Tense Ukraine Situation, EU Raising Trade Barriers... Korean Companies Hold Their Breath Amid Overseas Variables (Comprehensive)

Uncertain External Adverse Factors Mounting
Impact on Automobiles, Home Appliances, Smartphones, Aviation, Shipping, Petrochemicals, Cement, and More

[Asia Economy Reporters Park Sun-mi, Choi Dae-yeol, Lee Hye-young] As tensions escalate between Russia and Ukraine, South Korean companies within the sphere of influence are growing increasingly anxious as Western countries, including the United States, are considering economic sanctions against Russia. On top of this, the European Union (EU) is pushing legislation for retaliatory measures in response to trade threats, and anti-China sentiment is intensifying due to biased judgments during the Beijing Winter Olympics, creating a complex web of uncertain external challenges. Amid worsening domestic business conditions caused by various regulations originating from the political sector, the emergence of unexpected overseas variables that could negatively impact production and sales activities is further heightening concerns within the business community.

Rising Tensions... South Korean Companies on Edge

According to the business community on the 9th, industries that could be hit hard by the escalating tensions between Russia and Ukraine include automobiles, home appliances, smartphones, aviation and shipping, petrochemicals, and cement, among others.

The automotive industry faces inevitable damage if the U.S. decides to exclude Russia from the international financial messaging system, SWIFT, as part of its sanctions, given the large scale of export and import payments involved.

According to the Korea International Trade Association, last year South Korea exported $4.151 billion worth of automobiles and auto parts to Russia, accounting for 42% of the total export value. Automobiles and auto parts rank first and second among single export items, reflecting their significant share. There is also a need to prepare for the possibility of trade disruptions. This is because not only finished products are traded, but production plants located locally could face operational difficulties.

An industry insider said, "As recently revealed by the shortage of automotive semiconductors, the entire value chain is affected by just one or two key components," adding, "It is neither appropriate nor practically possible to stockpile important parts in advance."

If the U.S. imposes semiconductor sanctions that block exports to Russia of products made using U.S. technology in third countries, not only will smartphone exports to Russia become difficult, but home appliance companies like Samsung and LG, which have production plants locally, could also be affected. Since local home appliance factories focus on the domestic market, if the situation worsens to the point of war, sales in Russia and neighboring regions could suffer.

Russia is also a key import source for South Korea’s three main energy resources (crude oil, gas, and coal), which is another concern for Korean companies. Even if an invasion does not occur, continued tension could drive already high international raw material prices even higher. For crude oil, the largest import item, South Korea imported $4.27 billion worth from Russia last year, an increase of about 80% compared to the previous year.

Russia ranks sixth among South Korea’s natural gas import sources and second for coal. Kim Kkot-byeol, senior researcher at the Korea International Trade Association, stated, "Companies hedge against rising raw material prices, but if tensions persist, it will be difficult to avoid damage from further price increases."

The KOTRA local trade office also noted, "If economic sanctions materialize, exports of our home appliances, mobile phones, automobiles, and parts could shrink, and supplies of crude oil, natural gas, and coal from Russia, as well as minerals and grains such as krypton and xenon from Ukraine, could be affected. The proportion of Russian coal in our imports of thermal coal and anthracite coal reached 16% and 41%, respectively (as of 2021), and Ukrainian export companies are concentrated in border areas adjacent to conflict zones in Russia and Belarus, which is a concern."

EU Raises Trade Barriers... Accumulating Adverse Factors

The EU’s push for legislation that allows immediate retaliatory measures in response to trade threats from third countries to protect member states is another issue South Korean companies must prepare for. If the legislation is enacted, Korean companies with high export ratios could face a chain of impacts, including disruptions to supply chains.

According to a report from the Korea International Trade Association’s Brussels office, the EU Commission’s recently announced ‘Trade Threat Response Regulation’ includes broad countermeasures against countries that pose economic threats to the EU and its member states. The scope of possible sanctions covers virtually all sectors, including goods and services, foreign direct investment, public procurement, and financial services.

In emergencies, the Commission can implement retaliatory measures immediately without a separate approval process. The measures can apply not only to third-country governments but also to related individuals and organizations, thus carrying the character of ‘economic sanctions.’

South Korean companies will inevitably face long-term impacts if this regulation is applied.

If exports from South Korean companies proceed through third countries that exert economic threats against the EU, customs clearance could be denied, and overall business operations could be hindered. Cho Bit-na, head of the Korea International Trade Association’s Brussels office, said, "While the possibility of South Korea facing retaliatory measures from the EU is low, given the tightly intertwined global supply chains, it cannot be ruled out that our export companies might be unexpectedly affected."

Emotions between South Korea and China have deepened due to issues such as Hanbok and biased judgments during the Beijing Winter Olympics, which also pose threats to Korean companies. There is a risk of isolation in the Chinese market, the world’s largest market. Particularly, sensitive items like smartphones and automobiles are likely to be affected.

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