[COVID-19 Transformation] "Reshoring Incentives: Deregulation for Large Corporations... Financial Support for SMEs"

Regular Expert Panel Discussion

[Asia Economy Reporter Moon Chaeseok] President Moon Jae-in declared his intention to transform the Republic of Korea into a "world factory for advanced industries." In the process of global value chain (GVC) restructuring following the COVID-19 pandemic, the government plans to focus its national capabilities on promoting the domestic return of Korean companies and attracting overseas advanced industries. The government presented a vision to pioneer the post-COVID era by increasing corporate reshoring and foreign direct investment (FDI) through the enhanced "K-quarantine" premium.

However, it is also true that pessimism is widespread due to high corporate taxes, rigid labor flexibility, strict 52-hour workweek regulations, and labor costs less attractive than those in China and Southeast Asia, which create high barriers. Companies may be reluctant to bear the enormous costs of relocating facilities and enter Korea. Asia Economy organized a roundtable discussion with trade experts on the theme "Global Supply Chain at a Crossroads," focusing on GVC and industrial structure reform policy directions. Due to the spread of COVID-19, the discussion was held in print form.

[Participants (in alphabetical order)]

▲ Kang Naeyoung, Senior Researcher, Trend Analysis Office, Korea International Trade Association ▲ Jeong Ingyo, Professor, Department of International Trade, Inha University ▲ Choi Wonmok, Professor, Ewha Womans University Law School ▲ Heo Yoon, Professor, Graduate School of International Studies, Sogang University

Naeyeong Kang, Senior Researcher, Trend Analysis Office, Korea International Trade Association.

Acceleration of De-Chinaization of Global Production Bases
Focus on 'Onshoring' Using Multinational and Domestic Companies for Regional Outsourcing
Need to Sign Multilateral FTAs like USMCA and CPTPP to Reap Benefits
Opportunity to Leap in Global Supply Chains Using K-Quarantine Status

-What do you think are the main characteristics of GVC changes Korea will face after COVID-19?

▲ Kang Naeyoung = Due to the global spread of COVID-19, there has been a decrease in demand for overseas intermediate goods and disruption of production networks, so GVC stagnation is expected to deepen further. After the COVID-19 pandemic, with global border closures, a redesign of global supply chains has become inevitable, accelerating the de-Chinaization of global production bases. Beyond diversifying global supply chains, the importance of reshoring by multinational companies has increased. Based on the Fourth Industrial Revolution centered on advanced countries, the 'smartization' of manufacturing and the servitization of manufacturing will also expand.

▲ Choi Wonmok = Companies are facing a situation where they must switch to materials, parts, and equipment from their own countries or specially allied countries. This means fundamentally reshaping the GVC. Many countries and companies that were considering revising China-centric investment and GVC supply policies due to the US-China trade dispute will actively begin investment and supply chain transitions. Supporting the return of the medical industry to achieve self-sufficiency in medical supplies will become an international practice.

▲ Heo Yoon = 'Onshoring' (regional outsourcing) using multinational and domestic companies is already gaining attention. Onshoring refers to outsourcing by domestic and foreign companies within Korea's territory. Reshoring means converting 'offshoring' (offshore outsourcing) done to reduce costs into onshoring. Even when offshoring, production or parts procurement is shifting from 'farshoring' (long-distance outsourcing) far from the home country to 'nearshoring' (near-distance outsourcing).

Professor Jeong In-gyo, Department of International Trade, Inha University

-How should the Korean government or companies respond?

▲ Heo Yoon = For Korean companies to reshore their supply chains, there must be exceptional incentives like those offered by Japan or the United States, but realistically, this is hard to expect. With suffocating regulations, high corporate taxes, and hostile labor-management culture as they are now, attracting foreign companies, domestic companies, or repatriating companies is impossible in our current situation.

▲ Choi Wonmok = In the long term, it should be noted that the efficiency of the international GVC division of labor system is being distorted due to artificial incentives by various countries, and the costs are borne by all companies worldwide. The government needs to form or join GVC blocks between countries that consider corporate convenience and establish new GVC safety nets. A safety net means signing high-level multilateral FTAs so that companies in member countries can smoothly procure materials, parts, and equipment within the region and enjoy free trade benefits when trading finished products regionally. The government should strengthen economic community relations with countries that share core values and stable partnerships with Korea and build GVC lines among these countries. Korea could join the United States-Mexico-Canada Agreement (USMCA), an economic community among the three North American countries, or dramatically improve relations with Japan to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and instantly enjoy CPTPP's GVC supply chain benefits.

