Korea Republic of China- (taiwan) (implicit) Syria

Source: Ministry of Foreign Affairs, Republic of Korea

South Korea is now facing the difficulty of approaching China or increase

the strategic partnership with U.S, especially at this initial moment. North

20

13Korea vows to tear up Korean war ceasefire agreement on 11.3.2013 and

blocked all the connection with South Korea. Even these two big nations

are peacefully cooperation with each other, but we know that underneath

they are competing aggressively in all aspect. What we can predict is that

once South Korea decided to deepen collaboration with ASEAN and China,

U.S may turn out to be less supportive to hers national offenses. If North

Korea declared wars on South Korea, China, as the biggest ally will

definitely provides platform for its attack. While at the same time, U.S may

refuse to help and step back on this issue. Thus, in this case, South Korea

may go through the human dilemma.

Therefore, Joining TPP or ASEAN cannot be solely determined by economic

reasons. In somehow it determines whether South Korea will adopt a pro-

U.S or pro-China direction, as well as the attitude towards North Korea.

3.4 Industrial and Social Factor

South Korea relies heavily on exports to the growth of the economy. The

major exports types are finished products such as electronics,

semiconductors, LCD panel, mobile phone, computers related, television,

motor vehicle, steel, ships and petrochemicals. They occupied more than

70% of the total export of South Korea. And we can see that the Smart

phones made by Samsung or LG are invading the global mobile market and

13

The Guardian (2013, March 5). North Korea vows to tear up Korean war ceasefire agreement. Retrieved April 9, 2013, from: http://www.guardian.co.uk/world/2013/mar/05/north-korea-korean-war-ceasefire

21

can even compare with Apple. For the trading partner, the main export

countries are China, European Union, U.S. and Japan. Among these four

world-leading nations, China is the biggest trading partner with its strong

internal demand for advanced I.T products. The following firgure shows the

export commodities of South Korea from 2005 to 2011 and we can thus

have a more comprehensive picture for their export.

Figure 7:

Export Commodities from 2005-2011 (SOUTH KOREA) Data Source: International Financial Statistics (IFS)

One interesting phenomenon we can observe in South Korea society is that

in nowadays Korea, Korean are much more welcome Chinese than U.S

people. The nowadays younger’s from South Korea, mainly the university

undergraduate, they showed a positive support to have more cooperation

with China and ASEAN, other than with U.S, and the reasons are as follow.

Firstly, U.S is no longer the global head in the coming future, to be accurate,

22

its influences in all areas is deteriorating. It is not only the problems of U.S,

but also the other European Countries. With the Euro zone crisis and the

Quantitative Easing 3 emitted by the U.S, South Korean started to lose faith

on these western Power nations. With the rising up of the Asian power

simultaneously, particularly China, it seems like it would be favorable to

turn towards China. What we can see is that the nowadays Korean society

is pushing the next generation to learn Chinese (that is not encouraged by

the Korean government for the past 20 years for the Desinicization).

According to the news article 14The openness and welcomes to Chinese

tourists is so obvious, with at least one Chinese menu, one Customer

Service Representative that can speak Chinese. Therefore, it is clear that

the acceptance to Chinese is getting more and more. South Korea, as a

countries being controlled for more than 50 years, she is more than excited

to regain its national glory by not replying on western power but to develop

its own specialty. Getting a seat in Asia for the coming future is what they

are considering

3.5 Economic Factor

3.5.1 The Gravity model- Introduction

The gravity model of trade in international economics, similar to

other gravity models in social science, predicts bilateral trade flows based

on the economic sizes of (often using GDP or GNP measurements) and the

geographical distance between those countries. It is usually used to

14

《去漢字化后果尷尬 韓前總理籲學漢字》(新浪新聞，2012。)擷取自網頁:

http://dailynews.sina.com/bg/news/int/chinapress/20121027/03103903784.html

23

examine one or two more Economic Bloc or Regional Trade Agreements at

a certain period of time. The model was first used by Tinbergen in 1962.

The basic model for trade between two countries (i and j) takes the form of:

The gravity model of the bilateral trade is constructed as follow:

Where Xij is the trade flow, Yi is the economic size of the exporting country

while Yj is the economic size of the importing countries, Dij is the distance

between the pair up countries and B0 is a constant. The model has also

been used in international relations to evaluate the impact

of treaties and alliances on trade.

