The Impact of China-US Trade Conflict on Korean Economy

This paper concentrated on how US-China Trade conflicts would have impacts on Korean economy. Making the best use of WIOTs (World Input Output tables), this research focused on value added contents in trade instead of traditional trade statistics in the light of double-counting problem. Thus, the paper set two feasible bad-case scenarios: when China and US’s GDP fall and when China and US’s exports fall. Making a comparison of the results from the two models, the ripple effects that Korea would suffer from are bigger in China’s case. Even though it is under the same condition where China and US’s GDP identically fall by 1%, China’s case would bring about stronger impacts on Korea. In a nutshell, the outcome illustrates that the extent of the damage that Korea would undergo is always larger in China’s bad-case scenarios compared to US’s bad-case scenarios which reveals that Korea is more associated with China than US in global value chains. The findings of the analysis are arranged and diagrammed in a table as follows.


Introduction
The biggest hot issue around the world lately is trade conflicts between China and US. Since US imposed the first China-specific tariffs on Chinese imports in 2017, China confronted the preemptive strike with a chain of retaliatory tariff actions and the all-out trade war between China and US has unfolded. At present, three rounds of bilateral tariff plans are in effect and considering roll-out of the upcoming tariff plan delayed at the moment, they target a substantial amount of mutual imported goods. It seems that these trade disputes would continue to stagnate as they have extended the scope of the disputes from tariff to non-tariff areas. As China and US are the world largest economies, biggest markets and industries, it is attracting the world's keen attention. Not confined to their own matters, it has brought the world to anxiety and distress. It is obvious that it would affect adverse impacts on countries in a range of global value chains. South Korea, one of those countries highly engaged with China and US respectively, is likely to be damaged by China and US's protectionism. Thus, this study hereafter will observe China-US trade war and the feasible effects on Korean economy and more importantly, see trade in value added approach instead of the standard trade in gross term.
In order to quantify how China and US's protectionism would have a negative impacts on Korean economy, this paper assumes China and US's bad-case scenarios on the preferential basis where China and US's low growth rate and poor exports. Based on those assumptions, it would like to detect how much of effect Korea would have on GDP and exports. For data, it aims to fully tap into WIOTs 2014 provided by the Joint Research Centre of European Commission. Basically, the paper utilizes TiVA analysis in the first model and a methodology of decomposition of gross exports in the second model. The findings show that there are significant impacts on Korean economy. Under the two models where China and US's GDP and exports are expected to decrease, the extent of damage to Korea is always larger in China's scenarios compared to US's scenarios.

II. Data
This paper fundamentally underlies a good use of WIOD. Pursuant to the theme of this study, it mainly focuses on three countries (China, US and Korea) and counts other countries as rest of the world for computational convenience. Leaving the existing classification of the sectors intact, the paper utilizes the restructure of three countries where input output tables are recompiled from 44-country 56-sector to 4-country (China, US, Korea, Rest of the World) 56-sector or 3-country (China, US, Rest of the World) 56-sector in some cases.

III. Models
This paper aims to set two different models in which China and US would face bad-case scenarios from their protectionism-friendly policies. The first model assumes China and US's slow economic growth in terms of GDP and it would like to observe its feasible impacts on Korea's GDP. For measurement of their expected decrease in GDP, it follows the precedent studies mentioned earlier in Table 6. In this model, the study intends to see GDP by means of TiVA analysis.
The second model assumes China and US's exports reduction. In the first place, it performs elasticity analysis in order to compute their expected decreased exports and identifies Korea's forward and backward linkages in China and US bilateral exports through decomposition of gross exports. Forward linkage represents Korea's association on production side and backward linkage stands for Korea's association on final demand side. Thus, the study focuses on Korea's exports to both countries in forward linkage aspect and Korea's GDP in backward linkage aspect. Thus, the paper expects that Korea would have adverse impacts on GDP and exports in these two models.

1.
Reinterpretation of Trade in Value Added Approach

2.
When China and US's GDP Fall Note 1) Foreign demand, also known as value added exports is a given country's value added created in foreign demand.
Note 2) RoW stands for rest of the world.
The  Source: calculated by the author based on WIOD 2014 database.
Note 1) Escalated protectionism would push prices up, which might induce consumers to contract spending and a country's final demand would fall accordingly. On the ground of that, the paper set an assumption that China's GDP falls by 1%, and US's GDP falls by 0.3% respectively. These figures are from  To sum up, considering the extent that Korea would be damaged from China and US's economic slowdown, the damage from China is larger than the one from US. Even though the study applies the identical GDP reduction by 1%, the damage Korea would suffer from China is still larger.

When China and US's Exports Fall
Prior to entering into the main analysis, this paper examines elasticity analysis in order to identify China and US's estimated reduced imports due to mutual tariff escalation and then calculates how their exports reduction would have effects on Korea economy. It takes advantage of information regarding tariff growth rate and the imports demand elasticity. The initial stage of the calculation is computing a country's imports reduction with the given information and then transposing it in the other country's exports. So, the calculation of it is presented as follows.
(Suppose that a commodity's price tends to absorb 100% of tariff. For example, if 10% of tariff is applied on a commodity, the commodity's price consequently increases by 10%.)  Source: calculated by the author based on import demand elasticity from Ghodsi, Grubler, and Strehrer (2016) Note 1) Import-weighted average tariff rates refer to Figure 5 and 7.
Note 2) China's tariff-affected imported goods (%) = China's US tariff-affected imports value / China's total imports value from US. Note 3) Import demand elasticity is identically applied to all countries.

4.
When China's Exports to US Fall

5.
When US's Exports to China Fall   In backward linkage perspective, chemicals (US$ 12.8million), crop and animal production (US$ 11.2million), computer and electronics (US$ 9.3million) are regarded as the most damaged sectors in terms of final demand. As Korea's final demand in 'US→China→Korea' trade would fall by US$81.3million, Korea would suffer from -0.0063% of GDP growth.

V. Conclusion from the Findings
The studies on China-US's trade war and its impacts on Korean economy were implemented in the consideration of two hypotheses; China and US's economic slowdown (GDP), and their bilateral exports decline. Making a comparison of the results from the two models, the ripple effects that Korea would suffer from are bigger in China's case. Even though it is under the same condition where China and US's GDP identically fall by 1%, China's case would bring about stronger impacts on Korea. In a nutshell, the outcome illustrates that the extent of the damage that Korea would undergo is always larger in China's bad-case scenarios compared to US's bad-case scenarios which reveals that Korea is more associated with China than US in global value chains. The findings of the analysis are arranged and diagrammed in a table as follows.
There are some limitations in this study. First of all, the paper used data released in 2016 which practically underlies input output data in 2014. The data used in this paper is hard to perfectly fit into a current situation of Chins-US trade war still happening in 2019. So, there is a concern over applying the analysis findings to practice in reality. Also, in the middle of 'decomposition of gross exports' analysis, there existed a certain amount of accounting errors. It is a shame that the study failed to completely decompose gross exports into 16 value added terms even though the error is small and does not have a significant influence on the results. Thus, the results have a margin of error to some degree.