[New Year Interview] Jang Ji-sang, President of the Korea Institute for Industrial Economics and Trade, "Acceleration of GVC Restructuring... Korea's Opportunity to Become an Advanced Industry Platform"

Global Manufacturing Shock Due to COVID-19
Focus on Gradual De-Chinaization
Advancing Manufacturing with Digital Technology
Cooperation with New Southern Countries Needed

Key Trading Partners Join CPTPP
Korea Faces Higher Entry Barriers if Delayed
Incentive Systems Essential for Corporate Participation
to Achieve Carbon Neutrality Policy Success

Jang Ji-sang, President of the Korea Institute for Industrial Economics and Trade, is explaining the direction that the domestic industry should take in his office. In a New Year's interview with Asia Economy, President Jang emphasized that a rapid restructuring of the global value chain (GVC) will occur this year and that Korea must actively respond to it. (Photo by Korea Institute for Industrial Economics and Trade)

[Asia Economy Reporter Moon Chaeseok] "We need to reset the direction of domestic industrial strategy to respond to the increased volatility of the Global Value Chain (GVC)."

Jang Jisang, President of the Korea Institute for Industrial Economics and Trade, said in a New Year's interview with Asia Economy at the end of last year that the GVC restructuring would accelerate this year and urged a more proactive response. As companies worldwide are actively pursuing supply chain restructuring under the banner of 'de-Chinaization' following the COVID-19 pandemic, Korean companies also need to keep pace with this movement.

He advised actively pursuing membership in mega Free Trade Agreements (FTAs) to help with supply chain restructuring. In particular, joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which accounts for 13% of the global economy, would help reduce risks arising from the process of changing supply chains. President Jang emphasized, "We must hurry to join as soon as possible."

"Responding to Supply Chain De-Chinaization... Advancing Domestic Industry and Cooperating with New Southern Countries"

[Image source=Yonhap News]

President Jang said that now, as the world is caught in the COVID-19 crisis, is the time to reset the direction of domestic industrial strategy in line with the rapid restructuring of the GVC. While some predict 'de-globalization' based on the rise of protectionism and nationalism and the crisis of the WTO-centered multilateral trade system, he diagnosed that this is a process of 'GVC restructuring.'

China is at the core of supply chain reorganization. After the COVID-19 outbreak, production stoppages in China, the world's factory, caused a chain reaction shock to global manufacturing. The disruption of parts supply affected manufacturing processes in other regions. President Jang emphasized, "We need to focus on gradual de-Chinaization" and "In response, Korea should become an East Asian 'advanced industry platform.'"

His theory is that domestic industries should be advanced into high-tech manufacturing using digital technologies, while cooperating with New Southern countries emerging as production bases for labor-intensive products.

The trend of GVC restructuring is expected to vary by industry and product. He predicted fierce competition among Korea, China, Taiwan, and Japan to attract capital- and technology-intensive industries such as parts and materials.

President Jang said, "It is not easy to reduce dependence on China in the materials and parts sector in the short term, but the trend toward diversification and decentralization of supply will strengthen," and stressed, "We must capture the investment demand of foreign-invested companies trying to relocate production or R&D bases to Korea." To this end, he added, "We need to set foreign investment attraction targets centered on advanced technologies, products, and industries, and reorganize reshoring policies accordingly."

"Examining Digital Trade Before Joining CPTPP"

Director Jang emphasized that in order to prepare for increased trade uncertainties, the active promotion of mega Free Trade Agreement (FTA) signings is necessary. The photo shows President Moon Jae-in applauding Yoo Myung-hee, the Chief Negotiator of Trade from the Ministry of Trade, Industry and Energy, as she signs the Regional Comprehensive Economic Partnership (RCEP) agreement, the world's largest Free Trade Agreement (FTA), at the signing ceremony held at the Blue House on November 15 last year. (Photo by Yonhap News)

Regarding President Moon Jae-in's declaration on December 8 last year to consider joining the CPTPP, President Jang expressed, "We need to respond actively."

He judged that, in the mid-to-long term, key Korean trading partners such as the United States, China, the United Kingdom, Indonesia, the Philippines, and Taiwan are likely to join the CPTPP, so the entry barriers will increase the later Korea joins. He explained, "Regardless of whether Korea joins the CPTPP, countries with close trade relations with us will join in the mid-to-long term."

President Jang urged responding to issues such as 'digital trade, environment, labor, state-owned enterprises, and subsidies,' which are part of the U.S. trade norm policies that run through the Trans-Pacific Partnership (TPP) and the new United States-Mexico-Canada Agreement (USMCA). This is because the U.S. is expected to rewrite international trade norms centered on these issues and restore the WTO-centered multilateral trade system.