Since then, the gravity model has been widely used and increasingly

improved in empirical studies of international trade. According to this

model, trade between countries is positively related to the size of the

economy, but negatively related to the transaction cost. Sometimes,

different kinds of variables are introduced like population, to explain for the

negative effects on trade flows. Or a per capita income variable is often

included to provide a good reason for the high economic growth, which is

important in increasing export and import. In addition, several kinds of

dummy variables will be employed (Linneman,1966) into the gravity

formula to estimate the potential effect on bilateral trade, for example,

cultural, common language and institutional factor. As time goes by, there

are changes on gravity model. Log form of the equation dominated in most

24

of the research. The following are some of the econometric specification. In

most of the previous empirical studies and research based on cross section

estimation techniques, exports from a country i to a country j (Xij) are

presented by the typical gravity equation as follow:

log Xij = B0 + B1 log Yi + B2 log Yj+ B3 log Dij + B4 log POPi + B5 log POPj+ B6 log AREAj +

B7 logAREAj + B8EXRjt + B9DEFLATit + B10TAXjt + B11LANGij

where “POP” refers to the population, “AREA” refers to the surface area of

the country, “EXR” refers to the exchange rate, “DEFLAT” means the

deflation rate, “TAX” refers is the International Monetary Fund (IMF) trade

tax index for both importing and exporting country and “LANG” refers to a

dummy which is 1 if to countries share the same language. All in all, “I” is

the importing country while “j” is the exporting country and “t” refers to

the particularly period of time.

In the past, the main obstacles for international trade are due to the high

transportation cost and the unfamiliar with the local languages and cultures.

We would always expected that bilateral trade is beneficial of we can keep

a close corporation with the neighboring countries. Therefore, international

trade organization like APEC, European Union is established o strengthen

this kind of relationship. And we can see that in the traditional Gravity

model, a dummy variable is implied to test if two adjacent countries were

sharing the benefit of closer boarder.

Yet, due to the improvement of technology throughout these 10 years,

25

transportation cost and transaction cost is greatly reduced. Thus, the major

concern now is whether the potential trade volume is large or not. The

establishment of the TPP by the U.S is a way to ensure a closer trading

partnership between U.S and Pan- Asia District. At the same time, ASEAN is

now negotiating with China and see if China would join and become a

permanent member of this economic organization. However, the decline of

the U.S and Europe economy and the rise up of the China give so much

uncertainty to the international trade. South Korea, as a rising power in

Asia, as well as the world, has to make a very careful decision on which

group she should join. The use of gravity model enables us to analyze the

trade preference by adding dummy variables. We can then come out the

conclusion, South Korea should join either TPP or ASEAN (with China) when

economic factor is purely the consideration, in the case of a APEC group.

Therefore, we will add certain dummies to represent different economic

blocs. Having a comparison between countries and economic bloc, we can

then have a better understanding on which way Korea should go into global

integration.

3.5.2 Data sources and Selection of Data

I study the bilateral trade between 23 countries from 1990 to 2011. The

Countries involve APEC members ASEAN members, TPP members and their

the trading partners, including China, South Korea, Japan, U.S, Canada etc.

These countries are most important partners for South Korea and at the

same time, they are also competing with each other. U.S accounts for 15%

for the total amount of trade while ASEAN and China account for more than

26

1/3 of its total export. To estimate the trade potential between China, U.S,

ASEAN, TPP and South Korea, this analysis is important and representative,

in a sense that South Korea can determine its future trading direction,

which is extremely important in the global economy. With twenty-two

countries, where each of them has 22 country pairs, the sample is made of

506 groups and 11133 observations.

The bilateral trade data are measured in nominal U.S dollars and most of

them are obtained from International Monetary Fund, Direction of Trade

Statistics. The Gross Domestic Product and taxes are from IFS, CD-ROM data

base. For the population size and also the area, the data are from IMF as

well. Membership in ASEAN, APEC and TPP are measured by a dummy

variable in which 1 for member while 0 for non-members. Also, a dummy

variable for languages is employed such that 1 for sharing the common

languages and 0 does not.

3.5.3 Estimation Methods and methodology

To explain the bilateral trade between countries I (importer) and the

country X (exporter), based on the gravity model, we estimate equation of

the form and we will use this basic model in the paper.

Basic model:

LogExportij = B0 + B1 log GDPi +B2 logGDPj+ B3 logEXRi + B4logDEFLATi

+B5logPOPi+ B6logPOPj + B7logAREAi+ B8logAREAj

+B9logDISTANCEij + B10COMMONLij + B11APECi

27

Where : Exportij is the bilateral trade flow from exporting country I to importing

country j measured in dollar value in year T;

GDPi is the GDP of country i in year T;

GDPj is the GDP of country j in year T

DEFLATi is the deflation value of country i in year T;

Distanceij is the distance between country I and country J ;

EXRi is the exchange rate in market value to U.S in year T;

Popi is population of country i in year Y;

Popi is population of country j in year Y;

AREAi is the surface size of country i

AREAj is the surface size of country j

COMMONLij is a dummy variable which takes value 1 if country I and j

share the same language;

APECi is s a dummy variable which takes value 1 if country I are in the

economic bloc of APEC

Panel data of the variables are chosen as follow and in the following section,

in the following section, I am going to explain why all these variables are

included in the model.

