The purpose of this research is to discover an effective solution to managing North Korea's state assets during a temporary separation of the South and North, post-unification of the Korean peninsula. This study will focus on how to manage and liquidate North Korea's real estate and corporate assets and also suggest measures that are necessary during the temporary separation. Unification of the Korean peninsula is indeed one of the greatest ambitions of our people.  However, it is also considered an impending dilemma for both the South and the North. Especially when considering North Korea's unusually distorted economic status, the economic integration of South and North Korea is expected to be a considerable stumbling block.
  As a means to minimize possible confusion caused by the unification of South and North Korea, this study assumes the temporarily separated North Korean region to be the premise for analysis. This study is based on the assumption that with the political integration of the South and North, North Korea is economically separated for a limited period of time. Such an assumption narrows focus on exploring measures to managing and liquidating North Korea's state assets.
  This study consists of three main parts. The first part explores and analyzes the current condition of North Korea's land, housing and corporations. In North Korea, land is established as a socialist possession as a result of post-liberation land reform and post-war agricultural collectivization. By neutralizing the ruling class's economic base and raising poor farmers into yeoman farmers, the land reform achieved the political objective of solidifying Kim Il-Sung's support base and also the economic objective of securing state assets via nationalizing the industry. While rebuilding the country post war, agricultural collectivization was the process of completing socialistic reform and establishing socialistic property relations.
  In North Korea, housing is allocated according to hierarchy and social status. All real estate is defined as state-owned and individual ownership or construction is prohibited. The state built houses and residents were granted rights to use the housing. A characteristic of North Korean housing is that they were constructed through standardization and planned policies rather than a capitalist system, which relies on market economy. As a result, urban areas built mainly apartments while rural areas built mainly townhouses.
  North Korean corporations can be classified into various categories depending on the extent of socialization of production means, management methods and scale. In other words, North Korean businesses are similar to those of South Korea in that they are independently managed enterprises in production, traffic, transportation, distribution, and other economic fields. However, North Korean corporations can be divided into various forms according to the method of classification. That is to say, depending on the extent of socialization of the individual industry, there are state-owned enterprises or cooperative group corporations. And depending on who the management belongs to, they are classified as centrally or locally managed corporations. Corporations may also be classified as a production company or distribution company depending on the level occupied in the rebuilding process. North Korean corporations are created in 'Kombinat' form, which combines interrelated enterprises within a certain district while taking into account the relative effects between industries, availability of mass energy supply and issues of national defense. In addition, they adhere to the principle of industrial site selection, which maximizes use of domestic resources rather than relying on external resources and also show signs of being strategically located in areas that are unrelated to economic efficiency but in consideration of national defense.
  The second part is a case study of the Unification of Germany. In order to minimalize trial and error undergone by Germany during its unification, there was a need for accumulating the capacity for  privatization before the unification took place.  During the early process of privatizing East German assets, Germany had experienced a great hindrance due to insufficient information and understanding of government-owned property and lack of expertise of those in charge at the time. Korea also needs to shape a preliminary investigation plan in order to achieve a systematic accumulation of information on not only North Korea's real estate, but also its state enterprises. To do so pilot projects, such as conducting economic research on specific regions that are relatively inaccessible, are required.
  In the third part, this study presents a road map to managing the state assets of the North Korean region during the temporary separation period. The basic policy recommendations of this study are as follows: first, to revitalize the North Korean economy; second, to enhance efficiency and equity suitable for market economy; and finally, to build a common base for South and North Korean prosperity.   Also, in order to successfully manage and liquidate state-owned assets during temporary separation, a concrete road map of how to manage and liquidate land, housing, and corporate assets will be presented. The following are proposed principles of operation: first, fair valuation of property; second, preferential treatment of North Korean residents; third, contribution to supply funds for unification; fourth, investment support and attraction of foreign investors; fifth, integrated management-based organization.
  This study divides the temporary separation period into three phases for analysis: 'preparation,' 'implementation,' and 'preliminary integration' reflecting the aforementioned policy recommendations and principles of operation. During the 'preparation phase,' relative infrastructure such as consolidated legislation, organizational systems and renationalization must be established for efficient management of assets. During the 'implementation phase' privatization and nationalization of assets will take place over the course of approximately ten years. At the same time, a state asset management program is carried out by exchanging and utilizing human resources from both South and North Korea, drawing on foreign and domestic investments, and operating management funds. During the 'preliminary integration phase,' all privatization processes must be completed, and long-term preparations must take place for the integration of South and North Korean state asset management system through post-management monitoring and liquidation of funds.
  Management of North Korean real estate and corporations has a direct impact not only on the North Korean economy, but also on the economic development of the unified Korea. Hence, this study contributes to the establishment of a government unification preparation policy that can revitalize the reconstruction of the North Korean economy through the following ways: deducing effective management plans for North Korean corporations and real estate to ease the large-scale migration of North Korean residents, minimizing the possible negative impact of inter-Korean economic integration, and establishing a strong foundation for South and North Korea's coexistent development. 

