Third, bilateral economic cooperation shows more complementarities. China's imports from South Korea have also grown. The trade volume of the six main import categories---mechanical, electrical, video and audio equipment and spare parts, chemical industrial products, base metals and products, plastics and related products, mineral products and optical medical products---increased 19.5 percent in 2006 after a growth rate of 23.4 percent in 2005. Now the six categories account for 92.2 percent of South Korea's exports to China. In recent years, South Korea's textile materials and products exports have decreased, while base metals and products and chemical industrial products exports increased, which shows that South Korea's export structure with China has changed.

The change shows that the bilateral trade structure has moved from low-added-value to high-added-value products and from raw materials to finished products. Bilateral trade relations have entered a new stage of a more level division of labor.

Fourth, China's trade deficit with South Korea reached a record. With the enlargement of bilateral trade, China's trade deficit has continuously increased. In 2001, the trade deficit was $10 billion; in 2006, it reached $45.3 billion. Now, South Korea is the country with which China has the biggest trade deficit.

According to South Korean statistics, since 2003 it has had its second largest surplus with China, following the United States. One reason for China's increasing trade deficit with the ROK is the structural element. Although the production of labor-intensive products throughout the world has been moved to China, key spare parts and key skills and technologies for these products still rely on imports from Japan and South Korea.

Expanding the market

Meanwhile, China's export growth rate cannot catch up with its import growth rate when trading with South Korea. Besides, Chinese companies have not studied the South Korean market thoroughly enough, so that they cannot produce commodities that are suitable for South Korea's market demands and consumption habits.

Moreover, South Korean companies pay more attention to exports than imports. Chinese products face tariff problems and other difficulties when they are exported to South Korea. Actually, the products traded do show the complementarities of the countries' trade structure, because over 70 percent of these products are industrial products. A trade balance can be realized within years only if both countries pay equal attention to imports and exports.

Fifth, South Korean companies' direct investment in China is very active. Statistics from the Ministry of Commerce of China show that number of ROK-invested projects has maintained a yearly average growth rate of 16 percent, while the actual invested volume has increased 20 percent every year since 2001.

As early as 2004, South Korean companies' actual investment reached $6.25 billion, ranking No. 1 among all foreign investors in China. Even in the last two years, the country's investment projects and contract volume have remained at the top; only its actual investment volume is lower than that of Japan. According to China's statistics, South Korean companies' total direct investment in China reached $34.89 billion by the end of 2006.

China's rapid economic development creates bigger market demands, which have attracted more and more big ROK companies' investment in larger amounts. To them, east and south parts of China are perfect investment destinations. While the investment amounts grow, the technological content also increases. In addition, more investors are large South Korean companies, rather than small and medium-sized ones.

Frequent and strengthened communication and complementarities between the two economies ensure that there is a broad space for cooperation between the two neighbors.

First, investment in each other's country will promote the development of bilateral trade. When the South Korean investment environment improves, more and more Chinese companies will directly invest in that country. Although investment in South Korea has higher costs for Chinese investors, they can get technologies, markets and distribution channels. By the end of 2006, China's direct investment in South Korea was only $900 million. But as the bilateral trade grows, China's investment will increase too. And if the FTA is established, the pace of trade and economic development will be faster.

Second, the communication among research institutes and scholars will benefit the healthy development of bilateral trade and the economy. They can find the problems in the bilateral trade and offer solutions, which will promote the smooth development of trade.

Third, cooperation in other fields, such as tourism, education, information, environmental protection and technology, will tighten bilateral ties, as well as promote mutual understanding.

Fourth, the FTA will benefit the long-term development of bilateral trade and the economy, which is the reason that both countries regard setting up the FTA as their top agenda item, and leaders of both countries have expressed their sincerity to cooperate.

Currently, a nongovernmental study of the FTA between China and South Korea has finished, and joint research by officials and scholars from the two countries has started and made elementary achievements. It is believed that after the establishment of an FTA, the bilateral trade and economic ties and friendship will be promoted to a new stage.

The author is director of Department of Asian-African Studies at the Academy of International Trade and Economic Cooperation under the Ministry of Commerce