A Case Study on the WTO Dispute Settlement Mechanism：United States - Restrictions on Imports of Cotton and Man-Made Fibre UnderwearWook Chae & Chang-Bae Seo

1. Claims at the Panel Stage

On March 27, 1995, a formal complaint was made to the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) by Costa Rica over the restriction of imports of cotton and man-made fibre underwear imposed by the United States. A panel was established by the DSB on March 5, 1996 accordingly to the complaint made by Costa Rica on February 22, 1996, that the import restriction measures imposed by the United States on textiles from Costa Rica were in violation of the Agreement on Textiles and Clothing (ATC).

The panel concluded that the import restriction measures imposed by the United States was not valid, with the final report of the panel being circulated to WTO members on November 8, 1996. In an appeal by Costa Rica to the Appellate Body on one aspect of the Panel's conclusion supporting the United States' backdating of the effectivity of its transitional safeguard measure, the Appellate Body ruled in favor of Costa Rica on that particular point. The report of the Appllate Body was circulated to WTO members on February 10, 1997 and adopted by the DSB on February 25, 1997. In a DSB meeting held on April 10, 1997, the United States announced that it has ended the measures subject to the dispute as of March 27, 1997 and since has not reinstated the measures.

The dispute arose from complaints by Costa Rica which argued that while the Harmonized Tariff Schedule of the United States (HTSUS) provides the basis for a type of outward processing regime which enables products re-imported to the US under the HTSUS with partial exemption from US duties, the transitional safeguard measures imposed by the United States solely on textiles imports from Costa Rica were in violation of the ATC and GATT rules. Accordingly, Costa Rica requested that the Panel, on the basis of Articles 2, 6 and 8 of the ATC, recommend to the United States the immediate withdrawl of the measure. The United States, in turn, requested the Panel to reject Costa Rica's argument as it had complied with the obligations under the ATC.

The major point at issue in the dispute can be classified into 5 categories:
On the standard of review, Costa Rica requested the Panel, based on the general principles of GATT rules and the provisions of the DSU, to undertake an analysis and monitor the following five aspects: compliance with the procedural rules; proper establishment of the facts; objective and impartial evaluation of the facts in the light of the rules of the ATC; proper exercise of discretion in interpretation of the rules; and compliance with the rules. However, the United States argued that the standard of review of the "fur felt hat" case should be applied equally to the pending case and should, accordingly, be based on whether a safeguard action was properly taken at the time that the decision was made.
On the burden of proof, while Costa Rica emphasized that the burden of proof in a dispute settlement proceeding under the DSU for the purpose of determining the consistency of a import restriction measure with Article 6 of the ATC fell upon the importing Member, the United States argued that the burden of proof fell upon Costa Rica.

On Article 6 of the ATC, Costa Rica argued that the United States had failed to comply with the two principles applicable to the adoption of a safeguard measure under Article 6 of the ATC, establishing the sparing application of the transitional safeguard, and the consistent application of the transitional safeguard with the provisions of Article 6.1 of the ATC and the effective implementation of the integration process under the ATC. On the other hand, the United States argued that Article 6 of the ATC did not include more detailed procedures for investigation, nor did it provide more specific definitions to interpret the standard of law to applied and thus the appropriate standard ot apply to the importing country's determination was a standard of reasonableness.

On the determination of serious damage or actual threat thereof, Costa Rica noted that most of the information initially provided by the United States regarding the issue at hand were based on the purported existence of serious damage to the US industry and did not consider the existence of threat of injury. The United States maintained that since the ATC did not provide separate requirements for determinations of threat of injury and, thus, had not been employed in the CITA determination of March 1995, the determination by the United States of serious damage or actual threat of thereof was fully consistent with Articles 6.2 and 6.3 of the ATC.

On the existence of a causal link, Costa Rica claimed that since the United States failed to demonstrate the existence of a causal link between the supposed increase in imports and the supposed serious damage or actual threat of serious damage to the domestic industry, the United States consequently violated Articles 6.2 of the ATC. However, the United States stressed that export restraint settlements with other countries were not within the Panel's terms of reference and thus was not a matter to be considered by the Panel. They argued that the restraint on Costa Rican underwear was imposed in a broader context.

2. Panel Findings
In regard to the major points of issue in the textile dispute between Costa Rica and the United States, the Panel made the following findings:

(ⅰ) the United States violated its obligations under Article 6.2 and 6.4 of the ATC by imposing a restriction on Costa Rican exports without having demonstrated that serious damage of actual threat thereof was caused by such imports to the United States' domestic industry;

(ⅱ) the United States violated its obligations under Article 6.6(d) of the ATC by not granting the more favorable treatment to Costa Rican re-imports contemplated by that sub-paragraph;

(ⅲ) the United States violated its obligations under Article 2.4 of the ATC by imposing a restriction in a manner inconsistent with its obligations under Article 6 of the ATC; and
(ⅳ) the United States violated its obligations under Article Ⅹ:2 of the General Agreement on Tariffs and Trade 1994 and Article 6.10 of the ATC by setting the start ofthe restraint period on the date of the request for consultations, rather than the subsequent date of publication of information about the restraint.

The Panel recommended that the DSB request the United States to bring the measure challenged by Costa Rica into compliance with the United States' obligations under the ATC. The Panel further suggested that the United States bring the measure challenged by Costa Rica into compliance with United States' obligations under the ATC by immediately withdrawing the restriction imposed by the measure.

3. Claims at the Appeals Stage
On November 11, 1996, Costa Rica notified the DSB of the WTO of its decision to appeal certain issues of law covered in the Panel Report and legal interpretations developed by the Panel, pursuant to paragraph 4 of Article 16 of the DSU, and filed a Notice of Appeal with the Appellate Body, pursuant to Rule 20 of the Working Procedures for Appellate Review. Costa Rica's appeal only concerned the Panel's finding recognizing backdating the effectivity of United State's transitional safeguard measure and the Panel's legal interpretation recognizing the imposition of a backdated quota by such a safeguard measure. The United States, on the other hand, argued that a transitional safeguard measure was imposed on Costa Rica pursuant to Article 6.10 of the ATC, stressing that no provisions of the ATC or of the GATT prohibits the setting as the initial date of a transitional safeguard measure of the date of the public notice announcing the request for consultations.

4. Appellate Body's Findings
With regard to the issues raised in the appeal, the Appellate Body found that the Panel erred in law on the issue relating to the setting of the initial date of the transitional safeguard measure. In addition, it concluded that the Panel went outside the limits of the ATC by taking its assumed premise literally that Article 6.10 is "silent about the initial date from which the restraint period should be conducted" and describing the issue as "a technical question regarding the opening date of a quota period". However, the Appellate Body's conclusion leaves intact the conclusions of the Panel that were not the subject of appeal. Therefore, the Appellate Body recommended that the DSB request the United States to bring its measure restricting Costa Rican exports of cotton and man-made fibre underwear into conformity with its obligations under the ATC.

5. Implications
The dispute provides standards and guidelines on various legal and economic issues for future disputes. In addition, it provides various implications for developing countries in utilizing the WTO dispute settlement procedure by affirming the effectiveness and credibility of the procedure.
As a legal issue, the Panel's findings clearly prohibits retroactive application of the effectivity of a safeguard measure and reaffirms the need to prove the existence of increase in imports and serious damage or actual threat thereof prior to imposing a transitional safeguard measure. Also, the findings and conclusions in this dispute has become a precedent case which stresses the importance of Article Ⅲ: 2 of the GATT 1994 in order to apply an appropriate legal analysis.

With respect to the economic aspects, an importing country must render Most-Favored Nations treatment to the re-imported products, while providing a clear standard of review in showing damage to the domestic industry. Moreover, Article 6.2 of the ATC provides that an importing country must not only provide proof of burdenin determining serious damage or actual threat thereof, but also demonstrate the existence of a causal link between the supposed increase in imports and the supposed serious damage or actual threat of serious damage to the domestic industry.