GDP (Gross Domestic Product)

As we all know that GDP is relatively important in affecting one’s nation

trade. Two GDP variables and GDPi is for the importing country and GDPj is

for the exporting country. In general, as income and output in each country

increase demand for goods and services as well as production will

increase .Therefore, it is expected that a positive sign will be observed.

EXCHANGE RATE

EXRi is the exchange rate of the exporting country. Exchange rate is

defined as the local currency to one U.S dollar. The higher the exchange

rate, it means there’s a depreciation of the local currency or a fall in

28

country’s relative price. In this case, a positive sign will be expected for the

exporting countries.

DEFLATION

Deflation means the continuous decrease in the general price level. Deflati

refers to a comparatively cheaper price for exporting countries. As far as we

know, deflation is harmful to the economy and the society. Yet, it will

increase one’s purchasing power. The relative price of the exported goods

will then be lower. Therefore, it is expected with a higher deflation rate, the

higher amount of export and a positive sign is expected.

POPULATION

For both of the exporting countries and importing countries, POPi and POPj,

the greater the population, the larger the countries, they need to be more

self sufficient. As a result, they need to rely more on the imported goods

while requiring more export Therefore, a negative sign is expected.

AREA

With a greater size in the area of exporting countries AREAi and importing

country AREAj, the level of self sufficiency will increase and the chance of

requesting the imported goods will reduce. On the other hand, the level of

comparative advantage will also hinder the export rate. Therefore, the

coefficient of AREA is indeterminate.

COMMON LANGUAGE

With a common language LANGij, it is often expected that they will have an

easier communication and reduce the amount of transaction cost. Thus,

trade volume will eventually increase. In this case, we will expect a positive

29

sign.

DISTANCE

DISTij is defined as the geographical or physical distance between exporting

and importing countries. Shorter the distance, lower transportation cost is

required so as with a higher trade volume. Therefore negative sign is

expected.

APEC

AEPCi is defined when the exporting countries are belonging to the same

economic bloc and it is a controlled dummy. We want to examine if APEC

can affect the world trade proportion or not and the coefficient is

indeterminate.

Modified model

To see how’s each country can benefit most from the APEC group, the

following equation is developed:

Equation (1)- LogExportij = the above+ B13USi+B12KORi + B14CHNi +

B15JPNi

The following equations estimate under APEC, how Korea compete with

the U.S ,China and Japan, TPP, ASEAN and see which one can get the most

benefit from bilateral trade. On the other hand, in order to examine how

TPP and ASEAN is going to affect export for Korea, the following dummies

are adopted and equation is formulated in the following:

Equation (2) - LogExportij = the above+ B17ASEANi+B12CHNi

Equation (3) - LogExportij = the above+ B15JPNi+ B13USi

30

Equation (4) - LogExportij = the above+ B17ASEANi+B12CHNi + B16TPPi

Equation (5) - LogExportij = the above+ B16TPPi + B13USi + B15JPNi

Equation (6) - LogExportij = the above+ B17ASEANi+B12CHNi + B15JPNi+

B13USi

To examine whether Korea should join TPP or join ASEAN, dummy variables

are added and the equation is extended. The dummy variables took the

value of one if a country was a member of the related economic bloc or

particular country and zero otherwise. The following equations are used for

the estimation:

Equation (7) - LogExportij = the above+ B13USi+B12KORi

Equation (8) - LogExportij = the above+ B14CHNi+B12KORi

Equation (9) - LogExportij = the above+ B15JPNi+B12KORi

Equation (10) - LogExportij = the above+ B16TPPi+B12KORi

Equation (11) - LogExportij = the above+ B17ASEANi+B12KORi

Equation (12) - LogExportij = the above+ B17ASEANi+B12KORi+ B14CHNi

Where ASEANi is a dummy variable which takes value 1 if the exporting countries

are in the same ASEAN bloc, 0 for otherwise;

KORi is a dummy variable which takes value 1 if the exporting country is

Korea, 0 for otherwise;

TPPi is a dummy variable which takes value 1 if the exporting countries are

in the same TPP bloc, 0 for otherwise;