  This study is an introduction to research on “Temporary Separate Operation of South and North Korean Economies after Unification,” which is the third-year theme of KIEP’s on-going Medium-Term and Long-term Unification Study. The temporary separation operation plan is a newly emerging approach for the economic integration of the two Koreas. In order to gradually promote economic integration after political unification, it will be necessary to separately operate some sectors of the economy of North and South Korea for a certain period of time.
  The policy focus is to prevent large-scale migration of the North Korean labor force to the South after unification. To provide economic incentives could be an effective policy alternative since physical interception to prevent the migration is not a desirable option. However, the economic incentive in this case cannot be an artificial increase in income as seen with the German unification process. Regarding this dilemma, the KIEP Medium-Term and Long-term Unification Study seeks to provide alternatives through concrete institutional design in three sectors: labor and social welfare; monetary, financial and fiscal policy; and state property management policy. This study provides theoretical support for the studies related to the specific design of the system by identifying the economic necessity and legal validity of the temporary separation operation.
  This study consists of two independent studies. First of all, Chapter 2 deals with the legal validity of the temporal separation operation. In this paper we examine the scope and limitations of the autonomous rights of a special administrative region (SAR) in North Korea, the constitutionality of segregation of the North and South Korean labor markets, and prospective ways to confirm the people’s sovereign opinion. First, in relation to the autonomous rights of an SAR, this paper specifies in detail the scope and limit of powers that can be granted to an SAR in North Korea in terms of executive power, legislative power, and jurisdiction, in accordance with the current Constitution, laws and ordinances.
  Secondly, regarding the constitutionality of separation of the North and South Korean labor markets, measures such as the limitation of North Korean residents relocating to South Korea, an employment permit system for North Korean workers, or the setting of discriminatory minimum wages for North and South Korea are likely to violate the essential principles of fundamental rights guaranteed by the Constitution. However, such measures could be accommodated if it is recognized that the separation of the labor market is aimed at preventing 'clear and existing risks' to the national economy, and if efforts are made to ensure basic rights, such as by limiting the separation period, and supported by a national consensus.
  Finally, it is suggested that the referendum system would be preferable when it comes to confirming the sovereign intent of the people, which is a procedure that must be followed in order for the temporary operation of the two Koreas’ economy after unification. Our recommendation is based on the fact that this involves an important policy matter that can have a profound effect on all areas of politics, economy, society, and culture, which can thus cause serious restrictions on the basic rights of residents in North Korea, and how it would take a considerable amount of time to form a unified National Assembly.
  In conclusion, it is true that this plan for the temporary separate operation of the two Koreas involves many issues which could bear relation to infringement of the basic rights of the people, and thus become subject to judgments by the Constitutional Court. However, it is pointed out that unification of the two Koreas is an unprecedented event involving political, ethical, cultural, social, economic, and constitutional issues that cannot be determined in advance, meaning that unification policies are likely to be carried out under the highest degree of political commitment.
  Next, Chapters 3 and 4 address the economic need for temporary separate operation. First, Chapter 3 deals with the economic necessity of temporary separate operation. This paper shows that the gradual integration method (the 'Special Zone Model') through the temporary separate operation could be a way to maximize the economic benefits of the unified Korea. More precisely, we estimated the appropriate cost of unification and mode of economic integration to maximize the net benefit of unification.
  These unification costs are defined as the sum of the potential growth rate reduction effect (direct cost) and the social disruption cost (indirect cost), which is followed by Korea's fiscal transfer expenditure and increase in the national debt.
  Considering the financial transfer expenditure and the potential growth rate decrease, the GDP of the unified Korea is calculated by subtracting indirect costs from the GDP of North and South Korea. The benefit of unification is obtained by subtracting the sum of GDP from the two Koreas from the GDP (GDP of the unified Korea) of when South and North Korean remain divided. According to the freedom of movement of production factors, the South and North Korean economic integration system has established five integration methods that range from a fully open system in the manner of Germany to a completely closed type. In addition, each of the integration modes are defined as the composition ratio of infrastructure construction cost (I) and social security cost (S) among financial transfer expenditures.
  As a result, the unification cost that maximizes the cumulative net benefit for 20 years after unification was calculated as 1,000 trillion won. This figure presumes that 2.5% of Korea's GDP (based on 2020 figures) is invested annually for 20 years. While Korea's national debt to GDP ratio will rise to 71% by 2039, this is regarded a level that Korea can afford to bear.
  In Chapter 4, we derive implications for estimating the appropriate cost of unification. First, the economic integration method maximizing the cumulative net profit is a special zone model. In addition, the effect of mitigating the income gap between the two Koreas is also greater when proceeding with a special zone model than with the German model. However, even in the best case, the income gap between North and South Korea is not expected to be reduced any further than the income in the North rising to 34% of South Korean levels by 2039.
  Meanwhile, this study shows that the point where the cumulative net benefit becomes positive will arrive faster as we spend less than the appropriate cost of unification, and that the level of decrease in short-term benefits for Korea also shrinks in this case, but that the net benefit for after this point decreases as well. On the other hand, as the actual amount of expenditures approaches closer to the appropriate reunification cost, this point arrives later and short-term benefits fall by a larger level, but the net benefit after this point of time increases. In order to wisely overcome the valley of transition where the net benefit temporarily falls into the negative after the economic integration of the two Koreas, measures such as the establishment of effective financing plans must be taken to bring about a national consensus. 