Institutionalizing International Emissions Trading Under the Kyoto Protocol: Implications for KoreaAeree Kim

The international community reached agreement at the Kyoto Conference to reduce green house emissions through an emissions trading system. Following adoption of the Kyoto Protocol, the operational methods and implementation mechanisms of the emissions trading system became the subject of intense debate. At the 4th Conference of Party (COP-4) held in Buenos Aires, Argentina in 1998, a detailed work plan for an emissions trading system was agreed upon.
At this conference, Korea announced its intention to first reduce green house gas emissions on a voluntary basis and then, beginning in the third implementation period (2018∼2022) of the Kyoto Protocol, become subject to the legally binding emissions reduction target. Joining the Kyoto Protocol, however, presents significant challenges to Korea, the greatest of which are presented by ever-increasing domestic energy demand and an industrial structure dominated by manufacturers that inefficiently consume high amounts of energy. Thus, there is an urgent need for Korea to develop multi-dimensional strategies to reduce green house gases. In doing so, Korea must fully understand and involve itself in the current debate concerning actual implementation of the Kyoto Protocol.

Under the framework of the emissions trading system, a ceiling on allowable worldwide emissions is established. From this ceiling, individual emissions quotas are established for each country. Any excess or shortfall emissions may then be traded with other countries. The hope is that through such a trading system, green house emissions targets can be efficiently realized.

There are already some emissions trading systems operating around the world. An SO2 emissions trading system in the US has contributed to a successful and efficient reduction of SO2 emissions. The success of this program is attributed to a comprehensive yet thorough monitoring and implementation system. Also, through first establishing a clear set of procedures and regulations concerning trading and monitoring, the US system has achieved a high level of transparency and a reliable market mechanism. The criteria of emissions trading regulations were little changed following inception of the system, which has further contributed to stable market prices.

However, not all attempts to reduce unwanted emissions through a system of trade have been so successful. One of the main obstacles to success in other countries is difficulty in converting from the former system of environment regulations that emphasized strict caps on individual polluters to the more flexible emissions trading system.

Norway is one of only a few countries that impose a CO2 tax. Despite a widespread desire to convert its current direct tax into an emissions trading system, such hope has yet to be realized. The main obstacle is that conversion to an emissions trading system would lower government tax revenues. Those supporting emissions trading counter that the system would allow greater production levels than under the former system as trading would more efficiently allocate gases to those industries most in need of emissions producing materials. In addition, some of those supporting the introduction of emissions trading further propose a free allocation by the government to those emitters likely to suffer the greatest under the new system. Preceding emissions trading with free allocation of emissions allowances would reduce production losses and adjustment costs the new system would potentially inflict.

Even if formal agreement regarding an emissions trading system reached, this does not ensure effective implementation. Despite Switzerland's implementation of an emissions trading system for volatile organic compounds (VOCs) five years previously, the trade of such emissions remains insubstantial. The lack of vitality in the market is largely attributed to frequent change of emissions regulation criteria. Further preventing effective implementation are complex trade procedures and inflexible market operations.

In addition to the examples of success and difficulties of emissions trading be observed at the domestic level, the Montreal and Oslo Protocols represent two examples on emissions trading being implemented at the international level. While they provide much applicable knowledge in institutionalizing emissions trading under the Kyoto Protocol, there are differences between these two protocols and the Kyoto protocol. For example, in the Montreal protocol, which was adopted to control ozone depleting substances (ODS), the number of emissions sources is small. Accordingly, transaction costs are low and monitoring is relatively easy. On the contrary, emissions sources of green house gases are diverse and numerous. Thus, in order to reduce transaction cost and monitor the emissions thoroughly, streaming down the kinds and the number of emissions sources should be considered.

Despite the promise of meeting green house gas reduction targets through trading emissions allowances, many components of the trading system remain controversial. Developing countries accuse the system of lacking equity and transparency. Many countries also insist that the emissions trading system be only supplemental to real emissions reduction in each individual country. Also, there is the problem of transparency due to the difficulties in monitoring procedures and measuring some green house gases. In its operational methods and implementation mechanisms, such as participation of the private sector, reporting and monitoring and punitive measures for non-compliance need to be developed further.

One of the most pressing issues is disagreement regarding a ceiling on the total amount of emissions any country may trade. The EU continues to insist on the need for a ceiling while the US maintains that any restraints on trading will distort market principles and weaken the cost efficiency of reducing green house gases. Specifically, the EU insists that hot air, the term used to denote the amount which actual green house emissions of Russia and Eastern European countries during the first implementation period (2008-2012) fall below 1990 levels, not be included in the international trading market.

The EU desire to prevent hot air from being traded is based on the belief that it goes against the underlying principle of the Kyoto Conference, which is the reduction of green house gases. The EU also contends that hot air trade will fail to encourage development of the needed technology for emissions reduction. Furthermore, the EU claims that no reliable figures of 1990 emissions by Eastern Europe and Russia exist, thus accurate assessment of hot air is difficult.
Aside from these components, the level of participation must be decided. In order to carry out precise monitoring, a system that designates which private entities may be involved in emissions trading must be devised. Furthermore, a formal market must be established through which formal emissions brokering activities may take place. As mentioned earlier, the number and range of green house gas emitters is enormous. Thus, to enable efficient monitoring, facilitate market transparency and the exchange of information, a formal location of exchange needs to be established.

As for the issue of non-compliance, liability and punitive measures remain unsettled. Consensus has been achieved to some extent that responsibility for non-compliance should ultimately fall to the country selling a portion of its allotted emissions allowance. Giving responsibility to the seller rather than the buyer spreads incentive to meet quotas and will likely lead to side agreements insuring buyer compliance with emissions quotas. Periodic deadlines must also be established when compliance may be measured.

Emissions trading under the Kyoto protocol may face potential conflicts with the WTO as limiting trade within Annex 1 countries (developed economies) and the quota system may be found in violation of GATT's 'non-discriminatory trade principles.' However, the emissions trading system would fall under WTO rules only when emissions allowances are classified as a commodity rather than capital assets. As confrontation between the respective legal systems of the Kyoto Protocol and the WTO is likely, a method of resolving such disputes must be devised.

The international emissions trading system on green house gases is on the verge of being realized. At the COP-4, member countries agreed to reach a final decision concerning the flexibility mechanism by the year 2000. As debate on institutionalizing the international emissions trading proceeds, Korea must formulate strategies as to how to integrate itself into the coming global emissions trading system. The first step in preparation of joining the trading system is to introduce an emissions trading system domestically. Emissions trading has shown great success in efficiently reducing emissions and Korea should learn from the already existent examples. Green house gas reduction also provides an opportunity to boost industrial competitiveness through reducing energy waste. On the other hand, failure to initially introduce an emissions trading system domestically will put Korea at a disadvantage once it begins participating in the international emissions trading market.

Along with the introduction of an emissions trading system at the domestic level, it is imperative that Korea be engaged actively in international debates concerning emissions trading. Such involvement will not only allow Korea to share in molding the system in which it will soon participate, it will also provide Korea with the information needed to establish domestically the optimal emissions program. Presumably, this is the intent of the Kyoto Protocol-to provide each country with the necessary impetus to realize development that is sustainable, more effective.

