Global Value Chain of Korea's Automobile Industry in the Global Economy

Abstract

The objectives of this study seek for avenues for boosting the productivity and incomes in both developed and developing countries. This would require for people, roles and activities in the production of goods and services and their supply, distribution, and after-sales activities in a coordinated manner be it within an economy (inter-sector) or among economies (bilateral) or among sectors in different economies (bilateral-sector) through what is known nowadays as global value chain. For this to be realized, three complementary studies were done. The first topic intends to analyze a disaggregated accounting structure that steadily breaks down Korea's automobile gross exports at the sectoral, bilateral, and bilateral-sectoral levels into the sum of the various value-added and double counted items. The second topic seeks to do a comparative study on the gross accounting structures of the automobile sectors of Germany and Korea using the Wang-Wei-Zhu decomposition method, which splits bilateral gross exports into 16 value-added components. This method assists in producing a series of decomposition results to show how such a structural decomposition can help us to better understand the pattern of international production sharing. These components can broadly be divided into domestic and foreign value-added in exports. The Leontief decomposition method was used in the above two studies to measure the value-added flows between industries. This method decomposed the Korean automobile sector and analyzed how changes within the sector can affect other sectors. Wang-Wei-Zhu decomposition method was built on the Leontief insight to give a more detailed look at the structures of international production networks and the respective positions of countries and sectors within them. Our dataset was derived from the World Input-Output Database, using the 2016 release version, with 2014 as the base year. The 56 sectors were aggregated into 30 while the 43 countries into 15 with some key industries such as automobiles, pharmaceuticals, construction, and so on. The third topic utilizes the Computable General Equilibrium (CGE) model to evaluate the economic impact of the Covid-19 pandemic on the global economy and international trade. Using real gross domestic product (GDP), population, capital, skilled and unskilled labor as shock variables, we calculated the growth rate of the above variables as from 2014 (base year) to 2020 in order to measure the impact of the Covid-19 pandemic. Our empirical results of topic 1 showed that Korea's principal export destinations included: The United States, Russia, China and Canada. The amount of value-added that the Korean Automobile sector has contributed to the exports of the Korean ship building sector is very significant when compared with that contributed to the exports of other sectors within the economy. Externally, the sector's amount of value-added contribution to the exports of Russia's mining sector (the world's largest producer of diamonds and palladium) is very substantial. In terms of Korea's bilateral exports, most of its exports to the United States are mainly in final goods while its trade with China is mostly in intermediate goods. For topic 2, the results of this analysis show that both Germany's and Korea's principal exports destination is the United States despite the countries' huge differences in value-added export (VAX) ratios which could possibly be related to both countries' gross output and intermediate consumption at purchasers' prices. The vertical specialization (VS) share of Germany's automobile sector is greater than that of Korea. Interestingly, both countries follow a global sharing arrangement. Also, a greater share of Germany's foreign value-added in final exports comes from Canada, while a greater share of Korea's foreign value-added in final exports originates from France. For topic three, Real GDP of almost all countries negatively affected as a result of the Covid-19 pandemic. The output of most countries will witness a decline due to an increased rate of unemployment. as a consequence of the pandemic, household consumption will be negatively affected. Aggregate exports of most countries will decline due to a rise in the price of aggregate exports in the domestic markets which will be higher than the aggregate world price. Research Implications: based on our first two studies, Global value chains provide opportunities for developing countries to diversify their exports and intensify their integration into the global economy. As a policy recommendation, Domestic industries need to develop the ability to provide highly valued inputs in this GVC world. Besides, the need to strengthen the input competitiveness is not explicitly limited to manufactured goods.