  The digital transformation, which is often called as the Fourth Industrial Revolution, is attracting attention as a new driving force for economic growth. Digitalization is emerging as a measure to mid- and long-term trends, such as demographic change and transition to a low-carbon economy, while leading economic and industrial innovation. It is confirmed empirically that for high-income countries including the United States, digitization contributes to productivity improvement in other industries. However, these effects differ from country to country depending on the capabilities of digital innovation such as ICT infrastructure, R&D investment, ICT industry competitiveness, legal system, human resources, business use of ICT, and entrepreneurial activities. In Korea, ICT infrastructure is world-class, and ICT adoption and utilization are highly competitive. However, the competitiveness of ICT services, the effectiveness of R&D investment, contribution to innovation, legal system, human resources and entrepreneurial activities are far behind. By contrast, the United States has the highest level of competitiveness in ICT export, R&D investment and innovation, human resources and entrepreneurial activity. These factors are key concerns of the countries’ digital innovation policy, and each country is making a policy effort centering on it.
  The digital innovation policies of the United States, EU, Germany, Japan and China are similar due to the general characteristics of digital transformation, but they vary according to the capabilities and circumstances of each country. As in our analysis, the United States most clearly demonstrates the general purpose technology hypothesis that ICT capital contributes to increased productivity in the industry. In the United States, ICT has been a key driver of economic growth since the 1980s, and digital innovations led by Internet platform companies have become a source of mid- and long-term economic growth in the Obama administration. Recently, in the United States, innovation in the digital innovation is dominated by ICT or Internet service companies, and traditional manufacturing companies are also reviving through digitization. The US government is constantly investing in strategic research areas and advanced technologies required for digital innovation based on Strategy for American Innovation or NITRD, a government-level IT research and development program. In addition, the federal government operates a Chief Information Officer (CIO) and a Chief Technology Officer (CTO) to improve digital-based government management and to accelerate industrial innovation. The private sector is leading digital innovation while the government focuses on R&D investment in digital industry platforms and basic technologies such as big data and Internet of Things, solving public problems using ICT, and building consumer information protection systems.
  In contrast to the US, the EU has continually experienced a low ICT investment and a low ICT contribution to economic growth. The EU has identified the segmented digital market in the region as the cause of the problems and thus launched the Digital Single Market Strategy for Europe in 2015. Its main objective is to realize economies of scale by integrating the digital market with the elimination of digital barriers in the region and creating a common base of innovation. Following the digital single market strategy, the Digitizing European Industry, announced in 2016, is highlighting manufacturing as the center of European digital industry innovation. Unlike the United States, the EU's digital industry innovation tends to be government-led. In addition, EU focuses on joint private investment in strategic areas, digitization of SMEs, and promotion of technology commercialization.
  Germany is at the center of EU digital innovation. Germany has world-class competitiveness in advanced manufacturing and ICT services and has a solid medium-sized business base. Based on this, Germany is leading the digitalization of manufacturing. Building on long-term preparation with discussion among academia and industry, German government has led digital innovation policy. Germany is the first country to present its vision of the digitization of the manufacturing sector at the policy level. Based on a specific tradition in the process of policy implementation, the German government is engaged in mid- to long-term plans and tasks, and focuses on stakeholder policy platform construction, thereby inducing voluntary participation of companies. It also emphasizes the collaboration between large companies and SMEs so that SMEs can naturally participate in digitization.
  Japan has turned its attention to digital industry innovation as it has suffered from a long-term recession and a rapidly aging population. Japan has a solid competitiveness in ICT manufacturing and service industries, especially with global manufacturing base and robotic technology. In spite of the economic downturn, the Japanese industry has invested in basic R&D with a long-term perspective, securing global competitiveness in original technology. On the basis of this, Japan promotes digital innovation while focusing on process innovation in traditional manufacturing sector. In Japan, the government is playing a leading role in recognizing the digitalization of companies and societies. In particular, the government plays an important role in utilizing ICT technology to solve social problems such as natural disaster prevention, administrative efficiency and education. In addition, the government has established an integrated support system for research and development and various support policies based on the idea that major fields such as cloud service, Internet of Things, artificial intelligence, and big data are connected with each other in terms of industrial innovation.
  China has gained a worldwide market share in the internet platform sector based on the huge market and is recently emerging as a strong competitor of the United States. Since China has a variety of industries with different levels of technology, there is a complex task of promoting the transformation of traditional industries and fostering high-tech industries simultaneously. Therefore, at present, social innovation using ICT has policy implications and it is a key part to establish an innovative ecosystem and encourage start-ups centered on Internet platform companies. The Chinese government is actively promoting entrepreneurship as a substitute for a declining job in the manufacturing industry. In particular, it is characterized by the fact that big corporations take active partnership with the government in the management of platforms for start-up and innovation. In addition, the Chinese government is taking an open initiative in the fields of shared economy, internet banking, medical care, etc., and does not enact regulations that could hinder new types of businesses. do. In spite of various formal and informal regulations, global companies are actively seeking chances to enter the Chinese market. Chinese companies are actively introducing overseas advanced technologies in order to complement their lack of technology, and it is expected that the market will expand in areas where the demand for cooperation with foreign countries such as Internet of Things is increasing.
  Taking into account the general characteristics of digital innovation and the policies of the leading countries, the following lessons can be learned. First, there must be a strategic focus to promote industrial innovation through digital transformation. Digitization is practiced across industries and sectors, but it needs a starting point that matches the existing capabilities, conditions, and needs of the country. Second, the key to digital innovation is data. The Internet of Things, cloud computing, artificial intelligence and big data analysis are directly linked to the collection and analysis of vast amounts of data, which creates industrial competitiveness. Third, digital industry innovation requires openness. This means government agencies, government and business, researcher and business, researcher, openness, and even openness. Fourth, national mid - to long - term digital innovation strategy is needed. Since digitization is carried out across all industries and sectors, a policy implementation system that includes government departments and each stakeholder is needed. Also, in the short-term perspective, the pursuit-oriented industrial innovation policy does not seem to be suitable for the absolute digital transition period. Fifth, the government's role in promoting digital industry innovation needs to be focused on building institutional conditions, mediators between sectors and mediators of consensus, and investment in the public sector.
  The Creative Economy Strategy (2013) is Korea's new economic growth strategy in the era of the digital transformation. This strategy pursues economic and social innovation of the entire society including existing industrial innovation and promising industrial development. In addition, major strategies such as enhancement of science and technology and ICT innovation capacity, creation of entrepreneurial ecosystem, venture and SME development, and industrial innovation through digitization in order to ultimately pursue creation of innovation ecosystem across new economic society, As a growth strategy. However, it failed to fully realize the basic principle of departing from the chasing economic growth model. Moreover, although a considerable number of strategic policies and detailed policies were appropriate in light of the situation in the Korean economy, the strategy was not fully implemented yet.
  Taking into account the industrial competitiveness and the policies of the leading countries, Korea needs to recognized manufacturing as a strategic starting point to promote digital industry innovation. Manufacturing is Korea’s major industry and has a large economic impact such as employment. US and Chinese companies are leading the way in making virtual data as platforms while that of the real data such as operation data of factory facilities is in its early stage, there is a relatively high possibility for Korea to secure the sector. The scope and content of digital innovation policy is very comprehensive, as it can be seen from the EU's digital single market strategy. It is not realistic to achieve the results evenly in every sector and it is necessary to have a lead sector with remarkable performances. As the case of Germany, the government takes significant role in the digitization of the manufacturing sector, thus government should concentrate its capabilities on this agenda.
  Digital transformation is difficult to be defined and it is almost impossible to predict the rapidly changing trends. However, it should be emphasized that the key to digitalization is information and data. Many countries have introduced polices and strategies to emphasize big data, artificial intelligence and robotics, Internet of Things and cloud computing. The data is placed in the core of such policies. Also, collecting and utilizing data in strategic areas such as advanced manufacturing, high-end automobile, smart city, medical, energy and education are very important. Therefore, Korea needs to redesign its industrial strategy with particular emphasis on information and data. In other words, it is necessary to expand and sustain investments in general data technologies such as big data analysis, Internet of Things and cloud computing technology, application of enterprise and industry, and check the regulations to promote utilization of data in strategic industries. In order to spread common technologies such as the Internet, it is necessary to continuously improve institutional conditions such as personal information protection, cyber security, and intellectual property rights, and liberalization of cross-border data movement is the principle of foreign economic policy. And to find out how to do it.
  Digital innovation requires openness among all participants (Open Innovation). In order to effectively promote digital innovation, openness and cooperation among government ministries are required, which is a factor for the success or failure of digital industry innovation. Government should also focus on its role of mediators that form the network between technology developers, owners, and end users who apply them to the business, with a focus on end-users. Technological development is also required for digital-based industry innovation, but more importantly, technology end users are looking for and adapting to their business. This is because digital conversion is the result of an innovative business model that radically transforms the rules of existing games. In order to accelerate the digital transformation of the industry, it is necessary to strengthen the participation of the private and technical users from the R&D stage, to promote the international R&D network by increasing the openness of innovation. In addition, the Korean market should facilitate data-based innovation by leveraging free flow of cross-border data.
  Korea’s digital innovation policy implementation system needs improvements in managing and coordinating various policies promoted by different ministries and public agencies. Digital transformation leads to dramatic changes and innovations that are comparable to the revolution, which affects the entire economy and society. Therefore, strong and comprehensive leadership is needed to oversee data collection and utilization, apply ICT to entire economy and society and invest for advanced R&D. 