A Case Study on the WTO Dispute Settlement Mechanism:U.S.-Measure Affecting Imports of Wooven Wool Shirts and Blouses from India

1. Claims at the Panel Stage
India claimed that the United States violated Article 6 of the Agreement on Textile and Clothing ("ATC") in imposing the safeguard measure. India brought the matter before the DSB, arguing that the United States nullified or impaired benifits accruing to India under the ATC. However, the United States rejected those claims, arguing that it had complied with all the requirements of Article 6 of the ATC. Major issues in the dispute are as follows:
On the issue of burden of proof, India argued that, since the transitional safeguard measure taken by the the exceptions. On the other hand, the United States argued that India, as the party making the claim, bore the burden of presenting a prima facie case of violation before panel.
On the issue of standard of review, India argued that the task of the Panel was to determine whether the United States had observed the requirements of Article 6 in good faith, not whether it had acted reasonably. On the other hand, the United States responded that the task of the Panel was to consider whether the US authorities could reasonably and in good faith have determined that serious damage or actual threat thereof existed, not whether serious damage or actual threat thereof existed as such.
On the role of the Textiles Monitoring Board("TMB"), India asserted that the United States had failed to obtain the endorsement by the TMB of the proposed safeguard measure. On the substantive requirements of Article 6 of the ATC, India argued that the US determination had not met the requirements of Article 6 of the ATC in terms of economic factors and data to be considered for determination of serious damage or actual threat thereof as well as causation. The United States rejected the claims, arguing that it had complied with all the requirements of Article 6 of the ATC.

2. Panel Findings
The Panel supported the main claims of India, and made the following principal findings and conclusions:
o On burden of proof, the Panel found that since India was the party that initiated the dispute settlement proceedings, it was for India to put forward factual and legal arguments in order to establish that the US restriction was inconsistent with Article 2 of the ATC and that the US determination was inconsistent with Article 6 of the ATC;
o On the standard of review, the Panel found that its function was limited to making an objective assessment of the facts surrounding the application of the specific restraint by the United States, and of the conformity of such restraint with the relevant WTO agreements;o On the role of the TMB and DSU processes, the Panel concluded that its was required to make an objective assessment as to whether the United Sates respected the conditions of Article 6.2 and 6.3 of the ATC at the time of the determination by the United States;o On the substantive requirements of Article 6 of the ATC, the Panel found that the United States had not met its obligations, since of the eleven economic criteria mentioned in Article 6.3 of the ATC, no information or comment was provided by the United States in respect of productivity, inventories and exports;

3. Claims at the Appeals Stage
Although India agreed with the overall conclusions of the Panel, it appealed certain of its findings of law:
o on burden of proof, India contested the Panel's finding that India had the obligation to establish that the United States had violated Article 6 of the ATC, or that it had the obligation to present a prima facie case to that effect;
o on the relationship between the TMB and the DSU process, India asserted that the Panel's finding on TMB powers denied exporting Members two important procedural rights:the right to hold consultations on a proposed transitional safeguard action on the basis of specific and factual information, and the right to a review of a transitional safeguard action by the TMB.
o on the general powers of the TMB, India asserted that the Panel made statements giving the TMB powers that went far beyond those attributed to it by the ATC.
o on whether the Panel should have made findings on all the issues raised, India argued that the determination on the two issues that the Panel did not make findings on was necessary to resolve the dispute.
The United States disagreed with India's claims, arguing that:
o the Panel correctly required India to meet the burden of going forward with the evidence;
o the Panel's discussion of the TMB and its powers was mere obiter dicta, and that in any case nothing in the text of the ATC supported India's assertion; and
o the Panel did not err by declining to rule on all claims made by India.

4. Appollate Body's Findings
The Appellate Body upheld all the Panel findings under appeal. In particular:
o On burden of proof, it agreed with the Panel that it was for India to present evidence of an argument sufficient to establish a presumption that the transitional safeguard determination by the United States was inconsistent with its obligations under Article 6 of the ATC;
o On the relationship between the TMB and the DSU, the Appellate Body did not consider the comment by the Panel on this issue to be "a legal finding or conclusion" which the Appellate Body" may uphold, modify or reverse"; and
o On the issue of judicial economy, the Appellate Body agreed with the Panel that nothing in Article 11 of the DSU required the panel to examine all legal claims made by the complaining party.

5. Implications
The dispute provides good guidelines for developing relevant logics in the future disputes regarding the legal and economic issues as follows;
First, it is found that the party initiating a dispute settlement proceeding has the burden of putting forward factual and legal arguments in order to establish its case, while the defending party as respondent has the burden of demonstrating that it has complied with the relevant conditions of application of the provisions which it invoked.
Second, in establishing damages, all the relevant variables including those specified in the relevant provisions should be examined in order to provide an accurate picture of the dynamics of the industry concerned. In doing that, the reliability and representativeness of the data is crucial.
Third, in order to justifiably impose a restraint, it is crucial to establish that an increase in imports, not some other factors, is causing serious damage or actual threat thereof in the domestic industry. To prove it, it is strongly desired to make comparison between the current situation and the situation in the absence of the import surge, which may require econometric analysis to forecast future trends in various economic indices.

Present Condition, Problems and ProgressingDirection of Chinese State-owned Enterprises' ReformSuk-Heung Suh
This study arranges progressing process, present condition of Chinese state-owned enterprises' reform, and management state and performance of state-owned enterprises and investigates new progressing direction of reform since the 15th Party Conference.

Chinese state-owned enterprises have failed in changing management mechanism and improving management state in spite of various reform efforts made until now. So in the 15th Party Conference, Jangzemin, general secretary, offered general reform plan based on 'reform and reorganization'.

Its essential contents are as follows. The first is reforming traditional enterprise management system and management mechanism in terms of individual state-owned enterprise, making modern enterprise substance aiming market economy. The second is in terms of general state-owned economy reorganizing state-owned enterprise's arrangement stategically, Which is dispersed too widely. The motive of this 'reforming and reorganizing' comes from the recognition that state-owned enterprise is suffering from difficulty because of (1)state-owned enterprise's irrational management mechanism and (2)irrational arrangement of limited state-owned capital.

It is expected that from now according to this plan the changing into stock companies of the large and medium sized state-owned enterprises will accelerate. It must be true that the changing into stock companies of the large and medium sized state-owned enterprises will more clarify property-right relation and expand management autonomy. But the problem is suggested not only the simple expanding of stock companies but also how they will realize mechamism change that is, the original purpose of stock company.

In addition, it is expected that they will greatly reorganize state-owned economy and actively propel enterprises group fostering policy through the unification and M&A of enterprises. Especially China has set the goal at fostering five to ten international super-large enterprises groups. And also it is expected that such phenomena will be more full scale as bankruptcy of insolvent enterprises and changing into share-holding cooperative enterprises, selling or lease to private person of medium and small sized state-owned enterprises. It is expected that in this process by the inevitable lay-off of surplus employees, there will be considerable social agitation and trouble.

Stubborn defense of currencies depleting foreign currency reserves led to financial crises in Korean and Thailand. This resulted in both countries agreeing to implement restructuring and liberalization measures in exchange for much needed assistance from the International Monetary Fund and other international financial institutions. Since the outbreak of the financial crisis in 1997, both countries have continued to work closely with the IMF and have made great strides toward recovery.

Demonstrating the success of Thailand's response, many foreign investors have made significant recommitment or continued commitment to the country. Investment from the EU, the US and Japan have all increased lately. In addition to the improving prospects of the domestic economy, investors are drawn to the lower labor and raw material costs offered since the fall in the value of the baht.

The Bank of Thailand announced that foreign direct investment (FDI) totalled USD 7.6 billion in 1998, the highest level in the country's history. A total of USD 2.1 billion was invested in the banking sector, with the remainder going to the real sector. Of the USD 5.5 billion investment in the corporate sector, USD 4.5 billion went towards equity investment. Japan was the largest investor in 1998, accounting for one-third of total inflows into Thailand, followed by the United States with a 17% share and Hong Kong with a 9% share.

