proposal

Japan-ROK Cooperation: Not an Option but a Must

Chey Tae-won

Japan and South Korea are often said to be "near but distant countries" to each other. Although the two countries are geographically closest and share democracy and a market economy, unfortunately, the long-standing historical and political conflict is still a massive obstacle to the further development of the bilateral relationship.

Until now, this conflict may not have been a big problem. Thanks to the stable global conditions and the vibrant domestic economy, both nations experienced fast economic growth. However, about ten years ago, the growth model began to become unstable from its foundation. Japan and South Korea are now standing at a critical crossroads. Should we refuse to change and follow the path of decline? Or should we make a bold decision and move on a new path of leap-forward development? We are required to choose between the two options.

Last month, at the Japan-ROK Business Conference held in Tokyo and at the 29th Nikkei Forum "The Future of Asia," sponsored by the Nikkei Shimbun, I asked the question from the floor, "Is it okay for Japan-ROK relations to stay as they are? Isn't a new attempt needed?" What I wanted to convey by asking this question is the harsh reality before our eyes - "If we stay with folded arms, Japan and South Korea may perish together."

Both Japan and South Korea must change. I will later explain about this in detail. All that I want to say at the outset is that I believe a Japan-ROK partnership is the only strategy that could lead the two countries to sustainable co-prosperity.

Lately, we feel the winds of change blowing. Last year, the leaders of Japan and South Korea met for the first time in 12 years and resumed their shuttle diplomacy. Since then, the chill in bilateral relations has begun to ease gradually. During the past year, eight summit meetings took place, and all export restrictions lasting four years have been lifted. People-to-people exchanges have become active, with 10 million tourists traveling between the two countries last year. Their number is expected to further increase this year.

Numerous symbolic changes have occurred, but it is too quick to think everything is okay. For example, for about ten years from the late 1990s, the relationship between the two countries was at its zenith politically and culturally. Unfortunately, however, this did not last long. One reason seems to be that the trust between the people of the two countries was not fully grounded.

People around me are concerned about how long the current reconciliatory atmosphere will continue between the two countries. Both governments have reached significant political compromises, but cooperation tangible to both peoples have yet to bear fruit Opinion polls in both countries also suggest that mutual distrust remains inveterate. I do not think I alone worry about the possible deterioration of bilateral relations.

Now is the time to change our thinking. Japan-ROK cooperation is not a "choice" in the sense that it is "acceptable" but a "must" for both countries to survive. If we can empathize with why Japan-ROK cooperation is a "must" and not a "choice," I believe it will constitute a cardinal turning point in recognizing each other as "partners" rather than "competitors."

Then, what is the urgent situation that requires the two countries to cooperate?

First, both Japan and South Korea are caught in a low-growth trap. Labor, investment, and total factor productivity (TFP) are essential to economic growth, but all these elements continue to decline. In both countries, the birth rate is falling, and the population is aging. Japan's productive-age population has been declining since 2008, while South Korea's since 2020, creating a vicious cycle in which the population decline reduces consumption and investment. The declining birth rate and aging population are happening globally, but the speed of these phenomena is very high in Japan and South Korea. In addition, the low labor productivity of both countries also matters; it accounts for about 60-65% of that of the United States.

Secondly, the international free trade system that has long sustained the two countries' national growth is no longer effective. Today, the markets are divided by region, and competition is growing over smaller markets. In other words, the whole world is turning into a red ocean. Furthermore, as countries introduce protectionist policies and enforce their norms, compliance costs for export companies in Japan and South Korea are soaring.

Lastly, both countries, dependent on cheap and stable energy sources, must introduce next-generation new energy amid geopolitical conflicts and climate change. In particular, the AI ​​revolution will likely cause a sharp increase in future electricity demand; concurrently, both countries must realize a decarbonized society―the challenge of dealing with two contradictory issues in parallel. According to the International Energy Agency (IEA), electricity demand for global data centers is likely to rise to 1,050 terawatt-hours (TWh) in 2026, double that in 2022, or roughly the same size as Japan's annual electricity demand. As the cost of clean energy continues to rise, both countries that have depended on fossil fuels will likely be required to make more stringent efforts.