USi is a dummy variable which takes value 1 if the exporting country is U.S,

0 for otherwise;

CHNi is a dummy variable which takes value 1 if the exporting country is

China, 0 for otherwise;

JPNi is a dummy variable which takes value 1 if the exporting country is

Japan, 0 for otherwise

31

Table 4 :

Summary for the Hypothesized Gravity Model for bilateral trade

Determinants Sign, Hypothesized Exporter’s GDP (GDPi) + Export volume Importer’s GDP (GDPj) + Import demand Population of exporting country (POPi) - require self sufficiency Population of importing country (POPj) - less resources for exporting Deflation (DEFLATi) + cheaper relative export price Exporter's area (AREAi) ? may have more Importer’s area (AREAj) ? uncertainty on comparative advantage Distance (DISTANCEij) - reduce transportation cose Exchange rate (EXRi) + fall in country’s relative price Common Language (LANGij) + increase communication efficiency APEC (APECi) ? relative importance is uncertain

3.5.4 Results and analysis

(I) Basic determinates of Bilateral Trade

The following table reports the regression result for the basic model that is

over all countries. The estimation confirms all the hypothesis sign above

and the data and specification are consistent with other papers using

gravity model. The first column shows the result using OLS applied to the

pooled data set and the next column shows the results using random effect

model. In this paper, we are going to analyze the trade between 23

countries and 3 different economic blocs. In general, the fixed effects

model is known to provide more accurate results in estimating the gravity

model. However, it cannot estimate the time-invariant effect, e.g. distance

or area, so we will then adopt the random effect method as a trade-off.

The entire coefficient except for DEFLATi and importer’s population are

32

having different signs for random effect and pooled least squares methods.

As expected, both GDP for exporting and importing country has a positive

impact on trade and statistically significant. The estimated coefficient for

geographical distance is -1.01 and it is also highly significant. For the

exporter’s population, we can now confirm that self-sufficiency is difficult

with the greater amount of population and more export is thus required.

The estimated coefficients for exporter’s and importer’s area are negative

and statistically significant, yet, the coefficients are just too small and

apparently it does not affect that much on the total amount of export.

Similar to the exchange rate, it is with an expected positive coefficient and

statistically significant, it is also too small to have a strong influence on the

overall export volume. The effect for common language is positive and

statistically significant, which is consistent to the findings of other paper.

The last one is about the dummy APECi. There’s a bit difference between

the two estimation methods The OLS method estimates for APEC indicate

that APEC members tends to export more compare to the rest of the world,

with a positive coefficient and statistically significant, while the REM tends

to believe that whether you are members of APEC or not is insignificant.

Estimation Result 1 : basic model

Dependent variables: Export

Pooled OLS REM

Constant 4.010309 **

(21.41) 6.89017 **

(10.38)

Exporter's GDP 1.080057 ** (84.83122)

1.142956 * (58.01)

Importer's GDP 0.786533 **

(72.42) 0.406203 **

(27.83)

Geographical distance -1.010315 **

(57.16) -1.025253 **

(14.10)

33

Exporter's population -0.024734 *

(1.9) -0.106634 **

(2.52)

Importer's population 0.057889 **

(5.04) -0.148577 **

(8.32)

Exchange rate 0.0000402 **

(7.72) 0.000112 **

(15.72)

Deflation -0.058175 **

(3.15) 0.018701 *

(1.94)

Common Language 0.803037 **

(17.38) 0.550077 **

(3.22)

Exporter's area -0.000000201 **

(14.51) -0.00000013 *

(2.48)

Importer's area -0.000000558 **

(4.36) 0.000000259 **

(5.38)

APEC 0.882328 **

(24.06) 0.018356

(0.48) Observations 11132 11132

SEE 1.59 0.712753 R2 0.7 0.53

Adjusted R-sqaured 0.7 0.53 Notes: Absolute value of t-statistic is reported in parentheses * denotes significant at 5 percent ** denotes significant at 1 percent All individual effects are not reported (II) Country Effect

The following result shows the relative competiveness on world export for

different country or economic bloc. A result from this group of estimation

first reveal is that the OLS method shows a more robust result by having a

higher R-square. We can see how each country or trade bloc could gain in

the world export market. Also, from the above result, we can see whether

establish in bilateral FTAs in the Asia-Pacific region, that is ASEAN, can show

very different trade intensities in their trade with the rest of the world.

Among all these 5 countries, 3 of them, China, Korea and ASEAN tend to

trade more and is competitive in the world market, with a positive

coefficient and highly significant. It is estimated that they export 132%,

82.2% and 112% more than the rest of the countries, respectively.