  Recently, our trades have been declining for the second year in a row, due to the maturity of the global value chain and the delay in the recovery of the world economy. In particular, imports decline more than exports, but trade surplus is rather expanding. Policy makers and experts expressed concern about the decline in exports, but did not show interest in decreased imports. Behind these responses, there is dichotomy that the increase in exports is positive but the increase in imports is negative. More importantly, there is still a lack of clear understanding of Korea’s import structure.
  In this paper, we analyze determinants of Korea’s imports in the context of the interaction between exports and foreign investments, and investigate the effects of imports on firms’ exit and productivity in order to understand Korea’s import structure and distributional influences of imports.
  Since 1988, Korea’s overall imports have increased substantially, except for the currency crisis and the period of the global financial crisis, but it has recorded a continuous declining trend due to recent sharp drop in imports of raw materials.
  Major importing countries have changed from developed countries in the past to resource-abundant countries and developing countries. By type, intermediate goods account for about 50% of imports, raw materials and capital goods account for 20% respectively, and consumption goods account for around 10%.
  In order to analyze determinants of imports by type, we constructed theoretical model and found two propositions. First, regardless of types, imports will increase as the economic sizes of importing countries become larger, and will decrease as the transaction cost with the importing partner increases. Second, while imports of consumption goods increase as the income level and market size of importing countries increases, imports of intermediate goods and raw materials used as production inputs increases as the outputs and exports of industries increase.
  The results of the empirical analysis based on the theoretical model are summarized as follows. First, as the export becomes more active, imports of intermediate goods and raw materials used as production input factors will increase, while imports of consumer goods will decrease. Second, imports of intermediate goods and raw materials are positively related with inward foreign direct investment (FDI), but imports of consumption goods are negatively affected by inward FDI. Third, the more industries spend R&D investments, the more the industries import intermediate goods and raw materials. Fourth, the effects of import liberalization are different for each type of import. The influence of the tariff rate was limited for raw materials and capital goods imports.
  According to the analysis of Korea’s import structure, imports of consumption goods declined by 0.137%, and imports of intermediate materials and raw materials were analyzed to increase by 0.235% and 0.193%, respectively when exports increased by 1%. When inward FDI increased by 1%, imports of consumption goods and capital goods decreased by 0.02% and 0.017% respectively, but imports of raw materials were expected to increase by 0.071%.
  The main results of analyzing the effects of imports on probability of firms’ exit are as follows. First, the increase in total imports increase the probability of a firm’s exit but the firm size, capital stocks, productivity decrease the probability. Second, imports of raw materials and intermediate goods decrease the probability.
  Third, whether firms are exporting or not does not significantly affect the relationship between import penetration and firms’ exit. Fourth, the magnitude of the effects of imports on firms’ exit varied from industry to industry.
  The results of effects of imports on productivity structure are summarized as follows. First, the total import penetration rates have an inverse U-shaped relationship with total factor productivity. Second, these nonlinear relationships between import penetration rate and total factor productivity are very different for each type of imports by industry. In order to investigate the effects of imports on the distribution of productivity within the industry, we decompose changes in the productivity into within firm effects, between firm effects, and exit and entry effects. Second, when imports increase, within firms effects are significant in food, iron, transportation industries and between firms effects are significant in oil and iron industries. Only in the transportation industry, exit and entry effects turn out significant. Third, the total import penetration rates have a positive impact on the growth rate of productivity by economies of scale, whereas the penetration rates of intermediate goods imports increase productivity through technological progress.
  Based on this, three policy proposals were derived. The first is the introduction of a new statistical system for imports linked with export and investment. Also, the new system should contain statistics for e-commerce imports in order to analyze the current situation of import of consumption goods. The second is improvement of the trade adjustment assistant (TAA) program. An increase in imports will increase the competitiveness of the domestic market and induce the exit of companies with low productivity, but these impacts were analyzed to be somewhat different depending on type and industry. In addition, a nonlinear relationship between imports and productivity was also considered. Third one is customized policies taking into account effects of imports by type. As the FTA tariff elimination schedule goes forward, the effects of imports are expected to continue to expand. To introduce customized policy for imports by type, it is necessary to raise the understanding of Korea’s import structure. 

  The international community’s sanctions are getting tighter due to North Korea’s continued nuclear missile tests in January and September 2016. This report aims to examine the impact of sanctions against North Korea on its neighboring countries' trade. First, in the 2nd chapter we analyzed the history, main contents, and issues of multilateral and bilateral sanctions against North Korea. In the 3rd chapter we categorized North Korea’s trade into termination, substitution, detour, creation, and provided empirical analysis using trade dataIt is necessary to clarify the concept of detour trade among the concepts of termination, substitution, detour, and creation in trade as a result of sanctions. In general, detour trade(sanction target country-3rd country-sanction sender country) is a trade that makes a detour via a 3rd country in order to avoid sanctions by the sanction sender country, which is based on illegality. However, detour trade concept used in this research is similar to the usual usage of the term in that it maintains the trade route using a detour, but is different in that it does not necessarily need to be illegal. In this research detour trade encompasses both legal and illegal trade. Legal detour trade is trade that abides by the customary rules of origin. For example, if an item that is traded on a detour from North Korea to a 3rd country via China is 60% produced by China and 40% by North Korea, then its origin is legally China. Therefore in this case even if the item had been in part manufactured in North Korea, it will not be subject to sanctions.
. In the 4th chapter we surveyed the history of cross-border business in the North Korea-China border region and how the how the main actors and locations(Dandong and Yanbian) of the cross-border business changed after the sanctions, and how export items changed through trade statistics analysis. Finally in the 5th chapter we analyzed the future scenario, issues and implications of sanctions against North Korea.
  Specifically, in chapter 2, we examined the history, and the main contents of sanctions against North Korea. Sanctions against North Korea are divided into multilateral sanctions led by the United Nations and bilateral sanctions imposed by the US, EU, Japan, South Korea and others. Up until now, there have been a total of six sanctions, and all were adopted due to the test-launch of North Korea's nuclear and long-range missiles. The United Nations resolutions have been strengthened gradually and continually to include additional points while reaffirming the previous sanctioning resolutions. The United Nations multilateral sanctions focus on WMD, nuclear tests and constraints on relevant trade, finance and travel, and in line with the Geneva agreement in 1949, there is no direct effect on the lives of residents of North Korea. In other words, sanctions were enforced so that it does not restrict ??civilian life, and only restrict non-civilian activities.
  Meanwhile, bilateral sanctions were imposed at a level that discontinued economic and diplomatic relations with North Korea gradually notwithstanding consideration for civilian activities. Unlike sanctions against North Korea by South Korea and Japan, the United States has stated four reasons based on domestic law, such as security problems, communism, terrorism aid country, WMD diffusion, etc. The sanctions were imposed by the U.S. since the 1950s, which includes ban on aid and financial support, freezing of assets related to North Korea, embargo of weapons, and prohibition of entry by stake holders. Japan's sanctions against North Korea had been initiated on the grounds of North Korea‘s abduction of Japanese citizens, and features a ban on imports against North Korea, the banning of related aircraft and ships, entry prohibition of stake holders in 2006, and banning exports to North Korea in 2009. South Korea's sanctions against North Korea includes the discontinuation of Mt. Geumgang tourism triggered by the attack on a South Korean civilian in 2008, the complete discontinuation of trade relations except the Kaesong Industrial Complex triggered by the 2010 Cheonan ship attacks, and in 2016 discontinuation of the Kaesong Industrial Complex.
  In Chapter 3, we analyzed the changes in trade between North Korea and neighboring countries due to sanctions. Sanctions against North Korea triggered changes in North Korea’s trade, which can be divided into trade termination, trade substitution, detour trade, and trade creation. Trade termination was due to the sanctions against North Korea by Japan in 2006 and amounts to about $ 180 million(annual average trade value between 2004 and 2006), and from the South Korea’s sanctions against North Korea in 2010, which amounts up to $300 million in trade termination(annual average trade amount between 2007 and 2009). As for trade substitution, inter-Korean trade increased by 113.1% in 2006, North Korea and China trade increased by 95.2% to Japan’s sanctions against North Korea, and North Korea-China trade increased by 195% due to South Korea’s sanctions in 2010. Detour trade North Korea-China-Japan amounts to about 2.1% of total North Korea-China trade(annual average of 2007 to 2009). After the 2010 South Korean sanctions, North Korea-China-South Korea detour trade amounted to about 5.6%(annual average between 2010 and 2012), North Korea-China-Japan detour trade amounted to about 2.6% (annual average between 2010-2012) of North Korea-China trade. Trade substitution to China and increase in detour trade via China due to Japan and South Korean sanctions increased China-North Korea trade to a considerable extent.
  In chapter 4, we analyzed how sanctions against North Korea impacts the businessmen and location of North Korea-China border region, and changes in major trade items as well as dispatch of North Korean workers to China. In the 1990s cross-border business was usually managed by the Chaoxianzu, or the ethnic Koreans in Northeast China, and centered on the Yanbian region. In the 2000s, cross-border business with North Korea was led by the South Koreans in the form of South Korean management and Chaoxianzu local brokers, mainly staged in Dandong. After the 5ㆍ24 measures, the major trading entity has changed its form from South Korean management - Chaoxianzu local broker to Han Chinese management ? Chaoxianzu and ethnically Chinese North Korean broker. The center of cross-border transaction shifted from Yanbian, Jilin Province to Dandong, Liaoning Province. In terms of trade items, North Korea’s traditional trade items such as anthracite and iron ore decreased after the sanctions against North Korea, while the growth of trade in textiles and marine products trade is remarkable. Finally, the number of North Korean workers sent to China has increased. After the sanctions against North Korea, the subjects, regions and products of the cross-border business with North Korea project have changed, but while North Korea's trade has not been greatly affected by sanctions, human interaction has rather increased.
  In chapter 5, we forecasted scenarios, issues and ripple effects on changes in sanctions against North Korea. An important factor in strengthening sanctions against North Korea is whether North Korea will conduct additional nuclear tests and long-range missile tests. Contents of the U.S. strengthening its sanctions against North Korea based on active participation by China include secondary sanctions in the financial sector, restrictions of the main export goods of North Korea which are coal and iron ore, restrictions on trading processed goods such as clothes and marine products which are rapidly increasing sectors for North Korea, as well as restrictions of dispatch of overseas workers. If the problem of weapons of mass destruction is resolved, sanctions against North Korea can be relieved at the level of sanctions enforced in 2006. Relaxation of South Korea’s and Japan’s sanctions against North Korea can be done relatively smoothly. However, the US sanctions against North Korea can be extremely complicated as it is necessary to dispose of relevant laws, amendments, and exemptions for North Korea. More importantly, the important variables that determine whether sanctions against North Korea should be strengthened or mitigated can be three-fold, such as changes in North Korea's behavior, changes in South Korea, the US and Japan's policies, and changes in China's policies.
  The ripple effect of the change in sanctions against North Korea was analyzed by distinguishing between the effect of strengthening and the effect of relaxation. In the case of strengthening the sanctions, North Korea's trade will be totally suspended and only emergency supplies based on humanitarian purposes will be sustained. The effect of alleviation of sanctions will result in rapid increase in trade between North Korea and Japan, and inter-Korean trade, whereas trade and detour trade between China and North Korea will rapidly decrease. 