The industrial sector received 47% of non-bank FDI in Thailand, followed by 18% in trading and holding companies and 13% in financial institutions, mostly in retail banking. Investment in the machinery and transportation sectors accounted for 31% of total industrial investment in 1998, followed by 17% going to the oil refinery sector, 16% in the ferrous and non-ferrous metals sector and 9% in the petrochemical sector.

The majority of foreign investment to Thailand in 1998 was used to boost the the financial structure and efficiency of local firms. Almost none went towards increasing production capacity. This trend will likely continue until recovery has been realized and positive growth has continued for a number of years. Meanwhile, worries of a widespread takeover of key Thai industries by foreign investors have proved largely unfounded. In a survey of 50 leading industrial firms in Thailand, only 14% of foreign investment in 1998 was characterized as investment intended to rest corporate management away from domestic control.

To further take advantage of the benefits of foreign investment, in June 1998, the Thai Government announced a series of measures designed to help revive the economy by attracting increased foreign investment. Such measures would also indirectly improve efficiency and the competitiveness of Thai industries, and decrease unemployment through the creation of new jobs.

These measures included the relaxation of restrictions on the location of export promotion zones. Such zones, in which foreign companies targeting exports out of Thailand may set up operations and receive various incentives, may now be established anywhere in the country, with the local governments given largely free reign as to what incentives they want to provide. Foreign companies will be able to import most raw materials and other intermediary goods intended for exports, and also machinery using higher technology, duty-free. Meanwhile, guidelines governing the evaluation of expansion projects by foreign companies have been clarified. Such investment must surpass the former company's one-year sales by 80% and increase employment by either 500 employees or by 50% of the prior level. For projects meeting these criteria, an income tax waiver for 3 years will be provided if the project is located in the Bangkok area and up to 5 years for projects outside of the capital.

Applications for these expansion projects must be submitted to the Board of Investment (BOI) no later than December 31, 1999.Other amendments under the Alien Business Laws that will boost foreign investment and presence in the Thai export sector will also be studied and implemented. The BOI will cooperate with the public and private sectors to study which agricultural and agro-industry activities can be added to the list of activities in which foreign companies may be eligible to receive incentives. Research will be conducted to determine measures to encourage foreign companies to provide greater levels of training, engage in increased levels of research and development and to apply environmental protection measures more widely. An environment will be created to revive the real estate sector by enabling foreign companies to purchase a specified number of existing buildings, within a given time frame. The liberalization of BOI Investment Laws and Alien Business Laws will be implemented to ensure all of the above take place.Despite these increased incentives to foreign investment in Thailand, Korean direct investment in Thailand has continued to fall, while that of Japan and most advanced western nations increase. This is largely due to Korea's own credit crunch and falling credit ratings making finding needed financing impossible.

As for Korean companies already operating in Thailand, performance has varied according to the type of sales targeted. Broadly, export-oriented Korean affiliates in Thailand have outperformed those affiliates relying mostly on domestic Thai sales due to the domestic economic difficulties. However, even export-oriented affiliates have not escaped difficulties as financial support from their parent companies back in Korea has been substantially reduced, forcing them to often totally fend for themselves. Particularly, in the case of those exporters that must first obtain raw materials from Korea, troubles of the home-based companies have interrupted a smooth supply of raw materials.
Meanwhile, those companies relying on sales to the domestic Thai market have had to try to reverse strategies and increase export sales.

Overall, the coping strategy of Korean affiliates operating in Thailand is an increase in the localization ratio of production. However, Thailand shows the greatest promise of recovery among those Asian economies suffering from the financial crisis. Thus, to capitalize on the eventual revitalization of the economy Korean companies must maintain a Thai presence and implement and pursue new investment strategies vis-a-vis the country. However, such investment is unlikely to be implemented unless government support is forthcoming. Such support is exactly what Japanese government is actively providing its own country's firms operating in Southeast Asia. Similar action by the Korean government would ensure continued competitiveness by Korean firms in the region and prevent Koreans from missing out on the substantial opportunities provided by still promising potential of Thailand.

The introduction of the Euro and its impact on Korea-EU tradeChong-Wha Lee, Cheol-Won Lee, Hoo-Young Chung
The introduction of the euro will likely be the most influential event affecting the international monetary environment since the institutionalization of the Bretton Woods system. Based on the economic size of the euro area, its integration of the intra euro markets, and the commitment to a stable currency by member countries, the euro will eventually, if not immediately, challenge the dominant position of the US dollar in world financial markets.

Prospects are for a stable and strong euro. Supporting this view are the sound fundamental economic conditions of the euro countries and strong initial euro demand coming from the integration of European capital markets. Furthermore, European economic recovery beginning last year continues and to expected to last well into 1999. Euro countries in 1999 are expected to realize a current account surplus of USD 200 billion; whereas the US is expected to run a deficit of more than USD 250 Other factors spurring robust euro demand will be the European Central Bank (ECB) billion. placing top priority on price stability. Thus, the ECB is likely to follow the anti-inflationary policy of the German Bundesbank.

Among the euro zone countries, the positive effects stemming from the euro will be summarized as follows. The elimination of transaction costs and hedging costs will increase the amount of internal trade. Price transparency in goods, services, capital, labor markets will increase and accelerate the unification of the markets and this will enhance competition among firms. The euro making pricing comparisons of all products sold inside the euro area instantaneous will boost competition and cause prices to merge at levels likely lower than existed in the pre-euro days.

The euro will increase competition among financial institutions as it pressures the area's financial markets to unify. Assurance of one interest rate and one exchange rate will boost euro-wide financial market activity as both liquidity and merger and acquisition activity increase. In addition to the increased interest of investors within the euro in financial markets, foreign investors are also expected to show higher interest in the euro area market.

The ECB will be in charge of EU-wide monetary policy whereas fiscal policy will remain under each individual member's control. Therefore, in case of symmetrical shocks, such as a fall in oil prices, an EU-wide response is needed to respond to the changed financial conditions and the member countries will normally rely on the ECB's single monetary policy. The recent(3rd December 98) interest rates cut in the euro area adopted to respond to the growing world economic crisis is one such example. However, when asymmetric shocks occur, such as the unification of Germany, and changes are only needed by individual members, then that member alone will implement the needed fiscal measures.One of the largest potential disagreements within the euro area may center around the proper exchange rate of the new currency. The ECB prioritizes price stability above all else. Meanwhile, the currently left-leaning governments dominating major European capitals want to see policies that prioritize job-creation. Based on last month's lowering of interest rates, it seems as though the job-creationists currently have the upper hand as the ECB was coerced into lowering interest rates.
As for exchange rates, again conflict arises between the ECB, which favors a strong euro, and individual governments, which are more concerned with maintaining the competitiveness of exports. However, both the ECB and the individual euro area governments are more concerned with intra euro conditions than with international factors. Thus, the euro exchange rate will not be given a high priority in economic policy making. This 'benign neglect' may lead to high fluctuations between the euro, the dollar and the yen.

Yet another area of conflict between euro authorities and individual member governments is the 'growth and stability pact' which will subject any country with a budget deficit exceeding 3% of GDP to fines. As individual euro members may now only rely on fiscal measures to deal with domestic problems, many euro members find this measure too restrictive. While economic conditions are currently relatively benign in Europe, once recessions hit, the 'growth and stability pact' is highly likely to be a hotly debated topic.

The goal and indeed the likely effect of the euro is stronger European growth and in the long-run, the region's demand for import will likely increase. However, as intra-euro competition increases due to the previously-mentioned factors, thereby boosting the competitiveness of euro firms, the area's exports are also likely to increase, pushing a number of non-euro exporter aside.While in the mid- to long-term, the introduction of the euro will likely boost European growth and thereby korean export opportunities in the region, in the short-term, Korean firms are likely to be challenged by the changes in euro trade structure. Furthermore, as intra-euro area competition heightens, this may further increase the use of anti-dumping measures against korea. Thus, even if the euro proves to be a strong currency relative to the won, in the short-term, the euro area will likely prove to be a difficult market for Korean exporters.