34

Undoubtedly, China benefit most and this somehow fit the real trade

pattern in nowadays world. Japan seems to trade less or diverse its trade

into the other countries rather than those in APEC group with a negative

coefficient. On the other hand, the U.S dummy variable shows negative

coefficients or statistically insignificant, indicate that U.S trade roughly

without regular pattern or no one can expected. One of the possible

reasons is that these two countries faces serious current account deficit.

However, U.S does trade with other countries other than APEC’s country or

those included in our model, for example Taiwan, Netherlands and etc. In

conclusion, Korea, China and ASEAN are trade intensive- country while U.S

and Japan is somewhat trade-deficient countries.

Estimation Result 2 : Each country /Economic Bloc Dependent variables:

Export Pooled OLS REM

Constant 2.60 ** (13.25)

5.62 ** (8.26)

Exporter's GDP 1.27 ** (80.1)

1.17 ** (58.64)

Importer's GDP 0.78 ** (73.08)

0.40 ** (27.38)

Deflation 0.78 ** (4.63)

0.02 * (2.06)

Exporter's population -0.09 **

(8.43) -0.13 **

(2.93)

Importer's population -0.12 **

(5.86) -0.14 ** (7.91)

Exchange rate 0.07 ** (4.80)

0.00 ** (14.59)

Geographical distance 0.00 ** (52.12)

-0.92 ** (12.79)

Common Language -0.93 ** (18.86)

0.64 ** (3.78)

Exporter's area 0.87 ** (10.00)

0.00 * (1.69)

Importer's area 0.00 ** (5.03)

0.00 ** (5.30)

APEC 0.79 ** 0.45 **

35

(16.17) (10.9)

Korea 0.60 ** (7.55)

0.64 * (2.06)

China 0.84 ** (9.23)

0.8 ** (2.38)

U.S -0.47 **

(5.36) 0.04

(0.03)

Japan -1.02 ** (10.82)

-0.52 * (1.74)

ASEAN 0.75 ** (14.40)

0.48 ** (3.14)

Observations 11132 11132 SEE 1.532598 0.714851 R2 0.721193 0.561005

Adjusted R-sqaured 0.720792 0.560373 Notes: Absolute value of t-statistic is reported in parentheses * denotes significant at 5 percent ** denotes significant at1percent All individual effects are not reported

(III) TPP V.S ASEAN

This part comes to the comparison of TPP, ASEAN, China, U.S and Japan. We

have divided it into the following group. The findings are correlated to the

findings as above. When both ASEAN and China dummy are included in the

equation, they are showing statistically significant results with positive

potential. That means they export 56 % and 139% more, respectively. On

the other hand, when both U.S and Japan dummy are included, we observe

that US is showing a statistically insignificant negative coefficient while

Japan tended to export less with a negative coefficient, statistically

significant. One of the possible reasons is that, U.S and Japan are showing a

declining trend of the world export, in terms of its proportion and the

relative importance, especially in APEC group.

When we are comparing ASEAN, China and TPP, the former two tends to

36

export more, while TPP tends to export less, with the entire statistically

significant figure. One of the possible reasons may due to the weak linkage

among all the members in TPP bloc. TPP is a relatively new regional

integration and the expected trade outcome may not be observed in such a

short period of time. Also, two major members who contributed most in

TPP bloc, are found to have a diverse trade pattern and are not benefited

from APEC group, it is able to foresee such an estimation result. If TPP, US

and Japan are included and standing alone, all these three dummy show a

negative coefficient and significant effect. It refers that somehow they are

comparatively exporting less compare to the other countries. And finally if

we put all four dummies ASEAN, CHINA, US and TPP together in one

equation, it is similar to those finding above. ASEAN and China can export

more while TPP doesn’t generally, and U.S with a negative but insignificant

coefficient.

Estimation Result 3: TPP/ASEAN V.S each country/ economic bloc

Dependent variables: Export

Equation 2 (ASEAN+China)

Equation 3 (Japan+U.S)

Equation 4 (ASEAN+China+

TPP)

Equation 5 ( TPP+Japan

+U.S)

Equation 6 (ASEAN+China

+U.S+ TPP)

Constant 5.943 **

(8.65) 6.523 ** (10.13)

6.051 ** (8.82)

6.635 ** (10.27)

5.895 ** (8.64)

Exporter's GDP 1.109 ** (51.90)

1.098 ** (55.65)

1.110 ** (51.32)

1.100 ** (55.70)

1.113 ** (55.12)

Importer's GDP 0.402 ** (27.35)

0.409 ** (28.20)

