hankyoreh

Cranes move freight containers in a port in Busan in this undated photo. (Yonhap)

By Cho Byeong-jung, former adjunct professor at Kwangwoon University

With a positive trade balance of around US$29.5 billion in 2021, South Korea was ranked as the world’s eighth-largest trade power and officially recognized by the UN Conference on Trade and Development as a developed economy.

But after recording a trade deficit of US$47.2 billion last year, it is threatened once again in 2023 with a severe deficit estimated at US$45 billion.

The factors behind this deficit include skyrocketing energy prices and supply instabilities resulting from the war between Russia and Ukraine. But an even more decisive factor has been the subordination of supply chains to security concerns since the May 2022 launch of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF).

Exports have fallen dramatically due to various security-related regulations and constraints on the markets in China and Hong Kong, which account for over 60% of semiconductor exports. The side effects of this are now being felt ever more widely.

Also, while a South Korea-Japan summit last month purportedly resulted in export controls being lifted, trade with Japan does not appear likely to provide much of a boost, with fears that this removal of controls could deal a blow to South Korean companies that had been hard at work domestically developing materials.

With Chinese trade subordinated to the security economy in the wake of the IPEF launch, and with Japanese trade subordinated to economic security, the worsening of the trade balance is a very real risk.

On July 5 of last year, I published a guest essay in the Hankyoreh titled “Questionably beneficial IPEF participant warrants consideration of practical gains for South Korea.” In it, I observed how IPEF’s four pillars offer little in the way of practical benefits from South Korea’s perspective.

The four pillars are (1) trade; (2) supply chains; (3) clean energy, decarbonization and infrastructure; and (4) tax and anti-corruption. What we should note here is that countries are not obligated to sign off for all four, and that there is some flexibility based on factors such as economic scale.

Some have suggested that there is little likelihood of China retaliating against members, noting how the focus of IPEF is on establishing a US-led cooperative framework focusing on a new trade agenda.

But matters like subsidies for South Korean semiconductor production in the US and strict US regulations on South Korean semiconductor factories in China are serious concerns, where the very fate of the semiconductor industry hangs in the balance.

The South Korean trade structure in the past was one where our trade surplus with the US and China made up for the chronic trade deficit with Japan.

With exports to China dropping sharply since last year, the South Korean trade deficit has continued to grow and grow. As recently as 2018, China accounted for South Korea’s largest trade surplus among countries; as of last year, it was down to No. 22.

The IPEF framework emphasizes supply chain transparency, imposing regulations where members are required to cooperate to increase transparency in key areas (including semiconductors) and boost resilience in global supply chains. While it does not name any particular country as a target, it hints at the need for partnership on regulations relating to China.

A production and supply system that unites the four main semiconductor powers (the US, South Korea, Japan and Taiwan) into a “Chip 4” alliance in the name of stable semiconductor production and supplies among partner countries carries large risks for South Korea’s production and supply chain. It’s an area where our priority should be on trade policies that are practically beneficial.

In terms of the chronic trade deficit with Japan, we need to continue working to increase the percentage of domestically produced components while applying “import substitution industry” designations to areas where there is a high level of reliance on imports.

Currently, there are around 100 strategic materials where our import reliance exceeds 70%. These are predominantly semiconductor manufacturing equipment, fine chemical raw materials, and basic materials like plastics.

The export controls imposed by Japan on semiconductor materials, components, and equipment since July 2019 have prompted South Korean businesses to pursue domestic production. The lifting of export controls last month on three items (including hydrogen fluoride) is expected to delay the domestic production process.

The path toward overcoming our chronic trade deficit with Japan lies in policies to steadily increase domestic production by applying import substitution industry designation to industries where we rely heavily on Japanese imports.

When our trade ends up subordinated to security concerns or otherwise distorted, a solution to the deepening trade deficit is no longer in reach. The launch of IPEF and the trilateral security cooperation system with the US and Japan pose grave risks of worsening our trade environment.

In terms of the IPEF’s second pillar on supply chains, we need to respond in a flexible way and ensure free trade activity by establishing supply chains suited to our economic situation. We cannot allow our trade policy to be subordinated to trilateral economic security cooperation.

Not only in semiconductors but in other areas too, we need practically beneficial policies at the government level to allow South Korean companies to engage freely in exportation and importation activities in the global market — including China.

We should also be grooming trade experts to oversee and negotiate the enactment of administrative measures and laws on trade that are damaging to South Korea. To avoid discriminatory treatment of South Korean businesses, we need a proactive, preemptive response rather than an after-the-fact prescription.

Please direct questions or comments to [english@hani.co.kr]