Grant Period : Sep 2025 - Aug 2030
Faculty : KIM Younghoon
Can export controls backfire, leading to an increase (decrease) in productivity in the targeted (imposed) country? And how might this effect vary across industries? I use the responses of Korean and Japanese producers to the 2019 Korea-Japan Trade Dispute to answer these questions.
In 2019, Japan announced export controls against South Korea for national strategic items, leaving enforcement up to Japanese officials. Although no export restrictions were imposed in practice, the potential risk alone triggered substantial changes in the imports, exports and production of both Korea and Japan. Korea’s imports from Japan declined significantly, irrespective of whether items were subject to the announcement. However, Korea’s imports from Japan decreased disproportionately in sectors where Japan had been the primary supplier, and Korean producers’ revenue also increased in these sectors, suggesting import substitution. Notably, Korea’s exports to the rest of the world expanded more in these sectors while prices declined, suggesting increased productivity.
Motivated by these empirical findings, I structurally estimate the strength of scale economies in each industry, leveraging the variation in exposure to Korea’s substitution away from Japanese goods, both across and within industries. This project provides novel evidence that export controls can benefit the targeted country, driven by scale economies. It also demonstrates the heterogeneous strength of scale economies across sectors, offering direct implications for industrial policy.