  Following the global financial crisis, Korea recorded an average export growth rate of -1.8% for 2012-2015, and has not yet recovered its growth rate of 19.1% in 2003-2007 before the crisis. Considering the important role played by export growth throughout Korea's economic growth, a significant part of the recent decline in economic growth can be attributed to this slowdown in export growth. This study focuses on the relationship between financial constraints and exports in order to elicit policy implications for boosting export growth.
  In an analysis using firm-level data, we found that the financial constraint on the supply side of funds contributed to the decrease of exports. The financial shock to the banking sector, which supplied more than 70% of the external funds in 2015, has been found to affect exports of Korean firms. This main result is robust to another index representing the health of banks and different empirical model specifications including firm fixed effect, alternative variable transformation, and an empirical model considering the endogeneity problem. Small and medium-sized enterprises (SMEs) are more sensitive to the health of banks than large firms, and, among the top four manufacturing industries with a high proportion of exports, metal processing products are particularly vulnerable to financial constraints.
  Another empirical analysis using industry-level data again showed that the financial constraints are closely related to decline in export. Debt dependency ratio and tangible asset ratio were used as variables that indicate industry-level financial constraints. Having a higher debt dependency ratio and tangible asset ratio signifies a lower level of restrictions from borrowing in the financial market. An industry with a high financial constraint is more likely to show a large decline in exports as the cost of funds increases. By firm size, SMEs are more sensitive to financial constraints than large firms, as they both face the same financial costs. A classification of exports by item characteristics (e.g. capital goods, raw materials, consumer goods) shows that the financial constraints have a greater impact on exports of capital goods and raw materials. In the case of consumer goods, the effect of financial constraints on exports was not significant. However, further analysis of detailed consumer goods showed that consumer discretionary goods turned out to be sensitive to such financial constraints.
  The policy implications suggested in this report include an improvement in the health of banks, recognizing the different effect of financial constraints on exports by firm and industry characteristics, and the need for micro-financial policies. In relation to improving the health of banks, we propose improving loan examinations. This would involve an enhancement of the expertise employed to identify companies (or industries) that are expected to bring high profitability in the future. We also emphasize that the perception of policy authorities on the different effects of financial constraints on exports by firm and industry characteristics is a very important factor for the effective implementation of policies. By enterprise size, SMEs are more vulnerable to financial constraints than large firms. Therefore, policies to mitigate financial constraints on SMEs would be more effective. Since the relationship between financial constraints and exports is very different from one industry to another, we also emphasize the need for micro-financial policies. In Korea, financial constraints are more relevant to mid- to long-term economic growth rather than short-term economic fluctuations, indicating that policies related to financial constraints need to focus on the mid- to long-term. As the meaning of debt ratio is interpreted differently in empirical results for firm- and industry-level data, the policy maker should take this into account when establishing policies for individual firms and industries.
  The implementation of micro-finance policies that reflect the different effects of financial constraints on exports by firm and industry characteristics will serve as an effective policy option for policy authorities, as an additional policy instrument complementing existing monetary and fiscal policies. If the firms (or industries) with a large decrease in exports due to financial constraints are selected and focused on as a policy target, this would maximize the effect of policies while minimizing unintended side effects.
  The most salient feature of this report setting it apart from previous literature is that it applies proven methodology from previous research to Korean data, showing the part of decrement in exports caused by financial constraints. In addition, we found that these effects are different by firm and industry characteristics. Based on this report, future work using upgraded data will improve the estimation of the coefficient implying an accurate relationship between the diverse effects of financial constraints on exports by firm and industry characteristics, micro-finance policies and financial constraints under the control of various variables. Through this we ultimately hope to raise the effect of policies to improve the export growth rate. 