The combined domestic market capitalization of all 15 EU equity markets is currently half of that in the US. However, this gap will surely narrow as the huge European market is largely unified under the euro. Futhermore, a leading factor behind the preference for dollar denominated securities in international trading is the currency's low exchange rate and interest rate volatility.

However, as liquidity and size of the European financial market increase, the euro's interest rate and exchange rate volatility will likewise decrease.As European financial market instruments are to grow more advanced and numerous, the interest of European investors in investment products outside of conventional bank deposits and loans will certainly increase. This increased sophistication of euro investors, compounded by the likely higher economic growth for the area, portends higher foreign direct investment by euro countries. To capitalize on this opportunity, Korean firms and financial institutions should accelerate ongoing reforms and implement a transparent system that will lure the optimal amount of euro investment.

Ultimately, the euro is expected to decrease the international dependency on the dollar as a currency of settlement, especially in Eastern and Western Europe and in Africa. Thus, the Bank of Korea should prepare for the increased euro usage by increasing the share of euros in its foreign reserves. The central bank of China currently keeps 60% of its foreign reserves in dollars and 15% each in deutsche marks and yen. However, China plans to change its foreign reserve holdings to 40-50% in dollars and 30-40% in euros. In addition to public institutions, private financial institutions must also alter the composition of their portfolios based on the future importance of the euro. As the euro is likely to be a strong currency, the tendency is to denominate assets in euros and debt in dollars. According to the German Deutschebank, in the long term, 30-40% of world financial assets will be denominated in euros and the share of euros in the foreign reserves of the world's central banks will amount to 25-30%.

In raising the level of euros in its reserves, Korean public and private entities should give strong consideration to issuing euro denominated bonds as the euro will likely continue to have low interest rates. International organizations, such as the Asian Development Bank(ADB), is considering a large euro exposure and the government of the Philippines is considering issuing USD 50 billion in euro denominated bonds.

While it would be premature to conclude that the euro will soon gain stature in international markets equal to that of the dollar, the euro is off to a strong and promising start. Furthermore, major international financial institutions have implemented or are on the verge of implementing major buy orders for the currency. Korea should not allow itself to be forced into a catch-up policy concentring its euro policy. Instead, Korea must rise to the challenge to realize the benefits the advent of the euro can bring.

TILF and Ecotech have been pursued in an unbalanced way during the APEC's development. While developed economies emphasize the role of the private sector in promoting Ecotech, developing economies argue that governments should also play at least a complementary role in order to maintain the momentum of the APEC trade and investment liberalization process (TILF) that has accelerated recently. Redirection of developed economies' ODA policies in favor of APEC could alleviate financial limitations of Ecotech, promoting many concrete and practical programs and balancing Ecotech with TILF. In this context, we have discussed the possibility of the existence of a positive link between international trade and aid. Also, a recipient economy's tariff can be reduced by more aid. Empirically, we found that donors with high export/GNP ratios provide less ODA to recipients with smaller export shares. While all donors provide more ODAs to recipients with lower per capita income, except the U.S., Japanese ODA policy is directed toward APEC and France and German are against it. The U.S and U.K have no particular favor or disfavor on the APEC.

Therefore, as further liberalization of TILF programs will bring about higher trade interdependence, more aid from APEC developed economies could not only improve its own welfare but also promote APEC liberalization process. An obvious implication is that strengthening of Ecotech through more ODA toward the APEC and acceleration of TILF are mutually re-enforcing.

Currency Crisis and the Difficulties for Korean Overseas Affiliates: A Case Study on the Restructuring of Korean Affiliates in ChinaJong-Keun Kim

For the nearly ten years that preceded the recent financial crisis, and especially so following the establishment of formal diplomatic relations between the two countries in 1992, Korean foreign direct investment (FDI) in China had been rapidly increasing. However, the respective number of cases and amount of Korean FDI in China during the initial three quarters of 1998 fell 64.4% and 21.2% from the same period of 1997 to 160 cases and USD 423.54 million (Figure 1).
Figure 1. Korean Overseas Direct Investment in China(Units: US$ Thousand)

Note: Based on actual investmentSource: Ministry of Finance and Economy, 'Trend in International Investment and Technology Inducement'

Korean overseas affiliates in China are faced with the urgent need to restructure to adapt to the deteriorating economic situation in Southeast and East Asia. Top of the list of difficulties are over production, the difficulties of targeted Asian markets and slower growth of domestic consumption in China. Also necessitating restructuring and a reassessment of strategy is that the Chinese maintenance of the yuan's dollar peg despite the depreciation of most of the other regional currencies has slashed the amount of exports of Korean affiliates in the country. The United States has also hurt exports from China as it has tightened its textile quotas. The last hurdle that needs to be overcome is the regional credit crunch caused by the financial crisis.

Based on case studies, we discerned various patterns of restructuring by Korean companies in China to overcome and adapt to the deteriorating situation in China. One such strategy is the altering of employment structure, largely through implementing cost-cutting layoffs. Another strategy is to increase production efficiency and boost investment in high value-added production. This is part of an overall focus on efficiency and profits rather than market share and revenue. Finally, Korean companies in China are restructuring manufacturing and marketing divisions under one management structuring in order to increase responsiveness to the customer.

At the same time, Korean affiliates in China are diversifying export markets. Electronic components manufactures are turning to developed countries as new export targets, avoiding the past concentration on the markets of Southeast Asia and Russia. In addition, the toy manufacturing industry is moving its production facilities inland, away from the relatively affluent Chinese east coast in order to reduce labor costs. At the same time, such companies are attempting to find new export markets. Labor intensive industries, such as toy manufacturing, are successfully moving production sites as labor intensive production requires little infrastructure while sales are often implemented through long and dependable relationships with buyers.

Meanwhile, Korean affiliates in China relying largely on exports back to their home country are striving to enlarge domestic market share. Since the process cannot be done quickly, these affiliates are also trying to cut additional expenses by reducing local firm size while searching for new export markets.

As for financing, due to the deteriorating Korean economy, local Chinese banks are increasingly reluctant to lend money to Korean affiliates. Therefore overseas affiliates are pleading with the Korean government to intervene to improve lending conditions in China.

The difficulties of most affiliates aside, a few affiliates of the largest Korean conglomerates and a number of other Korean affiliates, mostly toy and textile manufacturers that have been able to maintain a stable sales networks, are actually increasing investment in China. Increased chaebol investment is based on the enormous potential demand of continued Chinese economic development. Meanwhile, the successful small- and medium-sized firms are mostly those riding the tides of economic boom in the United States and Europe, through which they continue to source their investment needs.
A number of overseas Korean affiliates in China are facing potential bankruptcy and are attempting to sell assets to stay afloat. Such measures begin with attempts to attract fresh capital investment, but often resort to the selling of often valuable assets, the proceeds of which go towards revitalization and restructuring measures. Finding and negotiating with potential buyers of such assets has been difficult, and even when sales have been agreed to, one or both parties have often found it difficult to live up to the terms of the hastily prepared sales contracts.

At the same time, FDI to China from developed countries is expected to increase while Asian investment appears poised to stagnate over the next few years. If Korea follows this trend, then much of its investment, which has not yet reached the stage where the full benefits can be realized, will wither and eventually be lost. Furthermore, Korean affiliates in China will have a hard time maintaining competitiveness with the increased presence of multinationals from developed countries. Therefore, in order to see the fruition of widespread investment in China and also maintain competitiveness vis-a-vis multinationals in China, the government needs to provide some form of financial and technical assistance to Korean affiliates operating in China.