0.402 ** (27.32)

0.410 ** (28.28)

0.407 ** (27.90)

Deflation 0.007 (0.77)

0.014 (1.51)

0.007 (0.69)

0.015 (1.55)

0.015 (1.53)

Exporter's population

-0.063 (1.43)

-0.022 (0.53)

-0.091 * (2.00)

-0.052 (1.18)

-0.079 ** (1.74)

Importer's population

-0.151 ** (8.48)

-0.152 ** (8.55)

-0.150 ** (8.47)

-0.152 ** (8.57)

-0.150 ** (8.47)

Exchange rate 0.000 ** (12.34)

0.000 ** (12.62)

0.000 ** (12.38)

0.000 ** (12.70)

0.000 ** (12.40)

Geographical distance

-0.951 ** (13.01)

-1.011 ** (14.32)

-0.948 ** (12.99)

-1.008 ** (14.27)

-0.945 ** (12.97)

37

Common Language

0.582 ** (3.45)

0.527 ** (3.15)

0.595 ** (3.53)

0.539 ** (3.21)

0.593 ** (3.52)

Exporter's area 0.000 **

(2.94) 0.000 **

(3.50) 0.000 * (2.43)

0.000 ** (3.13)

0.000 ** (2.49)

Importer's area 0.000 **

(5.42) 0.000 **

(5.56) 0.000 **

(5.41) 0.000 (5.53)

0.000 ** (5.37)

APEC 0.423 ** (10.35)

0.474 ** (11.81)

0.422 ** (10.30)

0.476 ** (11.87)

0.450 ** (11.11)

U.S / -0.079 (0.30)

/ -0.146 *

(2.25) 0.064 (0.24)

China 0.872 **

(2.51) /

0.835 ** (2.40)

/ 0.809 * (2.30)

Japan / -0.732 **

(2.50) /

-0.758 ** (2.59)

/

TPP / / -0.139 *

(2.12) -0.146 *

(2.25) -0.147 *

(2.25)

ASEAN 0.445

(3.10)** /

0.463 ** (3.10)

/ 0.472 **

(3.17)

Observations 11132 11132 11132 11132 11132

SEE 0.712949 0.714875 0.712781 1.573645 0.714226

R2 0.475713 0.562703 0.460918 0.708009 0.5632

Adjusted R-sqaured

0.4751 0.562192 0.460239 0.707667 0.56261

Notes: Absolute value of t-statistic is reported in parentheses * denotes significant at 5 percent ** denotes significant at 1 percent Method: Random effect method All individual effects are not reported

(IV) South Korea V.S major countries/economic blocs

The following group is estimating how if only Korea and one particular

country or economic bloc is included in our model. As we can see, the

dummy Korea is positive and significant and this means that in general,

Korea traded 80% to 169% compared to the rest of the world. This fits the

reality that Korea is having trade surplus of USD $30801 billion in 2011. We

observe that if we include both Korea and U.S dummy, the US dummy is

having a negative coefficient and statistically insignificant.

One possible argument is that there may be a high potential for U.S and

Korea bilateral trade and uncertainty is raised. Another interesting

38

phenomenon we can observe is that, Japan export around 73% less if

dummy Korea is included in statically significant. It may refer that Korea and

Japan are competitor, especially in high-technology industry. Similar

situation appear for dummy TPP and Korea. And from the above graph, we

can see that TPP is rather insignificant to Korea’s export and import,

compare with ASEAN. And It may due to the weak trading power of TPP,

with just few countries like U.S and Singapore are having high export but

not for the others nation. For both dummy China and ASEAN, our result

shows positive and significant effect. It may due to the high trading

potential for these countries and as a whole, they can corporate with Korea

and lead to a higher export. It implies that Korea’s role may help stimulate

the regional integration and global economies. It comes to the main point

of our analysis, should Korea join TPP, ASEAN or ASEAN plus China?

From the above regression result, we can make a comparison like follow.

According to the estimation result, it is clear that Korean received the least

benefit from joining TPP and then it makes not different for joining only

ASEAN or ASEAN with China. Their coefficients are 0.42, 0.73 and 0.73

respectively. But Why Korean can benefit most from ASEAN in an APEC

region? We can conclude into 2 reasons.

The first one is about the Industry component. From the following graphs,

we know that for South Korea, ASEAN and Korea are not competitor, they

are cooperator. According to the export commodities, what occupy most

39

for South Korea’s export are those electronic or semi-electronic products or

vehicles. That’s what those developing ASEAN countries desired. In a

comparatively low price but good quality, they are demanding more and

more goods from South Korea and they still have a big room for further

cooperation on trade.