A paradigm shift is taking place, to address the question of which traditional methods no longer work. Can the two countries deal with this challenge on their own? Can they survive while regarding each other as competitors as they have so far? If things continue as such, both countries will see their financial resources shrink, and government fiscal policies will be limited. In particular, financial resources for welfare services to support the senior population will be affected. However, the government could not readily raise tax rates, because such measures could hurt the private economy and accelerate the outflow of capital and human resources. Japan and South Korea have allocated hundreds of billions of dollars to address the declining birth rate over the past 20 years. They need to look back on how much they have achieved. It is apparent that if the situation remains intact, the international status of both countries will decline.

Japan and South Korea have followed similar paths of national growth over a long period. Therefore, they are facing very analogous structural challenges. Wu and Yue are in the same boat―Fate has put us in the same boat. We must row together and use our wisdom to cross the river of crisis.

Again, why should "Japan and South Korea" join forces?

First, both countries' economic structures have shifted from a competitive relationship to a mutually complementary win-win relationship. Over the past six months, both countries' chambers of commerce studied the effects of trade liberalization, including the elimination of tariffs, between the two countries. The study showed that after three to five years, both countries would mutually benefit in the areas of GDP (South Korea 0.37%, Japan 0.14%), consumer welfare (South Korea $4.8 billion, Japan $7.8 billion), and industrial production (agriculture, manufacturing, and general services). This study is an analysis focused primarily on the elimination of tariffs. If we also factor in the potential synergy effects in core industries such as advanced technology, startups, and energy, the resulting economic impact would be significantly greater. If South Korea joins the CPTPP, Japan and South Korea can advance further cooperation with the economic zones across Asia through multilateral economic partnerships, including RCEP, IPEF, and CPTPP. Both countries will have more occasions to advance into third countries.

Secondly, the furtherance of bilateral cooperation will enable both countries to play the role of a "rule setter" from the viewpoint of economic security. As geopolitical conflicts become acute, supply chain stability is weakening, and protectionist trade barriers are increasing. If we are content with being a "rule taker" as before, this will be equal to ignoring potential risks. We should lead in creating rules, establish them as global institutions, and possess the power and resilience to deal with external risks.

The size of an economic zone in which a country is dominant is related to whether it can assume the role of a rule setter. If Japan and South Korea realized economic integration, a giant economic zone would emerge with a GDP of $6 trillion and nearly 200 million high-income earners enjoying more than $35,000 per capita. The shared values of both countries, such as the market economy and democracy, will act as a catalyst for further enhancing economic integration.

Third, bilateral economic cooperation will prevent the Japan-ROK relationship from reverting to the tragic past. It will also provide a powerful driving force to open a future-oriented path. Japan and South Korea share a historical past that cannot be erased. For this reason, if both sides fail to continue active efforts, we will be trapped in a vicious cycle of conflicts. The past few years of chilly bilateral relations have led to a sharp decline in trade, investment, and people-to-people exchanges, dealing an additional blow to the already weak growth momentum. Now, it seems that the people of both countries are well aware that we should not return to the past.

Of course, political efforts are necessary to overcome the historical question. However, trust between the two nations must also be restored. We must start by discovering areas of tangible cooperation and building success stories. After World War II ended, Germany and France established a framework for joint management of coal and steel (European Coal and Steel Community, ECSC); they transformed the vicious cycle of competition into a virtuous cycle of coexistence. Their efforts resulted in the forming of a larger community known as the EU. It took 40 years to establish the EU, but Japan and South Korea do not have that kind of time allowance.

I will also be specific on what cooperation Japan and South Korea should carry out.

Institutional integration, such as South Korea's accession to the CPTPP, is a significant step. However, this will take time because it involves intergovernmental negotiations for coordinating multiple interests. Therefore, I think that we should first achieve results at the private level. If we can gain public trust by doing so, I think that as a result, an atmosphere will appear that will help to expedite intergovernmental cooperation.

Specifically, let me propose the following three as priority areas of bilateral cooperation.

