Japan's Export Restrictions, China’s 'COVID-19' Impact... U-Turn Company Measures Repeated Like a Stale Broth

A Time for Bold Tax Support
Preparing for Emergencies in the Global Value Chain

[Asia Economy Reporter Moon Chaeseok] Following Japan's export restrictions, and amid the novel coronavirus disease (COVID-19) outbreak originating from China, calls for a reassessment of South Korea's global value chain (GVC) have intensified. However, the government has announced a reshoring policy identical to the one from two years ago. On the 17th, the Ministry of Trade, Industry and Energy stated in the presidential work report that it would provide incentives and subsidies for factory construction to attract reshoring companies. There was no sign of drastic regulatory easing measures such as corporate tax cuts, which companies have been demanding. Experts point out the need for a cross-ministerial control tower that can push reshoring (reshoring) forward in a groundbreaking way.

◆ Doubts about the effectiveness of existing subsidies and incentives = Minister Sung Yun-mo of the Ministry of Trade, Industry and Energy announced in the work report that if Korean companies operating overseas return home, they will promote equipment subsidies, location incentives, and support for equipment automation. Minister Sung emphasized that the return of overseas companies to the domestic market represents a more fundamental change than the 'de-Japanization' of materials, parts, and equipment. He said, "We will select core target companies and provide incentives such as win-win jobs and smartization," adding, "In the long term, we will seek diversification of the world's supply chains." Specific details on the scale of equipment subsidies, contents of location incentives, and eligibility criteria for automation support are expected to be announced later.

However, the measures presented by Minister Sung on this day are largely similar to the reshoring support plan announced by the government in November 2018. At that time, the Ministry of Trade, Industry and Energy proposed policies such as ▲ recognizing reshoring companies if domestic production facilities reduce overseas production sites by only 25% (previously 50%) based on production volume ▲ expanding the scope of reshoring companies from manufacturing only to knowledge service industries ▲ expanding eligibility for location and equipment subsidies from 30 to 20 regular employees at domestic business sites ▲ supporting smart factory construction ▲ expanding corporate tax and tariff exemptions from small and medium-sized enterprises to large corporations.

The Ministry of Trade, Industry and Energy did not include tax benefits such as corporate tax reductions or equipment investment tax credits in the reshoring measures announced this time. Considering that, even after the comprehensive 2018 measures including small and medium-sized enterprises, no publicly disclosed corporate groups with total assets exceeding 5 trillion won, except Hyundai Mobis, have returned domestically, concerns remain about the low efficiency of this policy.

◆ "Simple reshoring inducement policies are insufficient" = According to the Ministry of Trade, Industry and Energy, since the enactment of the Reshoring Support Act in December 2013, the number of companies returning to Korea was 20 in 2014, 3 in 2015, 12 in 2016, 4 in 2017, 9 in 2018, 16 last year, and 3 up to January this year, totaling 67 companies. Among these, only 7 companies had more than 300 employees: 1 in 2016, 4 last year, and 2 this year.

The problem is that despite the 'urgent and serious' situation requiring a reassessment of Korea's global value chain due to Japan's export restrictions and China's COVID-19 outbreak, the government has listed unoriginal measures. This has led to criticism that the support is not an 'innovation' to ease the business environment but rather a regression compared to previous levels.

Given this situation, companies still say that if the situation in China worsens, they will target Southeast Asia such as Vietnam and consider returning domestically only as a last resort. They argue that entering Korea immediately after business difficulties in China is burdensome in terms of price competitiveness, and for large corporations, since exports account for a large portion of total sales, there is no reason to endure minimum wage increases and the 52-hour workweek policy to return domestically. Professor Jeong In-gyo of Inha University's Department of International Trade pointed out, "Policies that simply induce companies to return domestically without addressing the government's labor policy risks and Korea's lack of production cost competitiveness will inevitably be inefficient."

There is a flood of calls for more groundbreaking regulatory easing than in 2018, such as corporate tax reductions and the establishment of a cross-ministerial reshoring control tower. Professor Jeong said, "The essence of corporate reshoring policy is not labor cost reduction but discovering investment value, and easing regulations in the Seoul metropolitan area is most important," adding, "Ideas such as creating exclusive rental complexes for small and medium-sized reshoring companies in industrial complexes including the metropolitan area, recently mentioned, are essential policies."

This content was produced with the assistance of AI translation services.