This report on the complementary strategy about the Korea-Japan FTA is comprised of two independent studies.  Both of them reflects the growing concerns about economic and political shortfalls that Korea would go through, if the current phase of negotiation process kept unchanged and the Korea-Japan FTA in place without proper preparedness. Followings are their diagnosis on the current situation and the future policy recommendations.

Paper 1： Effects of the Korea-Japan FTA  on Their Industrial Structure / Young Han Kim

This study examines the impacts of Korea-Japan FTA formation on the industrial structure of Korea focusing on the technology asymmetry between two countries. Based on survey results on the technology gap between two countries' 11 industry sectors, this paper demonstrates that producer surplus of Korean industrial sectors deteriorates significantly when Korea-Japan FTA is arranged under the sequential FTA strategy, while it improves under the Hub&Spoke FTA strategy through the oligopoly Cournot competition model analysis. Although static social welfare effects of Korea-Japan FTA is positive in all types of FTA arrangement, the model analysis results strongly supports that Hub&Spoke type Korea-Japan FTA is welfare dominant especially considering the dynamic industrial restructuring effects. The policy implication of this study includes that it is highly recommended that the time schedule of Korea-Japan FTA negotiation should be adjusted such that the actual market liberalization towards Japan should occur simultaneously with the other major Asian markets such as China and ASEAN. Moreover, the active and nation-wide policy efforts for resource reallocation from the low-end agriculture and manufacturing sectors towards high value-adding sectors are required as pre-conditions for successful industrial restructuring caused by regional integration including Korea-Japan FTA.

Paper 2：Determining Injured and Beneficiary Industries from the Korea-Japan FTA / Si Young Lee

This study provides an in-depth industry analysis if Japan and Korea reach Free Trade Agreement(FTA, hereafter). Namely, we determine which industries would be injured and benefited due to the FTA. The main findings of this study can be described as follows: First of all, from the prospect of Korea, consumers would be better off but the beneficial effects for industries would be minimized due to the existence of non-tariff barriers in Japan. Futhermore, not only intermediary input machinery industries but also some final consumer good industries such as an automobile industry would be suffered if Korea and Japan simultaneously remove the existing tariffs. Therefore, due to the huge cost associated with those injured industries, the (best) policy prescription at this point is to postpone the on-going negotiations for FTA. However in the meantime, Korea should look for other partners for Free Trade Agreements in order to minimize political transaction cost. “Start easy and small” strategy should be employed in order to successfully conclude a sequence of several FTAs (including FTA between Japan and Korea, later).