The first is the areas capable of creating business synergy. In this context, there are more than a dozen areas worth consideration, but if we narrow them down to a single field where Japan and South Korea could complement each other's weaknesses and maximize their strengths, LNG and clean energy (hydrogen, ammonia) will be a promising business point.

As for LNG, the shares of Japan and South Korea in the total global demand will likely decrease. In 2015, the share of the two countries combined was 46%, but by 2030, it will drop to 16%. Joint procurement is considered a way for Japanese and Korean companies to continue obtaining LNG at low cost. Since Japan's demand for LNG is estimated to decrease due to the resumption of its nuclear power plant operation, small- and medium-sized enterprises will have a keener incentive to participate in joint procurement. According to our research results, if Japan and South Korea jointly purchase LNG from a Middle Eastern supplier from which LNG is available at a low price subject to a long-term large-lot contract of 10 years or more, we could save 1.8% to 4.4% on the procurement price basis. For example, if we jointly procure both countries' demand of 20 million tons of LNG, of which the contracts need to be renewed by 2027, we can save about $500 million in procurement costs. Joint procurement of both countries' total demand of 100 million tons would give rise to $3 billion of procurement cost savings.

Hydrogen and ammonia businesses are even more promising. In traditional energy sectors such as LNG and oil, Japan and South Korea were obliged to remain rule-takers despite our enormous buying power. Meanwhile, the situation is different in the hydrogen and ammonia markets. These markets are yet to mature, and Japan and South Korea, as the largest importers, have a perfect chance to take the lead in building the market order. Expected clean hydrogen imports in 2035 by Japan and South Korea will amount to about 8 million tons, accounting for about 20% of the global clean hydrogen flow. There are many related areas in which the two countries could cooperate, such as joint procurement, joint development of suppliers, and setting new rules, to name just a few.

For example, Japan and South Korea run many small-scale coal-fired power plants, promoting ammonia co-firing power generation as a climate change countermeasure. If either of them were to set up a hub terminal for joint operation, they would not have to import clean ammonia separately. Large vessels could transport ammonia from the supplier to the hub terminal, and after bulk breaking, smaller ships could carry it to coal-fired power plants in both countries. According to our research, this means would create a maximum of $140 million in shipping cost savings as of 2030. Moreover, each importing firm could save on building storage tanks separately.

A step further would include establishing an international hydrogen and ammonia exchange. The hydrogen market is still in its early stage of development; many countries, including China, Germany, and the Netherlands, are rushing to establish exchanges. If South Korea and Japan, the leading actors in the market, were to establish an international exchange center, we could take the lead in reorganizing major normative systems such as clean hydrogen standards, technical standards, and price indexes. Inter-government cooperation is also crucial. Harmonizing the different clean hydrogen standards in the two countries would realize business involving diverse companies.

The second area is concerned with building an ecosystem for future generations. Unlike past generations who have navigated the growth curve, the young people of both countries are losing hope in a stagnant society. We, the current generation, must size up the market while building the grounds for the development and prosperity of future generations.

From this perspective, the creation of startup infrastructure is the most urgent challenge. Unfortunately, the entrepreneurial environment in Japan and South Korea is the most fragile one in the world. Looking at the number of unicorns with a corporate value of over $1 billion, there are only seven and 15 in Japan and South Korea, respectively, compared to 655 in the United States, 169 in China, and 52 in the United Kingdom. Fortunately, since last year, efforts have been underway at the governmental and private levels to align and integrate startup platforms. In May of this year, the Japanese and South Korean governments announced the establishment of a $100 million "joint startup fund," launching corporate venture capital (CVC) initiatives for matching private investors with numerous startup entrepreneurs. However, we should not be content only with the move in our countries. We should jointly foster startups in advanced markets like Silicon Valley in the United States.

Prerequisites for fostering startups include capital and the constant influx of talented people, who should be allowed to move freely. The period of working only in one place is now over. The future generation of experts, such as entrepreneurs, content creators, and IT engineers, are working as "digital nomads" moving from one place to another. This overlaps with the situation where so-called "workation (work + vacation)" has become a global trend since the spread of COVID-19. Japan and South Korea, with their top-tier tourism, transportation, medical, and ICT infrastructures, are perfect places for workation.

