It was unimaginable for Korea to catch up with technical level of materials and parts industry in Japan even 20 years ago. With the gradually increased trade between the two countries after the normalization of diplomatic relations between Korea and Japan in 1956, Korea had posted a slowly increasing trade deficit for the materials and parts industry.
After the diplomatic relations between Korea and China were normalized in 1992, the trade deficit with Japan for materials and parts industry had rapidly increased leading to deficit of $12.4 billion in 1996 and $24.3 billion in 2010. While the trade deficit with Japan for materials and parts industry ballooned dangerously, materials and parts industry of Korea was compared to cormorant. Profit earned by selling complete unit to China was spent to import core parts from Japan, and it is analogous to that when a cormorant has caught a fish in its throat, the fisherman has the bird spit the fish up. Meanwhile, Korea''s trade deficit in the area of manufacturing industry with Japan has been Achilles'' heel. Furthermore, it was even believed that Korea would never be able to keep up with materials and parts industry of Japan.
In 2011, Korea posted the first decrease of trade deficit with Japan for materials and parts industry from $24.3 billion in 2010 to $22.8 billion. Trade deficit had been decreased for two consecutive years, $22.2 billion in 2012, $20.5 billion in 2013 and $16.3 billion in 2014. Furthermore, decrease in the trade deficit to $14.0 billion in 2015 is being predicted. As the trade deficit with Japan stays constant around $15.0 billion and the trade surplus of $100.0 billion was achieved in 2014, trade between Korea and Japan is not compared to cormorant anymore, and materials and parts industry in Korea is emerging as a promising business for the next generation. Structural changes in trade from 1996 to 2013 were investigated and multiple regression analysis were conducted in order to figure out the reasons for the improved balance of trade that Korea showed with Japan in the field of parts and material industry during that period.
By doing so, research about whether the balance of trade was affected by the structural changes or it was a temporary phenomenon was achieved. In the analysis, the balance of Intra-industry trade was used as a dependent variable. Also, seven independent variables were selected; the average of the gross domestic product (GDP) between Korea and Japan, the investment in research and development (R&D) that two countries made, the investment in production facilities that they made, foreign direct investment in Korea, Korea''s outward direct investment, exchange rate changes between two countries, and dummy variables for the policy evaluation.
From 1996 to 2013, Korea gradually developed parts and material industry whereas the industry in Japan shrank significantly after the peak in 2011. It means that considerably declined parts and material industry in Japan led to the reduction in the balance of trade deficit, rather than excellent performance of Korea in that field. According to the results of the analysis on the balance of intra-industry trade, the intra-industry generally increased, the vertical intra-industry of high quality products significantly increased, the intra-industry of low quality products also grew a little. However, the horizontal intra-industry rather decreased. According to the result of the multiple regression analysis, investment in R&D, exchange rate changes, foreign direct investment in Korea and Korea''s outward direct investment showed positive relationships. However, GDP turned out to have a negative relationship unexpectedly. In addition, the investment in production facilities was not deemed statistically significant. The implication of this research is that, in order to reduce the trade deficit in parts and material industry with Japan, Korea should not only expand investment in R&D with a long-term plan but also cope with variation of exchange rate in this low yen era. Moreover, special efforts should be made to develop advanced materials so as to attract more foreign direct investment in Korea.