International Financial Markets:Trends, Recent Developments, and Policy Issues

Ⅰ. Introduction (Yunjong Wang)
As a ripple effect of the East Asian Financial crisis, factors resident in the emerging markets that fueled instability forced an increasing number of countries to seek rescue from the International Monetary Fund. Financial crisis and recession spread and deepened, this ultimately led adbanced economies to undertake coordinated interest rate cuts. Partially as a result of the interest rate cuts, conditions in the current international financial market environment have improved since Russia declared a moratorium last August. Nevertheless, there continue to exist forces that could quickly bring a return to the chaos seen in 1997 and 1998.

First, signs of widespread insecurity remains in financial markets of the advanced economies. Despite the U.S. Federal Reserve Board three rounds of lowering interest rates, low-risk asset management remains the preferred investment strategy. Further, as the Long Term Capital Management(LTCM) crumbled last September, hedge funds have undertaken serious restructuring efforts. While, the collapse of the hedge funds will reduce enthusiasm for the risky investments that contributed to the financial crisis, the collapse has also severely damaged the health of the banks that did business with the hedge funds. As for Japan, the huge amount of non-performing loans led Moodys to downgrade the countries sovereign credit rating from Aaa to Aal last November. The resulting higher borrowing costs are affecting negatively Asian financial markets as Japanese interest rates rise.

From a short-term standpoint, the introduction of the euro may further exacerbate instability in international financial markets. The prevailing view is that the euros emergence will lead to USD 500 billion to 1 trillion worth of liquidity in international financial market. As countries adjust the composition of their foreign-currency reserves to the new currency and as the euro challenges the dollar as the currency of settlemint, short-term volatility of the foreing exchange market can be expected. As a result, the European nations will need to pay attention to the increase in the voltility of the dollar and euro if both monetary authorities will maintain a policy of benign neglect.

Financial anxiety within the emerging markets appears likely to persist for at least the short-term. Emerging markts ard largely high return-high risk propositions, Thus, if international investors continue to perfer safer investments, these emerging markets will continue to fall victim to al liquidity shortage. For this reason, 1999 will have to be a year in which the policy coordination to pervent continuation of an international financial crunch will rely on the initiatives of advanced economies.

To this end, this report seeks to educate and increase awareness of recent events in world financial markets based on the review of the most important current changes in international financial markets, and further discuss and suggest policy directions for the future. In Chapter Ⅱ, we will look at the formation and historical developments of international financial markets. In particular, we will focus on the euromarket and its effect on international capital markets. Through understanding the structural changes of the international financial environment and the internationalization of financial markets, we seek to identify the fundamental causes to the East Asian financial crisis. Furthermore, we have added our analysis of the most recent developments in the world financial markets and the capital flows into the emerging markets. In Chapter III, we have analyzed the effects the of the Asian financil crisis on international financial markets. We have descrigbed how the Asian financial crisis came about, spread and affected capital flows of emerging markets. The discussion leads to what extent the irregularty of capital flows results from the structural instability of the world financial markets. In Chapter IV a thorough analysis is provided concerning hedge funds, including our demonstration of how their recent downfall begun by the collapse of Long Term Capital management (LTCM), was primarily caused by the failure of exorbitant investments in the emerging markets. In Chapter V we have provided forecasts concerning the chnges and movements in international financial markets given the emergence of the euro. We place emphasis on how the euro will affect the exchange rate fluctuations of the U.S. dollar. We devote the final chapter to discussing current changes in international financial markets, the factors that may lead to instability in the future and the pressing policy issues and possible directions regarding the near future.

Ⅱ. Historical Developments of the International Financial Market(Jae Joon Lee)
The primary benefit of freer capital movements in international financial markets is that allocative efficiency of the investment can be attained at the international level. A significant amount of international liquidity has been supplied by the euromarket as the market includes a huge array of traded financial instruments, including bonds, stocks and derivatives. And because it is borderless within Europe and free from all national and most institutional regulations, the euromarket itself is close to being a perfectly competitive market. Likewise, the euromarket has developed financial institutions that are capable of providing creative and varied financial intermediary services.

Since the end of the second World War, the United States economy has gained preeminence and its currency has been the international currency of payment settlement. In adition to the need for and alternative to the dollar, there were a number of other contributing factors to the development of the euromarket : the intensification of the Cold War since the latter half of the 1950s, the nullification of foreign exchange controls in Western Europe since the 1960s, the oil shocks of the 1970s providing oil-exporting nations with an enormous surplus of dollars and the ability of investors to evade the haphazard regulations have led to continuous growth of the euromarket. Furthermore, since successful financial innovations instituted since the 1980s, including the U.S. Federal Reserve Boards change in monetary policy, emergence of floating rate-based financial commodities in response to the increasing volatility of interest rates, expediency of the settlement system, and the emergence of the U.S. International Banking Facilities (IBF), have likewise led to euromarket growth.

There are four underlying causes behind the drastic changes in world financial markets in the last 20 years. First, financial instruments and strategies have grown increasingly advanced and numerous. Second, market integration has grown as investors in advanced markets have looked for increased opportunities and as demand for capital in developing markets has grown.Third, traditional differences among financial institutions such as banks, securities firms, and insurance companies have been eroding. Fourth, mergers and acquisitions activity has resulted in an increasing world dominance by supra-national financial groups. These structural changes are molding a new international financial environment with investors more open to international markets.

The volume of capital financing in international financial markets prior to the Asian financial crisis in 1997 had been at an all-time-high. However, this all ended upon the outbreak of the currency crisis in Thailand in July. The issuance of government bonds in the fourth quarter of 1997 decreased 40 percent on average against the level of the first three quarters of the year.

Such pattern is prevalent throughout Asia and has had a strongly negative effect on international financial markets. However, the volume of international financial transaction volume improved in the first and second quarters in 1998.The roller coaster continued as the Russian crisis and worries of a recurrence of the Asian financial crisis caused investors to again fly to low-risk assets, a resulting spread of credit risk in emerging bond markets, ensured that the international financial crisis persisted. At this juncture, investors sitting on highly leverage positions largely bailed on or readjusted their bets. This resulted in increased fluctuations of major country bond yields and the yen/dollar exchange rate.
Since the Asian financial crisis, such reevaluation of credit risks in the emerging markets have affected capital flows into the markets. Therefore, in order to boost confidence in emerging markets and to resume capital inflows, the following points will need to be tackled. First, the governments of emerging markets should address financial structure weaknesses immediately. Second, lending institutions and investors should alike analyze credit risks more thoroughly. They should also discriminate between investment decision based on more asset-inherent factors instead of investment decisions based on more regional factors. Such strategy would reduce risk to one region and restrain contagion effects in the international financial system. Third, advanced economies and international financial institutions should institute policies that foster a stable supply and maintenance of liquidity in order to increase stability in international financial markets.
The massive fluctuations of capital flow in and out of emerging markets also must be addressed. While to an extent capital flows were based on differing levels of financial and corporate health, they were also undoubtedly exaggerated and exacerbated the growth and then contraction of affected markets. Some countries have instituted various forms of capital controls in the wake of the Asian crisis as a way of preventing such abrupt capital flight in the future. However, the costs of such barriers may be even greater than the gains in stability.

III. The Asian Financial Crisis and its Spillover Effect on the International Financial Market (Sang-Uck Loh, Woo Jin Kim)
Thailands financial crisis prompted by the Thai Bahts devaluation on July 2, 1997 developed into a financial crisis for the whole Asian region. Its spill-over effects on the world economy surpassed all expectations. The Asian economies, which had experienced an incredible period of high and sustained growth are now experiencing unprecedented recessions. This abrupt reversal has cut sharply into growth of the world economy in 1988 and has had a strong impact on international financial markets as it prompted a sudden reversal of the net inflow from international capital markets into emerging markets. Receiving the blunt of the blame for the crisis are the growing current account deficits, economic slowdown and rigid foreign exchange rate system; however, the structural instability of international financial markets should not be overlooked as a further cause.

