[Supply Chain War]③ Key Task 'Decoupling from China'... "Reduce Dependence on China to 15%"

Global 'Nationalism and Regionalization'
Supply Chain Crisis Worsens, Korea-US-Japan Cooperation for Decoupling from China
Precise Measures Needed Due to High Dependence on China Trade

The core of the global supply chain war can be summarized as a departure from the existing trade system centered on China, the "world's factory." During the era when the values of globalization and shared prosperity prevailed, companies worldwide could plan products through division of labor. An economic circulation ecosystem operated where raw materials and components were procured and processed in China or Asia (Korea, Taiwan, Hong Kong, Singapore) and delivered to the final customers.

However, since the 2017 US-China trade dispute, the COVID-19 pandemic, and the Ukraine war, the foundation of supply chains has begun to shake. The conflict between the "G2 (the US and China)" has become increasingly acute, overturning the paradigm of trade norms. To prepare for domestic supply shortages, a significant portion of export volumes is being redirected for domestic use, and strategies to control and manipulate supply lines for national interests are frequently employed. This is the so-called "nationalism and regionalization."

A representative case is the "urea solution crisis." Urea, used for diesel vehicles, faced a global shortage in November 2021 due to China's coal export restrictions, and Korea, which depended on China for 90% of its urea solution imports, experienced a "scarcity crisis." Subsequently, the supply chain crisis spread to crude oil, liquefied natural gas (LNG), thermal coal, cement, steel raw materials, and more, becoming a burden on the global economy.

IPEF: Safety Net Activated Through Korea-US-Japan Triangular Supply Chain Cooperation

In particular, Korea was hit hard by the supply chain crisis due to its high dependence on China for overseas raw materials in key industries such as semiconductors, electric vehicles, and batteries. According to the Korea International Trade Association, from January to July this year, Korea's import dependence on China for key battery minerals was 84.4% for lithium hydroxide, 81% for cobalt, and 89.6% for natural graphite.

In response, the government is actively joining the global supply chain restructuring movement. Under the banner of "decoupling from China," the Indo-Pacific Economic Framework (IPEF) supply chain agreement, concluded in May, is led by the US and excludes China, with 14 participating countries (Korea, Japan, Australia, India, Brunei, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, Thailand, Vietnam). Member countries will activate a "crisis response network" to cooperate in case of supply chain crises in specific fields or items, discuss discovering alternative suppliers and transportation routes, and expedite customs clearance. A "Supply Chain Committee" will also be activated.

Strengthening the Korea-US-Japan triangular supply chain cooperation through the Camp David summit in August is part of this effort. Korea, the US, and Japan account for one-third of the world's GDP and trade volume. The synergy effect is significant when combining the US's source technology and financial power, Korea's technological and manufacturing capabilities, and Japan's competitiveness in "Sobu-jang" (materials, parts, and equipment). Above all, the "early warning system" established by the three countries to prepare for shortages of key materials is expected to enhance supply chain stability.

Possibility of Chinese Retaliation... Need to Diversify Export Routes

There are also challenges. While Korea has gained a safety net, it must prepare for China's obstinacy. Korean companies traumatized by China's retaliation after the government's official deployment of the THAAD (Terminal High Altitude Area Defense) system in 2016 still remember the damage. It is fortunate that Korea is receiving a love call as a key partner in the US-led supply chain restructuring drive, but this also entails risks. Korea needs a strategy to reduce its supply chain dependence on China while strengthening the US-led value alliance.

In fact, Korea's economy has high connectivity with China in exports, supply chains, and finance, making the negative impact of US-China technological conflicts greater than in other countries. Korea's export share to China is twice that to the US. In semiconductors, it approaches 55%. Korea's dependence on Chinese supply chains is more than twice that of major countries, underscoring the need for a crucial strategy to minimize the shock from US-China confrontations.

[Image source=Yonhap News]

US Technology Alliance... Need to Target Market Gaps from G2 Conflicts

Experts advise that while utilizing the US and technology alliances, Korea should actively target market gaps created by the US-China conflict. Diversifying import and export routes is important, but ultimately, diplomatic capabilities to flexibly navigate between the two countries are essential. Recently, President Yoon Suk-yeol sought to improve Korea-China relations at the ASEAN summit, and there is a view that this approach should be maintained separately from Korea-US-Japan cooperation.

Lee Jae-young, a research fellow at the Korea Institute for National Unification, said, "Not all economic interdependence leads to vulnerability, but Korea's current interdependence with China, as experienced in the urea solution crisis and THAAD retaliation, leads to vulnerability," adding, "As a risk mitigation and loss dispersion strategy toward China, Korea should reduce its trade dependence on China from the current 25% to below 15%, similar to other countries such as the US, which has the next highest dependence after China."

Lee Jae-seung, professor at Korea University's School of International Studies, said, "Looking at the overall trend of the global economy, strategic ambiguity is no longer a viable option," and added, "From a mid- to long-term perspective, Korea must respond nimbly by observing which side it should stand on to survive longer in the global market."

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