Introduction

Ⅰ. The Global Digital Economy: Trends, Impact and Prospects

1. The Digital Economy and Features of Digital Trade
2. Measuring Digital Trade
3. The Role of ICT in Northeast Asia
4.  Digital Services
5. Online Consumers
6. New Challenges Posed by the Digital Economy
7. Conclusions

Ⅱ. Existing Digital Trade Rules at the Domestic Level in Northeast Asia

1. Broad E?Commerce Regulatory Frameworks
2. Customs and Trade Facilitation Laws
3. Data Protection
4. Data Localization and Cross?Border Data Flows
5. Domain Names
6. IP Rights
7. Consumer Protection
8. Over?the?Top (OTT) Internet Services
9. Concluding Remarks

Ⅲ. International and Regional Trade Rules

1. The World Trade Organization (WTO)
2. World Customs Organization (WCO)
3. World Intellectual Property Organization (WIPO)
4. Asia Pacific Economic Cooperation (APEC)
5. Free Trade Agreement E?Commerce Provisions

Ⅳ. Negotiating Digital Trade Rules for the Future in Asia

1. Gaps, Challenges and Opportunities:  The Global Level
Recommendations:
2. The Domestic Level
Recommendations:
3. Addressing the Gaps:  Using Regional Trade Agreements
4. Concluding Remarks

Executive Summary 

  Economic policymaking is often a delicate dance between government officials and regulators and the marketplace.  Governments want to ensure, for example, that consumers are safe, that public goods are properly provided, and that government services are adequately supplied.  Companies want to find new markets and new consumers and reap maximum profits.  In mature markets or slowly evolving industries, finding the right equilibrium that balances the needs of government, citizens and companies is easier. 
  In digital trade and e-commerce, however, new technological advances are being developed so rapidly that governments are struggling to keep up.  Officials have responded by either allowing industries to exist in entirely unregulated spaces or have tried to adapt off-line rules and legislation to match growing on-line trade.  The result has satisfied no one.  Governments are uneasy with patchwork regulations and legislation in place to monitor the digital economy at the domestic, regional and global levels.  Companies face growing risks and uncertainty in their business models, since poorly structured and fragmented responses by governments can upend once profitable ventures overnight.  Consumers are also not getting the best outcomes since many products and services that they might want are not available, have uncertain quality, cost more, and may compromise their own privacy.
  This paper tracks the rapidly evolving landscape for digital trade and e-commerce across five Northeast Asian economies?China, Japan, Hong Kong, South Korea, and Taiwan.  These five countries are at the cutting edge of the digital revolution with increasingly wired citizens and innovative companies offering a staggering range of products and services.  The paper examines several business and consumer important trends of note, including the rapid explosion of e-commerce generally, the shift to online and mobile purchases, the proliferation of data and challenges of managing data flows across borders, and new disruptive technologies like fintech, 3D printing and the Internet of Things (IoT).  Each of these trends highlights the growing challenges to regulators in continuing to apply existing rules and legislation created for off-line applications to a digital world.
  It is one thing to note exciting new changing on the horizon.  It is another to grapple with how governments can actually address these rapidly evolving challenges.  The paper therefore breaks down digital trade and e-commerce into eight discrete segments of relevance for the digital economy.  The eight areas under examination are not the only areas that matter for digital trade, but give a better sense of the scale and scope of issues facing regulators at the domestic level. 
  The paper then tracks actual legislative and regulatory policies that govern (or do not yet address) policy for the following issue areas: overall e-commerce regulatory frameworks; customs and trade facilitation rules that apply to e-commerce goods; data protection frameworks; data localization and cross-border data flow rules; domain names; intellectual property rights rules; consumer protection in an online world; and over-the-top internet services.  A review of how the five Northeast Asian countries are grappling with policy in these eight discrete issue areas reveals wide differences in rules between the countries at the domestic level and often significant variation from what might be considered “best practice” ideas for each topic.
  Overall, the review of policy at the domestic level shows that governments have not yet figured out the best approach for creating supportive and enabling frameworks for digital trade and e-commerce.  To date, much of the official response has been fragmented between ministries and agencies, with little coordination.  Digital trade is unlike many other sectors?it cuts across an increasingly wide swath of the economy and regulatory policies in one area often has knock-on or unintended consequences in other areas. 
  It is also rapidly evolving, which is making it difficult for government officials to address.  If governments are too far out in front, too prescriptive or too forward leaning, they risk cutting off new sources of innovation and growth.  They may unintentionally box in specific technologies or platforms.  Yet it can be very difficult to think about regulating for outcomes, since it requires bureaucrats to have a visionary sense of the future that few individuals are likely to have.
  Creating digital economy policies at the domestic level, in any case, is probably not the best or most effective way to create sensible regulations.  The digital economy does not recognize national boundaries.  It does not logically stop at a customs border.  Hence, the more efficient and effective way to manage digital policies is at the regional or international level.  The paper therefore considers ongoing efforts in Asia the regional level, through the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) trade negotiations.  Both trade talks have digital components that could create sensible broader frameworks.
  Both the TPP and RCEP could also usefully contribute to broader global trade rules, crafted in the World Trade Organization (WTO), in the World Intellectual Property Organization (WIPO) and the World Customs Organization (WCO).  The paper also makes recommendations in the final chapter for provisions that should be considered in each of these fora to advance supportive, enabling digital trade and e-commerce rules that would allow governments and companies to reduce risk and uncertainty while ensuring that consumers are properly supported. 
  In the end, digital trade and e-commerce are likely to be the dominant means of creating and delivering goods and services to consumers and companies around the globe in the future.  Northeast Asian economies are at the cutting edge of these trends. The struggles that government officials, legislators and regulators are facing in creating the right frameworks to support this growth shows how vitally important it will be to get the appropriate scaffolding into place at the domestic, regional and global levels. 

Preface

 
1. Introduction

2. World and Korean Economy after the Global Recession

3. Three Structural Changes
3.1. Model
3.2. Constructing Counterfactual Scenarios
3.2.1 Aging Population
3.2.2 Rising Income Inequality
3.2.3 China’s 13th Five-Year Plan
3.3. Results
3.3.1 Aging Population
3.3.2 Rising Income Inequality
3.3.3 China’s 13th Five-Year Plan