The greatest impact of the Asian financial crisis on international financial markets is the sudden reversal of the capital inflows to the emerging markets, largely a result of the drastic capital outflow from the Asian region. This is where the greater impact of the Asian crisis can be clearly differentiated from the Mexican in late 1994. While there was an extended period of net capital inflows into both regions prior to the crisis, much of the huge outflow from Latin America in the crises relocated to other emerging markets.However, most of the large net outflow of capital from Asia following the regions crisis did not end up in other emerging markets, but instead fled to what were perceived as less risky markets.
Generally, the past strong capital inflow to emerging markets was the result of changes in the international financial market environment and its structure.The major recent changes included the low interest-rate policies of advanced economies, the globalization of international commercial and investment banks and widespread financial sector liberalization by emerging markets. When we observe the reversal of capital flows in three separate instances of financial crises since the 1980s, including the most recent Asian financial crisis, a question has to arise - whether current international financial markets can sustain stable capital flows into emerging markets and whether investors are accurately assessing risk. There has been a plethora of discussion and research recently attempting to clarify the structural instability of international financial markets.

More than a year has passed since the onset of the Asian financial crisis, but there is no clear sign of recovery. However, liquidity is again abundant in international financial markets due to the advanced economies low interest-rate policy and this has helped some emerging markets, including Asian markets to again gain access to a degree of international capital. Asian economies are also doing better as a result of the continued restructuring efforts and capital will likely begin flowing more strongly into the emerging markets in the near future, including Asia. The speed and the volume of capital inflows, however, would probably differ with those of the past.

Based on the particular development of the Asian financial crisis, it seems premature to expect international financial market mechanisms to rationally evaluate investment risks and provide sustained and sufficient liquidity to emerging markets. Further, as the Asian crisis clearly demonstrated, international capital market integration makes it highly likely that a new crisis in one country will have a widespread effect.

As a result, future capital flows of emerging markets may not be as drastic and reckless as they were in the past. Rather, they will take place on a more selective and steady basis. The investors will want to make investment decisions based on thorough due-diligence of the associated risks based on the most accurate of available information. Investors are unlikely to blindly invest in a broad range of areas, but instead invest in a specific country of interest.

Therefore, those emerging markets targeting foreign capital must improve the efficiency of their financial and industrial sectors through structural reforms and thereby meet the standards required by the international investment community.

Ⅳ.Long Term Capital Management (LTCM) Crisis and its Effect (Young Woo Lee)

The fury of the Long Term Capital Managements collapse last September was intense enough to shank up the worlds financial markets. Anxiety that the LTCM crisis would have a domino effect as the banking and investment institutions heavy losses in the hedge funds would create chaos in the financial markets had an immediate negative affect on liquidity and led to a chain of stock collapses in the New York Stock Exchange (NYSE), as well as in European and Asian stock markets. As a countermeasure, the 15 major creditors decided to financel a USD 3.6 billion emergency-rescue package for LTCM through the mediation of the Federal Reserve Board. The LTCM crisis continued to be an inexorable source of the loss of liquidity in the U.S. financial market. While the Feds lowering of interest rated allowed markets to recover, the effect of the collapse of LTCM still linger.

One of the main lingering effects is that many international investment banks have reconsidered their risk management models and discussed the need for stronger means to regulate hedge funds. Standard ＆ Poors announced that it would scrutinize the credibility of the firms that had invested in the hedge funds, taking the LTCM as the hedge funds, taking the LTCM as the initial case of the investigation. The U.S. Secretary of Treasury Rubin issued orders for the Department of Treasury, Federal Reserve Board, Securities and Exchange Commission, and Commodities Futures Trading Commission, and the Federal Deposit Insurance Company and other financial supervisory bodies to conduct thorough investigations of the trading between the hedge funds and banks. Prior to the LTCM crisis, the U.S. government did not pursue a positive regulation of hedge funds. However, in the wake of the collapse of LTCM, it now supports a certain degree of regulation, supervision and/or dissemination of information regarding hedge funds. At the October 5 Conference of G22 and the December 7 Finance Ministerial Conference of the G7, the participants decided on a set of standards to rigorously enforce the regulation and supervision of the hedge funds and their financial trading.

Some may characterize the Feds intervention of the LTCM crisis as a way to bring future stability to financial markets. This was the first case of the Feds intervening to give emergency-rescue-fund support to a non-financial institution. Financial markets appear to have evaluated the LTCM crisis intervention as an action taken to prevent a disastrous affect on financial markets. Regardless of the Feds motives, withholding financial institutions from incurring bad investment cost goes against market principles and if investors believe such bail-outs will be forthcoming in future crises, this could create widespread moral hazards.

Although there is a strong tendency to consider hedge funds as the refuge of rouge speculators, they have a diversified range of activities, and influence. In addition to their speculative activities, hedge funds invest in debt-restructuring funds, foster technological development and emerging market growth; hedge funds bring increased liquidity to financial market, thereby encouraging economic activities and a reallocation of capital towards efficient firms and countries their arbitrage trading.

In spite of this, hedge funds do pose a problem in financial markets as they are often associated with highly leveraged and speculative positions in the pursuit of high profitability. As evidenced in the LTCM crisis, the collapse of a single hedge fund can sap liquidity and vitality from the entire financial market. Thus, over-reliance on unfettered hedge fund activity may further increase the volatility of the markets. Extreme short-term mobility is another problem of hedge funds. As seen in the Asian financial crisis, hedge funds move faster than average investments. This is largely due to their strategy of short but huge bets based on market-beating accessibility to information and mobility. Therefore, the trading strategy of the hedge funds often leads to mob psychology in financial markets as other investors often copy the positions of large and successful hedge funds.

In the end, however, despite the negative affect hedge funds may bring, it is a question of whether it is even possible or practical to regulate hedge fund activity. Regulating hedge funds would be an immense task due the incredible amount of positions hedge funds take and the frequency with which they change these positions. Currently, there is discussion on institutionalizing the variable deposit requirement (VDR) to prevent excessive capital flows.However, such talk may not translate into action. Furthermore, if other countries do not institute the same regulations, then such controls will have little effect other than to push investment to less regulated foreign markets. In the end hedge funds can only partially be regulated foreign markets. In the end,hedge funds can only partially be regulated and for only a short period. As it is unrealistic to eliminate hedge funds, they must be accepted as part of the international financial structure. We can only seek to indirectly regulate the hedge funds by inducing financial institutions that trade with them to disclose the volume and content of their trading so as to enhance transparency as much as possible.

V. Euro and its Effect on the International Financial Market (Chae-Shick Chung)
Since the demise of the Bretton Woods system, the U.S. dollar has taken the dominant position in international trade and capital markets. However, the emergence of the European Monetary Union and the euro will likely result in two major currencies in world market. The emergence of a European financial market with a unified currency comparable to that of the United States in size will intensify the pressures for enlargement and securitization already underway since the early 1990s in international capital market. This will further contribute to increased international capital mobility and capital flows as advanced economies likely call for increased capital liberalization. Thus, the developing countries should consider undertaking sound fiscal and macroeconomic policies, coupled with sound policy towards the financial and foreign exchange markets.