Figure 8:

Export Share from 1990-2011 (South Korea) Data Source: International Financial Statistics (IFS)

Figure 9:

Export Share from 1995-2011 (South Korea) Source: Diection of Trade (DOT), IMF

40

The second one is about the how close the relations are between South

Korea and her exporting country. The figure 9 shows the percentage of

export sharing of South Korea. According to the figure, it is clear that South

Korea is having an increasing trend of exporting to China, from 7% in 1995

to almost 24% in 2011. On the other hand, she is having a declining trend

of exporting to U.S, Japan and European Union. Therefore, we can see it is

more beneficial if Korea can be one of the members of ASEAN.

Apart from U.S and China, the total trade of Korea and APEC are highly

correlated, which account for almost 70 % of the total trade. It is for sure

that U.S not only trade with those in APEC district and she has a diverse

trade pattern and TPP is heavily affected by Japan and U.S, while a lot

ASEAN countries are in APEC group, for example, Singapore, Thailand,

Indonesia, Philippines etc. Therefore, it is clear that, it would be more

beneficial for Korea to join ASEAN, if together with China, it would become

the world most important Regional integration bloc.

Estimation Result 4 : Korea V.S each country/ economic bloc Dependent variables:

Export

Equation 7 (Korea +U.S)

Equation 8 (Korea+ China)

Equation 9 (Korea+ Japan)

Equation 10 ( Korea +TPP)

Equation 11 (Korea

+ASEAN)

Equation 12 (Korea+ASEAN

+CHINA)

Constant 6.77 ** (10.12)

6.73 ** (10.16)

6.84 ** (10.50)

6.94 ** (10.41)

5.74 ** (8.29)

5.77 ** (8.38)

Exporter's GDP

1.14 ** (58.70)

1.15 ** (57.88)

1.14 ** (57.74)

1.14 ** (57.37)

1.16 ** (57.44)

1.11 ** (51.94)

Importer's GDP

0.41 ** (27.96)

0.41 ** (27.89)

0.41 ** (27.81)

0.41** (27.85)

0.40 ** (27.27)

0.40 ** (27.39)

Deflation 0.02 * (2.33)

0.02 * (1.94)

0.02 * (1.87)

0.02 * (1.86)

0.02 * (1.75)

0.01 ** (0.804)

Exporter's population

-0.10 * (2.50)

-0.15** (3.36)

-0.10** (2.51)

-0.13** (3.01)

-0.10* (2.31)

-0.07 * (1.49)

41

Importer's population

-0.15** (8.29)

-0.15** (8.28)

-0.15** (8.21)

-0.15** (8.35)

-0.14 ** (8.10)

-0.15 ** (8.46)

Exchange rate

0.00 ** (15.85)

0.00 ** (15.82)

0.00 ** (15.62)

0.00 ** (15.76)

0.00 ** (14.43)

0.00 ** (12.32)

Geographical distance

-1.02 ** (14.04)

-1.00 ** (13.70)

-1.02 ** (14.35)

-1.02 ** (14.01)

-0.95 ** (12.94)

-0.94 ** (12.89)

Common Language

0.58 ** (3.35)

0.63 ** (3.65)

0.56 ** (3.32)

0.58 ** (3.38)

0.59 ** (3.46)

0.61 ** (3.61)

Exporter's area

0.00 ** (11.97)

0.00 ** (2.94)

0.00 ** (2.41)

0.00 * (1.74)

0.00 (0.57)

0.00 ** (2.36)

Importer's area

0.00 ** (5.34)

0.00 ** (5.30)

0.00 ** (5.45)

0.00 ** (5.34)

0.00 ** (5.32)

0.00 ** (5.40)

APEC 0.47 ** (11.59)

0.44 ** (10.82)

0.45 ** (11.17)

0.46 ** (11.38)

0.423 ** (10.35)

0.42 ** (10.15)

Korea 0.63 * (2.00)

0.49 * (1.56)

0.59 * (1.88)

0.42 * (1.36)

0.73 ** (2.32)

0.73 ** (2.32)

U.S -0.08 (0.29)

/ / / / /

China / 0.86 **

(2.45) /. / /

0.87 ** (2.50)

Japan / / -0.55* (2.25)

/ / /

TPP / / / -0.18* (6.44)

/ /

ASEAN / / / / 0.52 **

(3.41) 0.523 **

(3.42) Observatio

ns 11132 11132 11132 11132 11132 11132

SEE 0.713 0.712 0.713 0.711 0.712 0.713 R2 0.56231 0.49053 0.49598 0.494796 0.47559 0.47608

Adjusted R-sqaured

0.56181 0.48993 0.49539 0.494205 0.47498 0.47542

Notes: Absolute value of t-statistic is reported in parentheses * denotes significant at 5 percent ** denotes significant at 1 percent Method: Random effect method All individual effects are not reported