4. Brexit
4.1. Model
4.2. Constructing Counterfactual Scenarios
4.3. Results
4.4. Appendix: Additional Figures

5. Summary and Policy Implications
5.1. Summary
5.2. Policy Implications

References 

  The Korean economy still faces severe headwinds from the weak growth recovery. Since Korea’s growth path has tended to converge to that of the global economy since 2003, Korea’s recent growth moderation partly reflects a still-weak global economy. Along with a weak growth in domestic consumption, Korea’s substantial export disruption might lead to a further slowdown in the Korean economy in the future.
  In this monograph, we suspect that there are common and structural global factors behind the convergence of Korean economy to the slow growth path of the global economy. Motivated by the recent policy-oriented works, we have analyzed the four structural, external changes of aging population, rising income inequality, the implementation of China’s 13th Five-Year Plan, and Brexit. In particular, we have quantified their effects on the Korean economy and analyzed the mechanism through which the structural changes affect the Korean economy.
  Our first finding exhibits the important role played by private domestic demand. Both rising inequality and aging population affect Korea’s GDP primarily through the private domestic demand channel. In the beginning of the implementation of China’s 13th Five-Year Plan, the external sector is the main driver of affecting Korea’s GDP. Over time, however, the channel through which private domestic demand affects Korea’s GDP outweighs external channels such as net export. Therefore, our results in Chapter 3 show that implementing policies, of which target is the domestic variables, can be more effective.
  Second, the policy to address aging population through raising the fertility rate should take into account trade-off between current employment and investment and the number of future working aged population. Our results show that an increase in fertility rate has negative consequences in current employment and investment. The result is consistent with our intuition that if women have more children, they are less inclined to supply labor. Therefore employment would decline. At the same time, because production factors, labor and capital, are complementary, a decrease in employment would lead to investment slowdown. On the other hand, raising the fertility rate implies an increase in the future working aged population. Again due to complementarity between production factors, this can boost investment and pick up growth in the future. Therefore, implementation of the policy to address aging should be based on the optimal growth of population and take into account trade-off between its short run and long run effects.
  Third, we need to deeply look into the whole income distribution to address rising income inequality. Our results show  that looking at one single index of inequality might be insufficient to analyze the consequences of inequality. Population within the different income groups might play a different role and the aggregate consequences might depend on the whole income distribution. For example, one of our results illustrate that the population within the top one percent income group tends to have positive consequences on employment and investment. In the absence of detailed data, however, we cannot tell what kinds of people among them would benefit domestic demand. Instead of targeting a single index for inequality, therefore, policy tools to address rising inequality should be grounded by further information on the whole income distribution.
  Finally, we devote Chapter 4 to the quantitative analysis of Brexit. At first glance, our results do not seem to be consistent with the standard gain from trade liberalization. For example, Korea can sometimes lose from an FTA with the United Kingdom. Instead, raising trade barriers against the United Kingdom sometimes benefit Korea's growth. Our seemingly counterfactual results would arise from the interaction between capital accumulation and market access versus the substitution effect. In particular, ending an FTA with a certain country might benefit our other trading partners if we import goods from them instead of the original exporter. Such substitution effect might be large enough to give us back the benefit especially if the other new trading partners are fast growing economies.
  Equally importantly, however, we do not argue that our results are against the general gain from trade liberalization. Instead, we argue that our results confirm the overall gains from trade liberalization again. Depending on factors such as a country’s input-output linkages with other countries, moving up and down in global value chains, and whether a country and its trading partners are growing, a country could either gain or lose from an FTA with a specific country. Given that the gain from trade liberalization may not be bilateral in practice, a careful approach to quantify the effect of trade liberalization should be necessary before the implementation of an FTA with a certain country.  

  Since the Global Europe Initiative in 2006, the EU has conducted active trade policy measures to contribute to economic growth, job creation and social cohesion in the community. One of the conspicuous features of the new trade policy is that the EU does its best to support EU companies to benefit from better market access through new trade policy tools. Comprehensive and high-leveled bilateral FTA initiatives, among others, have rapidly emerged as a major tool of the new trade policy to achieve the goals.
  The aim of the research is to illuminate how the goals of the new trade policy have been achieved through EU's FTA strategies. To do this, this research focuses on the three topics of EU standards, evaluation process of market openness and the global value chain (GVC), that is, how much EU's FTA strategies have contributed to achieving globalization of EU standards, job creation through careful evaluation processes and economic growth of the community by utilizing GVCs.
  First, the EU has made tremendous efforts to export its standards to other countries through various FTAs. Within its Community, the EU has tried to introduce unified technical and sanitary standards, but after little progress was observed, revised its standardization strategy to adopt a narrower harmonization area, leaving more flexibility in the area of general conformity. Since 1989, the EU has conducted international standardization of its community standards, and the process has been accelerated through bilateral FTAs after the new trade policy was initiated in the mid-2000s. The Korea-EU FTA was one of the best examples of EU's efforts in standard internationalization, which was also adopted in the EU-Canada CETA and the EU-Vietnam FTA. In the mega-FTAs, EU's efforts to export its standards do not seem to be so successful, not only because the EU faced big confrontation against the U.S. throughout the TTIP negotiations, but because uncertainties have grown after Brexit and a variety of standards have sprung up in the world recently.
  Second, it is utmost important that the FTA evaluation process should be carefully designed and conducted properly, in order to assess any impact of FTAs on community labor markets. EU has set out four stages for this evaluation process: impact assessment (IA), sustainability impact assessment (SIA), economic assessment of the negotiated outcome, and ex post evaluation. These assessments not only encompass aspects of quantitative economic analysis, but also qualitative economic analysis and social impacts such as broad impacts on the labor market, SMEs, competitiveness, income distribution, environment, human rights, etc.
  The trade sustainability impact assessment (SIA), among others, is particularly interesting with regards to the impacts of FTAs on employment. In the EU-Korea FTA SIA report, it is revealed that the Korea-EU FTA would bring about positive impacts on agriculture and services employment, but minor negative impacts on the manufacturing labor market. The dairy industry, with the exception of pork, would win in the case of a EU-Canada CETA, and manufacturing including automobiles would gain in employment in the case of an EU-Vietnam FTA. The TTIP may lead positive impacts on employment through a mutual investment boom, the TTIP SIA argues.
  Third, the FTAs pursued by the EU make full use of expansion of GVCs. The EU has set out global standards, prevailed competition in the services market, moved to high value-added stages in GVCs, strengthened market access not only in final goods but in the intermediate goods market. In addition, EU has increased forward linkage participation, provided better protection for IPRs, facilitated e-commerce, financial services supply and mode 4.
  Based upon the EU's FTA strategies revealed in its new trade policy, the following policy implications would follow: First, as for standard internationalization, we need to scrutinize various regulations and standards into several categories, and deal with them to the purposes. In case the standards would be helpful to globalize Korean standards, then we need to introduce them, which would help Korea lead the standard competition in East Asia. In newly emerging areas including IT, environment, and new technologies related to the fourth industrial revolution, it would be strongly recommended to lead platform competition. In this regard, we need to examine Chinese standards as they have rapidly emerged as a new competitor in the area of international standards.
  Second, Korea has its own assessment system in FTAs, but we need to cover a wider range of assessment fields such as social impacts and qualitative and institutional areas. A four-stage assessment system would be much more recommendable to conduct careful assessment of market opening. A stricter assessment process would be much helpful in maintaining public support to further FTA initiatives.
  Third, in order to make full use of GVCs, it is much desirable to upgrade value chains, and strengthen market access in East Asia in all stages of process. We need to focus more on the issues how to lift NTBs, widen services market opening, and persuade our trade partners to conduct enactment and enforcement of IPR protection. A single market for e-commerce and services must be established in East Asia. In order to harmonize different rules of origin among FTAs in East Asia, special dialogue channels must be created in RCEP or Trilateral FTA. More importantly, cooperative bodies for the East Asia Regulatory Dialogue can be utilized. 