In order for the euro to properly serve the needs of international financial markets as does the U.S. dollar, Europe must maintain currency stability, implement structural reforms in the labor market and construct a framework for an EU-wide payment system. Such improvement of the eurolands financial infrastructure and creation of a further diversified spread of financial assets will together satisfy the demands for the euro-denominated financial assets. will together satisfy the demands for the euro-denominated financial assets. In turn, this will increase stability of the euro and its stature as the currency-of-settlement in international markets. As the euro eliminates the foreign exchange risk within its market, thereby decreasing intra-euro transaction costs, it is likely to boost investment in the region. The recent low-interest policy of euro countries and the likelihood that euro authorities will target long-term low interest rates in the region should stimulate growth in the stock market, thereby advancing the regions financial markets to a new level of sophistication and activity.
As bond pricing throughout euro nations has been simplified and currency risk has disappeared, bond prices will eventually become merely a function of risk. The euro will ultimately decrease the issuing cost of governmant bonds and also the transaction costs for investors. This in turn would contribute to the eventual unification and consolidation of all euro bond markets.

As for European corporate bonds and their volume, there remain issues that need to be taken up due to the problems associated with regulatory and tax impediments. However, the future looks promising for corporate bonds as a stimulation of the bond markets is expected, with the resulting increasingly competitive environment pressuring bond underwriters and issuers to proceed with greater efficiency. Better performance of pension funds would also improve the lot for the European bond markets. Regardless, as the bond markets are likely to reduce financing costs, this will reduce the appeal of bank loans - the customary financing method of the past. However, the big bank domination of credit markets and their involvement in merger and acquisition activity and other securities-related areas are new areas where banks may thrive.As the Japanese yen risks being pushed aside by the newly emerged euro, there is speculation that Japan will make an effort to internationalize the yen.

The yens role as an international currency has been thus far limited due to the underdevelopment of its government bond markets. In response, Japan is considering such inducement as non-resident tax exemption (incurred on the dividend from short-term trading), transactions fee exemption for securities firms investing in government bonds, stimulation of secondary-markets for short-term securities, and improvement of the distribution and settlement structures for government bonds and short-term money markets. The internationalization of the yen could help Korea through boosting the efficiency of its private and public asset management. If Japan were able to truly establish the yen as an alternative to the dollar and the euro in international markets, this would reduce the wide fluctuation of the yen.The European Monetary Unions unified financial markets under the euro will unleash further advanced economy demand for capital liberalization.Therefore, the Korean government will need to complete its restructuring with expediency as well as make preparations if Japan appears poised to encourage use of the yen in international markets. Furthermore, Korea must plan for infrastructure developments in response to the drastic liberalization of foreign exchange controls.

Ⅵ. Recent Developments in International Financial Markets and the Policy Issues in Korea (Yunjong Wang)
Since the early 1990s, the mobility of international capital has increased due to the increasing demand for capital in emerging markets, growth of foreign direct investment, and developments in derivative markets. Such change is the direct result of widespread capital account liberalization efforts and the increased rate of growth of emerging markets. In the latter half of 1997, however, there was a decrease in the volume of private capital flows into emerging markets chiefly due to the East Asian financial crises. According to capital-flow analysis of the Institute of International Finance (IIF), the expected 1998 capital inflows into emerging markets are USD 158.2 billion, a 34.5 percent decrease from USD 241.7 billion in 1997 and the net volume of capital flows for 1999 is expected to remain similar to that of 1998.

A significant share of the international capital that was withdrawn from Asian markets since the regions crises has flown into other emerging markets. However, the government bond prices of the emerging markets have again plunged as investors flew to quality assets in response to the rising Russian crisis beginning in July of 1998. This phenomenon continued until the middle of October, when the worlds financial markets were stabilized by the U.S. Federal Reserve Boards two rounds of lowering interest-rates which the Fed justified by expressing concerns about the imminence of a credit crunch in the U.S.Although the world financial market is expected to become relatively stable in 1999, there still remain downside risks, including the possibility of a further collapse of hedge funds, continued financial anxiety in Wall Street and London, a depreciation of the yen if the Japanese financial reforms and economic boosting measures fail, latent factors causing further instability in emerging market (especially Russia and Brazil), and the unknown impact of the euro.Thus, skittishness is prevalent throughout international financial markets and the Korean government must design efficient and constructive measures to counter challenges that arise as external conditions inevitably change. To do so, Korea must pay close attention to movements in financial markets both at home and abroad and should develop policy options to circumscribe external shocks that may reverberate in the Korean economy.

In 1999, Korean government policy towards international financial markets should focus on 1) stabilizing the won, the current account balance and economic growth and other factors that are instrumental to the accomplishment of macroeconomic goals, 2) exhausting all efforts to boost international creditworthiness, 3) boosting access and financial instruments of the foreign exchange market in preparation for capital account liberalization, and 4)maintaining stability in the foreign exchange markets through improving the structure of external debts.

Short-term interest rates will remain an important policy instrument to stabilizing foreign exchange markets and achieving targeted inflation rates.Where the won faces strong appreciation pressure, Korea can easily lower short-term interest rates.

Foreign Direct Investment Policy: Policies of Foreign Countries and their Lessons for Korea- Investment Incentives -
Subsequent to the currency crisis that began in the end of 1997, the Korean government has actively pursued a policy objective of attracting FDI as a way to overcome the current economic crisis. In its efforts to attract foreign investments, the Korean government has enforced the new Foreign Investment Promotion Act on November 17, 1998, providing foreign investors with improved supporting services and increased incentives for investment to the surprise of many multinationals already operating in Korea.

Incentives for foreign investment stipulated in the New Foreign Investment Promotion Act can be summarized as follows:
First, opportunities for tax reduction or exemption have largely been expanded. A foreigner investing in businesses with advanced-technologies or in service businesses that support the competitiveness of domestic industry, for example, is eligible for a 100% tax exemption for an initial 7 years and 50% reduction thereafter over 3 years. The period for tax benefits begins at the first year showing positive earnings, reflecting the fact that during the initial stages of investment, earnings tend to be negative.

Accordingly, in the case where a foreign invested enterprise (FIE) pays dividends to its parent company abroad, the withholding tax on the dividends will be reduced by 100% and 50% for the initial 7 years and the following 3 years, respectively. Local taxes, including aggregate land tax, property tax, acquisition tax, and registration tax on properties owned by FIEs for business purposes will be reduced or exempted for 8-15 years by 50-100%. In addition, customs duties, value added tax, and special excise tax on imported capital goods will be exempted for the above businesses.
Foreign investors investing in other businesses are also eligible for the same tax benefits, once designated as a Foreign Investment Zone (FIZ) depending on the investment amount and job creation effects, such as FDI amount exceeding 100 million U.S. dollars.

A second feature of the New Foreign Investment Promotion Act is the inclusion of opportunities for rental fee reduction or exemption. Central and local government properties are open to foreign investors for rent for up to 50 years, allowing foreign invested firms to use necessary factory sites for a maximum of 50 years, free of charge.

Third, subsidies for various purposes, such as employment and job training, are provided to foreign investors by a local government in partnership with the central government. The Act also requires the central government to fund local governments in support of their FDI inducement activities.

However, in spite of these numerous provisions, the Act leaves many holes when it comes to actual implementation. Thus, this paper analyzes successful cases of foreign countries in attracting FDI. Examples and lessons of how to efficiently manage an FDI incentive system are drawn from the U.K., Malaysia, and Singapore.
Based on the study, we propose three ways to improve Korea's FDI incentive system.

First, incentives need to be provided more flexibly through consultations, or negotiations if necessary, with individual foreign investors, rather than by the previous uniform criterion. This will enable public funds for incentives to be used more efficiently, while allowing the Korean government to be more flexible in attracting potential foreign investors.
Second, more in depth analysis of the spillover effects of the investment is needed, especially in the areas of industrial and regional development. If substantial spillover effects are found to exist, then commensurate incentives need to be put in place.

Lastly, the autonomy of local governments in terms of FDI incentives need to be further enhanced, thereby expanding the role of local governments in inducing foreign investments. At the same time, possible harmful competition among local governments should be avoided in providing the incentives.