42

4. Discussion (Latest News)

4.1 Uncertainty raised by Japan

15Japan officially announced to join the TPP negotiations on March 15 at a

news conference. The Prime of Japan, Shinzo Abe, attended the news

conference and claimed that announced due to the aging population of

Japan's society and the long-term recession, joining TPP can benefit Japan

as a whole. It is accessed that after joining the TPP, Japan's real GDP will

increase by 0.66%, about 3.2 trillion yen (U.S. $ 33.3 billion). As the world's

third-largest economy, if Japan determines to join the TPP negotiations, the

TPP free trade zone will turn out to be the largest free trade area, with

about $ 27 trillion U.S. dollars, accounting for a total of nearly forty percent

of the global economy. TPP is regarded as the last chance of Japan's

recovery and the chance once a life time. If Japan can succeed in joining the

TPP negotiation in a early stage, then she may get a influential power to

lead the formation of the new free trade rules.

However, the decision made is receiving a strong oppose from the

agricultural sector. They are blaming that it will destroy the primary

industry while the supporting party rebutted that it the Japan's government

will safeguard the interest of this sector and the joining of TPP will bring

out a revolution of agricultural policy. Yet, at this stage, a disaster or reform

is still an uncertainty. South Korea, facing a similar situation with Japan, is

also considering whether to join or not at this initial stage. These two

15 YUKA HAYASHI (2013, March 13).Japan's Abe Seeks to Join Free-Trade Talks as Last

Phase of Economic Plan. The Wall Street Journal 2013. Retrieved April 9, 2013, from: http://online.wsj.com/article/SB10001424127887324392804578357913869135652.html

43

countries are not only collaborators, but also competitors. Who can gain

more from the negotiation, who can share the benefit from this FTA and

who can enjoy most at the East-Asia district, are something the

PakGeunhae’s government is thinking now. Or they should wait and learnt

from Japan and be the final winner when the shepherds quarrel.

4.2 Alternative plan- forming a China-Japan-Korea Free Trade Agreement

16In May 2012, at the Fifth Trilateral Summit between China, Japan, and

South Korea jointly announced their intent to begin negotiations on a

trilateral free trade agreement (FTA) by the end of 2012. In March 2013, the

representative from Japan, China and South Korea went on a conference in

Seoul for discussing the first round FTA. It is claimed that it will be a

comprehensive and high-quality FTA with WTO-consistent. Also, it should

strive for balanced result and achieve win-win-win situations on the basis of

reciprocity and mutual benefit Furthermore, all the negotiations should be

conducted in a constructive and positive manner with due consideration to

the sensitive sectors in each country. Will this be an alternative plan for

South Korea and Japan, while didn’t violate any political principles? There is

still a long way to go. However, at least forming such a FTA is remarkable

and strengthens the connection with the Asia-World power. Or it may

somehow turn out to change the economic pattern of the global economy.

16

BBC News (2013, March) .China Japan and South Korea eye free trade agreement. Retrieved April 9, 2013, from: http://www.bbc.co.uk/news/business-21934726

44

5. Conclusion

Korea’s primary goals are presiding over the slow and peaceful unification of

the peninsula and avoiding the need to choose between China and Japan or

between North Korea and the United States. However, North Korea vows to

tear up the Korean War ceasefire, at this initial stage of tense international

relations, it is hard to judge whether joining which regional integration is more

beneficial to South Korea.

However, concluded from the above analysis and all rounded factor, it is

suggested that Korea should join ASEAN other than TPP, no matter in economic

sense or sociological factors. There are a number of possible ways that Korea

can do. Firstly, Korea should try to speed up the regional Asia-Pacific

integration by participating and become one of the members of ASEAN. Also,

in order to enhance its export bargaining power, Korea needs to do everything

possible to complete a Japan-Korea-China FTA, or at least bilateral FTAs with

Japan and China. We can see that it is now going smoothly with the conference

held on 28/3/2013.

With the rising up of China and Korea, the plan for participating into TPP can

hold on while Korea can wait to see if this economic bloc does really apply any

effect on the global bilateral trade. Meanwhile, Korea can also consider to join

TPP in parallel with a bilateral or trilateral FTA that includes China. All three

partners should counter Chinese arguments against TPP and seek ways of

reducing discontent from China and the U.S could also cooperate together or

in coordination.

45

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