Hankyung Research Institute: "Trade Volume Between Korea and Japan Decreased by 12% in the Last 2 Years Due to Korea-Japan Conflict"

[Asia Economy Reporter Su-yeon Woo] Due to the rapidly deteriorating Korea-Japan relations since 2018, trade volume between the two countries has decreased by about 12% over the past two years. Concerns are emerging that the strained relations, which began in diplomatic and political fields, are negatively affecting trade, production, and employment, thereby impacting both economies adversely.

On the 25th, the Korea Economic Research Institute examined changes in Korea's trade volume (exports and imports) with major countries from 2019 to 2020 and found that trade with Japan showed the largest decline of 11.9%. During the same period, trade with China and Europe decreased by 4.7% and 4.8% respectively, while trade with the United States increased by 6.3%, indicating that trade with Japan declined significantly in comparison.

Source=Korea Economic Research Institute

Korea-Japan relations also negatively affected direct investment between the two countries. Korea's net overseas direct investment (ODI) in the manufacturing sector increased by 28.6%, from $21.7 billion in 2017-2018 to $27.9 billion in 2019-2020, but direct investment in Japan during the same period sharply declined by 25.6%.

Japan's net foreign direct investment (FDI) in the manufacturing sector rose by 47.8%, from 12.6 trillion yen in 2017-2018 to 18.6 trillion yen in 2019-2020. However, direct investment in Korea dropped significantly by 62.1%, from 578.6 billion yen in 2017-2018 to 219.4 billion yen in 2019-2020.

An analysis of the impact on the Korean economy due to the decrease in trade volume over the past two years revealed that during 2019-2020, Korea experienced a reduction of 1.2 trillion won in production inducement, 590 billion won in value-added inducement, and 13,300 jobs. The Korea Economic Research Institute interpreted that "considering Japan's exports to Korea decreased by 14.7% during 2019-2020, Japan also appears to have suffered considerable economic damage."

As the deterioration of Korea-Japan relations is shown to cause serious damage to both economies, calls for a swift normalization of bilateral relations are being raised. Koo Kwang-ho, Director of Economic Policy at the Korea Economic Research Institute, emphasized, "Even considering the impact of COVID-19 last year, the contraction in Korea-Japan trade was particularly significant. Since the worsened Korea-Japan relations are harming both economies, the governments of Korea and Japan should make prompt efforts to normalize relations to prevent further economic damage."

This content was produced with the assistance of AI translation services.