▲ Kang Naeyoung = We should strengthen the domestic production base by supporting reshoring of multinational companies centered on core processes. Since 2016, the US, Germany, and Japan have been reshoring advanced industries. In these countries, a virtuous cycle operates: 'domestic production → increased exports and decreased imports → increased facility investment and income → job creation and domestic demand activation.' Especially in the US, as a result of actively promoting reshoring policies such as corporate tax cuts, tax benefits, and deregulation, 482 companies on average returned home annually over the past five years (2014?2018). German manufacturing companies show a reshoring tendency ten times higher in technologically innovative manufacturing groups compared to other companies.

Choi Wonmok, Professor at Ewha Womans University Law School

-What strategy and stance should Korea take in its post-COVID relationship with China? Do you think accelerating de-Chinaization is appropriate?

▲ Heo Yoon = Due to SARS and COVID-19, the Chinese government has suffered a significant loss of trust in the international community. The possibility of renewed US-China conflict is high, and China's national risk is on the rise. It is time to find reasonable alternatives to hedge against China risk. I agree that de-Chinaization should be accelerated, but it will incur considerable costs. The Chinese government may impose retaliatory penalties on companies leaving China due to environmental or labor issues. If de-Chinaization is decided, a gradual and meticulous exit strategy over several years is necessary.

▲ Kang Naeyoung = It is necessary to shift the export strategy to China focusing on high-level intermediate goods, capital goods, high value-added consumer goods, and service exports. China is increasing the domestic share of general intermediate goods based on the red supply chain, changing its import structure from general intermediate goods to higher value-added intermediate and capital goods. Since the Association of Southeast Asian Nations (ASEAN) region is replacing China in assembly production, exports of general intermediate goods should expand from China to the ASEAN region.

▲ Jeong Ingyo = From Korea's perspective, the de-Chinaization discussion is much more burdensome than for other countries. This is because Korea's industrial structure and value chains are closely linked with China, and China's price competitiveness and domestic market potential remain high. It is not easy to give up the nearest large market, but the risks China poses cannot be ignored.

Huh Yoon, Professor at Sogang University Graduate School of International Studies

-What specific policies should the government implement to induce large corporations to return?

▲ Heo Yoon = I judge that large corporation return policies are impossible under the current policy stance. Rather, focusing policy on lighter mid-sized and small companies would make return inducement policies somewhat effective. Instead of special additional support, easing existing regulations such as total regulation in the metropolitan area, environmental regulations, temporary suspension of the 52-hour workweek or minimum wage application, or corporate tax cuts would still be effective.

▲ Choi Wonmok = Providing various incentives to overseas companies and drastically improving the domestic business environment through deregulation are necessary. Direct incentives such as subsidies are effective to induce returns of small and medium enterprises. For large corporations, pro-business policies like easing the 52-hour workweek and lowering corporate taxes, as well as efforts to improve the widespread anti-business sentiment domestically, are important.

▲ Jeong Ingyo = The decision to return is made by companies, and the government provides incentives for returning. Companies compare conditions and costs of various production sites to decide whether to return or establish production bases. We should not be optimistic that companies will return domestically with just a few measures. It is unrealistic to expect production activities employing many workers domestically under world-class labor regulations.

-There are opinions that thanks to K-quarantine, Korea can become a global supply chain hub; that reshoring should be combined with establishing production bases in local consumer markets; and that next-generation advanced technologies should be reshored while increasing production in consumer markets for other technologies to diversify risks.

▲ Jeong Ingyo = Next-generation advanced technologies are developed domestically for reasons such as security. If protectionism strengthens due to COVID-19, companies generally establish production bases in consumer markets. It is unlikely that the government can select and support reshoring or offshoring industries under current trade norms due to subsidy specificity issues. Production locations are decided by companies.

▲ Choi Wonmok = Reshoring and 'deshoring' (a concept similar to offshoring, also called 'disourcing') policies should proceed simultaneously. Next-generation advanced technologies and core industrial sectors should be induced to innovate continuously based on a stable domestic foundation through reshoring, while facilities and personnel for mass production and sales of these innovations should establish bases overseas through desourcing and adopt a strategy of producing and selling locally.

▲ Heo Yoon = Reshoring of our major large corporation industries is realistically difficult. Our export companies seem to have a more practical alternative in increasing 'local completeness' in major consumer markets. Our automobile and electronics industries are already combining deshoring, and utilizing onshoring strategies promoted by the US and European countries to form safe supply chains in these countries would be an effective alternative.

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