He said, "Regulations on state-owned enterprises and subsidies can be seen as measures the U.S. implemented targeting China, and if the U.S. joins the CPTPP, it will enforce these intentions," adding, "Considering that 'digital, environment, and labor' are the three pillars of Korea's New Deal, Korea can play a leading role in the process of reorganizing the international trade order."

Fiscal and Tax Support Needed for Carbon Neutrality

Deputy Prime Minister for Economy Hong Nam-ki is briefing on the 2050 Carbon Neutrality Promotion Strategy on the morning of December 7 last year at the briefing room of the Government Seoul Office in Sejong-ro, Seoul. From the left, Minister of Trade, Industry and Energy Sung Yun-mo, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki, and Minister of Environment Cho Myung-rae. Photo by Kang Jin-hyung aymsdream@

He emphasized that for the 2050 carbon neutrality policy (net zero carbon emissions) to succeed, government-level fiscal investment and incentive systems that encourage voluntary participation from industry and companies are essential. He pointed out the need to distinguish between areas that the private sector can pursue independently and those requiring national support. He explained, "The smart and green transformation of national industrial complexes and industrial sites is an area where the government should expand support for related technologies and finances. If companies have a vision and show willingness to invest, it can be effective not only in the short term but also in the mid-to-long term in industrial sites." He added, "Processes such as hydrogen reduction steelmaking using green hydrogen or CCUS (carbon capture, utilization, and storage) require large-scale investment for fundamental technology development and commercialization, and since the private sector finds it difficult to secure economic feasibility, these areas need state-led investment and industrialization support."

Carbon neutrality poses a threat to key domestic industries such as steel and cement. When the European Union (EU) implements the Carbon Border Adjustment (CBA) measures around 2023, these industries are likely to be hit hard. Since U.S. President Joe Biden has pledged to impose carbon adjustment fees or quotas on carbon-intensive imports, it could also become a significant burden for export companies.

President Jang diagnosed, "The EU plans to prioritize the cement and steel industries when implementing the CBA," and added, "It can be implemented in various forms such as carbon taxes, carbon tariffs, and linkage with emissions trading schemes. Since the EU already has an established emissions trading system, it is highly likely to link the emissions trading system with the CBA."

He believed it would be difficult to impose a carbon tax immediately. The CBA is a kind of protectionist measure that conflicts with WTO international trade laws, and globally, methods for calculating the carbon content of imports and exports and carbon cost methodologies have not yet been established.

If the EU and the U.S. introduce the CBA, production companies' raw material purchase costs will increase, and consumer prices may rise. For steel, exports to the EU and the U.S. accounted for 11% and 9%, respectively, last year. President Jang predicted significant damage if the CBA is introduced. For cement, if exports to the U.S. or EU markets become difficult, products from competing countries like China may flood the domestic market. He said, "The government should support companies through prompt information provision, various impact analyses, tax and financial support for short-term transition costs, and streamlining overlapping environmental regulations."

"Consider Establishing a Green Investment Fund for the Korean New Deal"

President Moon Jae-in speaking at the 'Korean New Deal National Report Conference' held at the Blue House's Yeongbingwan on July 14 last year. (Image source=Yonhap News)

President Jang suggested that a 'greening' strategy covering the entire industry is necessary for the success of the government's 'Korean New Deal.' Currently, measures to reduce carbon are limited to some sectors, but greening should be expanded to all industries. He urged, "To promote 'manufacturing greening' with global competitiveness, we need to establish a phased implementation plan targeting intra- and inter-industry linkage and transition, and systematize mid-term reviews, evaluations, and improvement processes."

He also pointed out the importance of creating investment conditions so that individual companies and industries can focus on related research and development (R&D). President Jang said, "Policy financial institutions such as the Korea Development Bank and the Export-Import Bank should consider expanding loan support for green sector companies," and added, "Expanding support through a matching fund method where the government invests and the private sector participates to create a green industry investment fund is also an option."

However, he did not forget to emphasize the need for understanding and cooperation from the industrial sector beyond government policies. He said that for all government policies, including the Korean New Deal, to be effective, the attitude of recipients is also important. If companies make efforts to respond to the climate crisis according to government policies and are provided incentives, they are more likely to improve processes that emit a lot of greenhouse gases. Such a 'virtuous cycle' can further encourage corporate participation.

He also proposed establishing a 'Korean-style greenhouse gas emissions trading system' that allocates emissions according to the characteristics of each industry and sector to maintain manufacturing competitiveness. In the third phase of the Emissions Trading Scheme (2021?2025), which applies from this year, the proportion of paid allocation for 41 'paid allocation sectors' that must purchase paid allocation permits increased from 3% in the second phase (2018?2020) to 10%. As the burden on carbon-intensive industries such as steel, cement, petrochemicals, and refining has increased, a system suitable for Korea's reality is necessary.

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