  The Brexit referendum, which took place on 23 June, 2016, revealed the British people’s willingness for their country to leave the EU. The year 2017 will witness the beginning of Brexit negotiations between the UK and the EU taking place in a time full of uncertainties arising from the possibility of the negotiations extending beyond the originally planned duration of two years, ambiguity in EU’s competency areas leading to a complicated decision-making process in the Council, whether or not British MEPs should be given voting rights in the European Parliament, and so forth.
  One of the key issues in the relation between the UK and the EU in the post-Brexit era is whether or not the UK maintains full access to the Single Market, which is directly related to the issue of if the principle of free movement of the four factors of people, capital, goods and services still holds after Brexit. It will be a key factor to evaluate accessibility to the Single Market if British sovereignty on commercial policy and immigration is restored, and the principle of homogeneity does hold. Thinking carefully over several cases of the models of Single Market, half Single Market, or non-Single Market would lead to a pessimistic reasoning that the UK would hardly be able to maintain Single Market accessibility, and be inclined to take the non-Single Market model.
  With regard to the macroeconomic impacts of Brexit on the world and Korea, Brexit is expected to have negative impacts on the world in the short-term while having positive impacts in the longer-term. The world economic growth rate may slow down by 0.1?0.4% in 2017 and 0.1?0.7% in 2018, and Korea’s growth rate may also shrink by 0.1?0.5% in 2017 and 0.1?0.8% in 2018. Negative impacts would be spread out not only in the stock market and employment, but also in the areas of consumption and investment, with a harder hit being dealt to investment than consumption.
  In the medium-to-longer term, Brexit brings about positive impacts on the third countries including Korea in terms of economic growth and consumer welfare. Korea’s economic growth would be accelerated by 0.088% and 0.043% in the cases of Hard Brexit and Soft Brexit, respectively. Without a Korea-UK FTA, the positive impacts of Brexit on Korea’s growth rate would diminish by 0.038% (Hard Brexit) and 0.037% (Soft Brexit) from the previous positive numbers. Hard Brexit will decrease the growth rates of the UK and the EU by -1.56% and -0.18%, while Soft Brexit will do so by -0.949% and -0.133%. Establishing a new Korea-UK FTA results in a positive impact on the UK economy by 0.018% (Hard Brexit) and 0.017% (Soft Brexit).
  This study analyzes the impacts of Brexit on the production and export of Korea’s industries, too. First, Brexit leads to shrinking exports of Korea to the UK, and negative impacts would be bigger in the case of industries with stronger GVCs, such as manufacturing. Second, an elasticity analysis shows us that the automobile industry is one of the most sensitive industries in Korea’s exports to the UK, while the textile and leather industries are the least. With regard to Korea’s export to the EU, primary metals and chemicals are susceptible to GDP changes in the EU led by Brexit, while the automobile industry is less so. Third, Brexit leads to positive impacts on Korea’s industrial production in the long-term if Korea-UK preferential trade relations are established. Such a positive influence would be larger in the case of Hard Brexit than that of Soft Brexit. Automobiles and textile are estimated to be the biggest beneficiary industries. Without a Korea-UK FTA, most of industrial production shrinks in the case of Soft Brexit, while no clear signs can be observed in the case of Hard Brexit. Fourth, Brexit may lead to rather moderate impacts on the Korean banking and financial sector. The negative impacts of losing passporting rights in the European continent will be minimized at least in the short-term, as most of Korean banking and financial institutions have maintained a separate market strategy between the UK and the rest of the EU, and/or have not actively used the rights in their business. In the longer-term, it is true that rising uncertainty and costs from Brexit will be harmful to outbound activities of Korean financial companies. As for the inbound area, the most important factor that influences foreign banking and financial companies’ business activities in Korea will be the attractiveness of Korean assets in general, related to fundamental economic conditions rather than institutional changes led by Brexit.
  In the post-Brexit era, Korea-EU and Korea-UK economic and commercial relations will be heavily dependent upon various factors including the direction of revision of the Korea-EU FTA, EU-UK relations after Brexit, the contents of the Brexit agreement, economic conditions in the UK and the EU after Brexit, and so on. As both Korea and the EU have considerably benefited from the Korea-EU FTA, it is now a proper time to think about how to upgrade this FTA after five years of entry into force. Therefore, it would be utmost important to retain preferential trade relations between Korea and the UK after Brexit, which requires the initiative to embark on a new Korea-UK FTA after the Brexit agreement between the EU and the UK is concluded.
  A way to minimize the negative impacts of an institutional vacuum in the economic relations between the UK and Korea after Brexit, would be to include an interim clause of “extension of the preferential factors of the existing Korea-EU FTA to the case of Korea-UK” in a revised Korea-EU FTA.
  Based upon the analysis, we draw the following policy implications: First, the process of a sustainability impact assessment on market opening initiatives such as FTAs needs to be carefully designed and strictly implemented. Brexit is an exemplary case that symbolizes the anti-liberalization and protectionism in major developed countries. This is, in a sense, like a revolt by the ordinary people against elitism and globalization led by elites in the advanced economies. In order for market opening policies to successfully exploit foreign markets and enhance efficiency in the domestic market through strengthened competition, the general public should be brought to realize the benefits of market opening policies, which requires a more comprehensive and well-designed sustainability impact assessment process.
  Second, better communication and closer cooperation between government, private companies and related industry associations are needed to cope with the growing possibilities of negative impacts of Brexit on some industries with higher GVCs, as those industries are more susceptible to negative impacts from stronger direct effects.
  Third, Korea-UK relations need to be newly developed apart from the Korea-EU relations. Brexit will accelerate the divergence of the UK economy from the EU, which will require an independent policy towards the UK. Trade policy toward the UK needs to consider the multi-layered characteristics in the economic relations of the UK not only with the EU but also with transatlantic nations, the Commonwealth, East Asia, etc. In this regard, Korea needs to make full use of strengthening its financial network with the UK, especially for the inbound business area, as the UK’s business activities in the banking and financing sector may become more active and worldwide after Brexit.
  Fourth, the contemporary Korea-EU FTA needs to be revised in due course. The first step to revise the pact is to include any change of circumstances after Brexit. Additional protocol on the occasion of Brexit is to be developed and attached to the original text. The second step to revise the pact is to embark on a new deal for full-revision of the pact, making considerations to rebalance mutual interests, as Brexit provides the off-balance fields of interests in the existing Korea-EU FTA. The five years of entry into force of the FTA, together with Brexit, raise the necessity for revision of the pact, too. A temporary extension of the preferential provision to the case of Korea-UK needs to be reflected in the revised pact.
  Fifth, it is not too early to think about a concrete type of Korea-UK FTA. There is no reason for the Korea-UK FTA to be a duplication of the Korea-EU FTA, as the economic structure of the UK is quite different from that of the EU. A new pact between Korea and the UK should reflect careful consideration on the areas that the UK had asked for but failed to include within the EU’s request lists in the Korea-EU FTA, detailed compilation of the industries with comparative edges of the two, and strategic judgement on the change in the cumulation method between the UK and the EU after Brexit. We need to consider the issues in market opening in services and in enforcement of IPR, especially in agricultural IPR, and those in sustainable development areas.
  Sixth, as mentioned above, Brexit is a symbol of protectionism and anti-globalization, and it is not good for a small, open economy like Korea to contribute to this trend. Therefore, we should make honest efforts to set out a virtuous mechanism to spread the fruits of market opening out to all people in the society and to firmly abide by trade liberalization in international organizations such as the OECD and WTO, and multilateral fora like G20, ASEM, APEC, and so on.