From this perspective, it is noteworthy that both Japan and South Korea recently introduced the "Digital Nomad visa," allowing overseas professional talent to stay for up to six months (Japan) to two years (South Korea) without obtaining a work visa. If the two governments jointly implemented "Digital Nomad visa" programs, it would further facilitate the exchange of talented people between the two countries and attract talent from third countries. If they can enter Japan and South Korea without difficulties and stay longer, it will stimulate production and consumption activities in both countries. In the long run, such population mobility will help address the issues of population aging and declining birth rate both countries are facing.

The last area for bilateral cooperation I want to discuss is response to the declining birth rate and aging population―social issues common to Japan and South Korea. Both countries define them as issues to address within the government policy framework, but this approach alone does not suffice. There are limits to government budgets, and companies also face significant difficulties in securing necessary talent.

To address the declining birth rate, Japanese and Korean companies may share their successful efforts because they have nurtured similar corporate cultures. Recently, some Korean companies have paid childbirth subsidies to their employees and the Korean government has exempted tax for them. This can be said to be a "win-win-win" case for government, companies, and employees. If the Japanese side has practicable examples to share, they may benefit the Korean side, and, if necessary, both sides may propose a joint policy to each other's governments.

We need to change our thinking by considering the aging population problem not as a "burden" but as an "opportunity." By using older people's capacity, we will likely overcome the labor shortage in both countries; there will be an opportunity to explore the silver economy. The rapid aging of the population is a global trend. Therefore, it is also an opportunity for Japanese and Korean companies to discover other promising markets related to the silver economy. There are chiefly two practical approaches to this end.

The first approach is to promote senior people's participation in economic activities. In Western Europe, employment standards for seniors have been changed from "age" to "ability" so that capable "active seniors" can continue to work. By raising or abolishing the retirement age, or introducing job-based employment such as re-contracting after retirement, those countries seek to ensure that institutional memory is wholly preserved and inherited within the company. Since the reform of the corporate employment system is bound to provide large social impacts, Japan and South Korea should study the strengths and weaknesses of the system, examine it as a whole, and make a proper decision on reform.

The second approach is to improve nursing care support for aged people. Japan has developed a home-care medical system to improve access to medical care for aged people who find it difficult to go out; Japan's experience and system would also benefit South Korea. I believe AI and robotics will be the key to future elderly care. Earlier this year, Goldman Sachs predicted that the development of AI would make humanoid robots a life technology following electric vehicles and smartphones. Many hope that the natural language processing capabilities of large language models (LLMs) will reach a high level, making it easier for the elderly to use various services such as finance, medical care, consumer goods, and public transportation. Since 2019, South Korea's SK Telecom has offered an AI speaker to as many as 17,000 senior people. Through this arrangement, the corporation provides a wide range of care services, from psychological counseling to emergency rescue services. More recently, I heard the news that an AI chatbot service for the aged would begin in Japan through cooperation between Japanese and South Korean IT companies. Conversely, Japan and South Korea, which suffer most from population aging, could offer suitable test beds for attempting various elderly-oriented technologies.

In summary, the areas where we can achieve results at the private level are, first, areas where business synergy occurs; second, areas for helping the development of future generations, and third, areas that contribute to resolving common social problems.

I have already said what I think on crucial subjects. However, to solve the current challenges, it is not enough to only recognize the issues as such and contemplate the areas where we can cooperate. We must delve into those challenges and build a framework to put solutions into practice. From this perspective, I would like to again propose a "ROK-Japan economic cooperation platform." Various stakeholders, including researchers and entrepreneurs from both countries, will participate in the platform, and a broad range of discussions will be held, from the selection of areas of cooperation for feasibility studies, third-country case studies, and developing concrete implementation plans. One of its missions will be to form a consensus from discussion results and submit policy recommendations to both governments.

Next year will mark the 60th anniversary of the normalization of diplomatic relations between Japan and South Korea. I believe that we are now at an important turning point for opening up a new horizon for Japan-South Korea economic cooperation. We must start preparing now so that both countries can celebrate the 60th anniversary full of hope.

(Chairman and CEO SK Inc.)

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