"Rising G2 Tensions, Need to Join US-Centered Supply Chain Construction"

"Korea Pursues Practical Benefits Amid Supply Chain Diversification... Takes Conservative Approach to China and Focuses on ASEAN"

[Asia Economy Reporter Lee Hye-young] This year, as the conflict between the United States and China once again emerges as a major global issue, an analysis has been made that a multifaceted response is necessary to minimize damage to the Korean economy through active supply chain diversification policies and pragmatic diplomacy. While actively participating in the supply chain construction led by the U.S., it is essential to capture changes and opportunities within the Asian region, which is expected to become a battleground of U.S.-China conflicts.

The Federation of Korean Industries (FKI) presented on the 20th the policy directions of the world's five major economic blocs and Korea's response measures accordingly.

Intensification of U.S.-China Hegemony War, Asia to Become a Battleground

The FKI analyzed that the U.S. is expected to continue its containment of China this year, focusing particularly on strengthening the 'Asia Network' to secure superiority over China and achieve supply chain decoupling.

Especially, with major political events for the G2 countries such as the U.S. midterm elections (November) and the Chinese Communist Party Congress (October-November), the hegemonic war between the two countries is expected to intensify further. In December last year, the U.S. consecutively introduced measures to increase pressure on China within a month, including legislation on the Uyghur Forced Labor Prevention Act, signing the National Defense Authorization Act to strengthen China containment, and declaring a diplomatic boycott of the Beijing Winter Olympics. China also indicated a countermeasure by publishing an 'Export Control White Paper' stating that it could ban exports of strategic materials on national security grounds.

President Joe Biden of the United States
[Photo by Yonhap News]

The U.S., which has pressured its allies to participate in containing China, is expected to focus this year on solidarity with Asian countries and supply chain stabilization by promoting the Indo-Pacific Economic Framework (IPEF) as a core policy.

The FKI suggested, "Korea should participate in the U.S.-centered supply chain construction to utilize the opportunity for supply chain diversification, secure practical benefits, and strive to minimize potential damages to Korean companies caused by the U.S.-China trade conflict."

Depending on the results of the U.S. midterm elections, the Biden administration's push for infrastructure bills and others may stagnate, but the Biden-style 'America First' policy is expected to continue, the FKI forecasted. As the U.S. signals more than three interest rate hikes annually and shifts to a full-fledged tightening monetary policy, Korea also needs to respond to ripple effects such as financial instability and export slowdown in emerging countries.

China: Xi Jinping's Third Term, Growth Slowdown, and Economic Recession Pose Major Policy Variables

China's economic growth is expected to slow down this year. While China was the only major country to grow (2.3%) in the first year of the COVID-19 pandemic and showed the highest growth level globally (8.1%) in the second year, its economic growth rate is projected to be only 5.1% this year. Since the 1990s, China has recorded an annual growth rate of over 6%, but it has been hampered by strict lockdown policies due to the spread of variant viruses and the Evergrande Group crisis.

Chinese President Xi Jinping [Photo by Yonhap News]

Accordingly, this year, Chinese authorities are preparing to release various measures by central and local governments to stimulate domestic demand along with regulations controlling real estate and technology companies. Ahead of the 20th Chinese Communist Party Congress (October-November), which will confirm Xi Jinping's third term, significant political and policy changes are expected, including bold promotion of Xi's key policies such as 'common prosperity' (a society where everyone prospers together).

The FKI advised, "While monitoring these changes, it is recommended to adopt a conservative approach to the Chinese market and actively seize opportunities arising from the Chinese authorities' domestic demand stimulation policies."

Europe: Possibility of New Trade Regulations

The EU is set to prioritize member states' interests and actively pursue supply chain independence in strategic industries. It is promoting 'open strategic autonomy,' which focuses on building self-sufficient supply chains in strategic and high value-added industries such as semiconductors, batteries, and electric vehicles, while strengthening foreign investment screening to protect core sectors like pharmaceuticals and healthcare.

Accordingly, Korean companies need to prepare by flexibly managing export-investment strategies, such as shifting existing exports to Europe to production within European factories.

Furthermore, European policies for the revival of green and digital industries and the EU Commission's emphasis on corporate responsibility are expected to become more prominent. The full-scale introduction of the Carbon Border Adjustment Mechanism (CBAM) and the legalization of supply chain due diligence obligations represent significant changes.

The specific direction of policy implementation is expected to be determined by elections and leadership changes in major European countries this year. With leadership changes or elections upcoming in major European countries such as Germany (December last year), France (April), and Italy (January), uncertainties persist. The FKI emphasized the need to pay attention to changes in trade policies regarding China, responses to Russia, green regulations, and protectionism.

Japan: Attention to Changes in the 'Kishida Era'... ASEAN's Enhanced Status

Japan's GDP growth rate is expected to moderately recover from 1.8% last year to 3.4% this year.

The FKI forecasted that this year, the first full year of the Kishida Cabinet, the color of Kishida's policies will become clearer across various fields such as Korea-Japan relations, security, economy, and energy. "In particular, attention is needed to the impact of major economic policy changes, including the establishment of the Economic Security Office aimed at strengthening strategic material supply chains and the promotion of nuclear power plant restarts," it pointed out.

President Moon Jae-in is speaking at the ASEAN+3 virtual summit held at the Chungmugil Room of the Blue House on October 27 last year. [Image source=Yonhap News]

ASEAN is expected to further assert its presence as a global production base and the largest consumer market. The active reconstruction of the existing global value chain (GVC), which was highly dependent on China, and the expansion of global companies' production base relocation to ASEAN support this outlook.

From January, the Regional Comprehensive Economic Partnership (RCEP), the world's largest economic agreement, came into full effect, expanding trade volume with ASEAN and enhancing its status, which is also a positive factor. Additionally, ASEAN has a young population structure and a high mobile penetration rate, indicating great potential.

The FKI emphasized, "Korea needs to actively seize emerging opportunities in ASEAN's new production and consumer markets by expanding exports of intermediate goods and parts to ASEAN production bases, strategically expanding exports using RCEP's country-specific tariff concessions and cumulative origin rules, and entering ASEAN's online markets."

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