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Under new conservative President Yoon Suk-yeol, South Korea looks to forge closer ties with a range of economies in the Indo-Pacific. gettyimagesbank |
Government urged to seek ways to diversify export destinations
By Kim Bo-eun
HONG KONG ― South Korean President Yoon Suk-yeol is gearing up to reorganize the country's trade relations by reducing its dependence on China and building "supply chain alliances."
The world's No. 2 economy is by far South Korea's largest trading partner, accounting for 25 percent of total trade last year, followed by the United States, whose share stands at 15 percent.
But under Yoon's new conservative administration ― which is seen as being more hawkish towards China ― Korea is looking to forge closer ties with a range of economies in the Indo-Pacific.
The shift is set to take place as the U.S.-led Indo-Pacific Economic Framework (IPEF) materializes. While it is not a free trade pact, the trade rule-setting initiative is set to boost the economic alliance among members, which include South Korea, Japan, Australia, India, Indonesia and Vietnam. The framework was launched via a virtual meeting during U.S. President Joe Biden's visit to Tokyo, Monday, after his stop in Seoul for a summit with Yoon.
During Biden's visit to Korea, the two leaders pledged to strengthen their countries' partnership not only in regional security, but also for their respective economies. The U.S. president visited Samsung Electronics' chip plant in Pyeongtaek, south of Seoul, immediately after he arrived in the country on Friday, in what was seen as a symbolic move to highlight South Korea's cooperation in the global chip supply chain. "The (South) Korea-U.S. alliance must evolve in an era in which economic security is key," Yoon said at a press conference following his meeting with Biden on Saturday.
Securing supply chains for critical goods and materials has emerged as a priority for many countries following the coronavirus pandemic and amid heightened tensions between China and the U.S.
But data shows Korea has a long way to go.
In the first three quarters of last year, 3,941 out of 12,586 items that South Korea imported had a minimum 80 percent dependency on a particular country, data from the Korea International Trade Association showed. Some 1,850 items, or almost half, had at least an 80 percent dependency on China.
"Whether it be rare earth or noble gas ― there are sufficient reserves elsewhere outside China," said Kim Ba-woo, a senior researcher at the Korea Institute for Industrial Economics & Trade.
"The problem is the cost of extracting the resources elsewhere is likely to be higher due to environmental regulations."
South Korea's government is seeking to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), whose signatories span economies in North and South America, as well as countries in the Asia-Pacific.
The Brookings Institution, a U.S. think tank, estimated that Korea could gain $86 billion annually by joining the trade bloc, as it would boost the country's role "in Asian and North American supply chains by lowering tariffs and non-tariff barriers with economies such as Japan, Malaysia, Mexico and Vietnam."
All 11 member nations of the CPTPP need to approve new members, with negotiations expected to take at least a year.
South Korea will also increase economic cooperation with countries in Southeast Asia after joining the Regional Comprehensive Economic Partnership (RCEP), which went into effect in January.
RCEP is the world's largest trade bloc, with 15 member states centered on the Association of Southeast Asian Nations (ASEAN), but also includes non-ASEAN economies.
The election of Yoon as South Korea's president has raised questions over the future direction of relations between Seoul and Beijing.
He has taken a tougher stance on China than his predecessor Moon Jae-in, but South Korea's reliance on Chinese imports, especially those used in its world-leading electronics sector, will be hard to break.
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Samsung Electronics' chip plant in Xi'an, China / Courtesy of Samsung Electronics |
Electrical and electronic equipment account for the largest portion of imports from China, including unfinished semiconductors that are completed in Korea.
South Korea imported $17.93 billion of semi-finished chips from China in 2020, which made up 39.5 percent of the total value of imported semiconductors.
The country also relies on China for rare earths ― a key component for electric vehicle (EV) batteries. Korea is among the world's top five global producers of EV batteries. Rare earth minerals are also used in semiconductors and cars.
Semiconductors and rare earths are among the four items the Biden administration has identified as critical strategic assets, with electric vehicle batteries and pharmaceutical ingredients being the others.?
Major economies are scrambling to ensure stable supplies of these items, especially after the disruptions brought on by the coronavirus pandemic.
Countries such as Germany, Japan and the U.S. have sought to diversify their rare earth imports from China to other countries such as Brazil and Vietnam.
However, both countries still largely lack the technology needed to produce and refine the rare earth materials in a form that can be used for industrial purposes. China produced 85 percent of the world's refined rare earths in 2020.
"Import diversification of key items for which many countries have relied on China will depend on how fast the US and EU jump into development projects, and what the regulatory scheme looks like in the countries with the resources," Kim said.
Environmental regulations in Southeast Asia are not stringent at the moment, but are likely to become stronger due to growing global demand, Kim said. China has benefited from decades of rare earth production free of such regulations.
"Meanwhile, items that can be immediately produced by making infrastructure investments, and other items that do not require an industrial ecosystem, would likely be substituted in a short amount of time," the researcher said.
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South Korean Foreign Minister Park Jin, in the upper photo and on the right in the bottom photo, speaks in Seoul during a video call with his Chinese counterpart Wang Yi in these images provided by South Korea's foreign ministry, May 16. Yonhap |
In a phone call with his South Korean counterpart on Monday, China's Foreign Minister Wang Yi said both countries should jointly oppose attempts at decoupling and maintain the global supply chain.
Wang said China's massive market offers potential for Korean businesses, while cooperation in the digital economy, artificial intelligence and new energy would lead to greater benefits.
Moon Jong-chol, who is also a research fellow at the Korea Institute for Industrial Economics & Trade, said it was possible for countries in the Indo-Pacific to "partially" substitute imports from China in "limited areas" when considering the tech capabilities and resources each had.
"The shift has been possible, for example, in the assembly of smartphones, which relatively does not require high levels of technology," he said. "But China will still play a considerable role in trade with Korea."