[Collapse of Trade Theory, New Supply Chain Era]② "Tariff Impact Larger Than Expected... Supply Chain Will Be Restructured"

U.S. Tariff War Makes Supply Chain Restructuring Inevitable for Companies
Trump's Tariffs May Hit Companies Harder Than Expected
Firms Must Develop Long-Term Strategies Through Rebalancing
Relocating Production Bases: U.S. vs. India, Vietnam, and the EU
Windfall Gains Possible, but Long-Term Risks Remain

Editor's NoteThe tariff war triggered by the Trump administration is shaking the global supply chain. Since the establishment of the World Trade Organization (WTO) in 1995, globalization, which had been sustained for 30 years based on low tariffs, has entered a decline. Instead, localization, which has emerged after the COVID-19 pandemic, is beginning to take hold as the new trend. In the past, 'optimal cost' was the top priority in building supply chains, but now minimizing supply risks has become the foremost priority for companies. Especially through two terms of the Trump administration, there has been a trend of production bases being established centered on the North American market. Korean companies face a crossroads on whether to overhaul their production strategies according to U.S. trade policies or to pioneer new markets. Asia Economy conducts an in-depth analysis in six parts on how our companies are responding amid the tectonic shifts in the global supply chain.

The U.S. tariff war is making it inevitable for companies to reorganize their supply chains. What strategies are needed to reduce tariff burdens while securing stable production bases? Companies still cannot afford to lose the U.S. market. Considering supply chains and market size, expanding investment within the U.S. is a likely direction. However, long-term alternatives that reduce dependence on the U.S. and minimize tariff impacts must also be prepared. Amid these changes, companies are struggling to devise countermeasures. On the 26th, Asia Economy sought answers from Lee Taegyu, Senior Research Fellow at the Korea Economic Research Institute, and Cho Seongdae, Director of the Trade Research Office at the Korea International Trade Association. The analysis of the two experts is summarized in a 'virtual dialogue' format.

Lee Taegyu, Senior Research Fellow at the Korea Economic Association (left, Photo by Yoon Dongju), Cho Seongdae, Director of the Trade Research Office at the Korea International Trade Association (right, provided by the Korea International Trade Association)

- How much impact do you expect the tariffs imposed by the Trump administration to have on South Korea's exports if they materialize?

▲ Lee: Whether the currently announced tariff imposition plans will actually be realized is still uncertain. As U.S. President Donald Trump has stated, full-scale tariff imposition is most likely to proceed after investigations are completed in April. Even then, the actual tariff rates may vary depending on the negotiation results between the two countries, and cases of tariff exemptions cannot be ruled out.

▲ Cho: The damage to individual companies could be greater than expected. Tariffs are fundamentally a cost borne by importers. When a U.S. company imports from a Korean company, the exporter may be required to lower the delivery price by the amount of the tariff cost. Ultimately, the tariffs imposed by the Trump administration are meant to protect domestic companies. Taking steel as an example, the extent of damage depends on how competitive U.S. steel companies and Korean steel companies are in exports. If competition is intense, the impact on us will inevitably be greater due to the domestic protection policy. The damage could exceed previously announced estimates.

Lee Taegyu, Senior Research Fellow at the Korea Economic Association, is being interviewed by Asia Economy on the 26th at the Korea Economic Association headquarters in Yeongdeungpo-gu, Seoul. Photo by Yoon Dongju

Josungdae, Head of the Trade Research Office at the Korea International Trade Association, is giving an interview to Asia Economy at the Korea International Trade Association headquarters located in Gangnam-gu, Seoul, on the 26th. Photo by Korea International Trade Association

- What strategies should our companies adopt to minimize damage?

▲ Lee: Supply chains should be reorganized by managing external risks through rebalancing and redefining the core competencies of companies. It is risky to rebalance solely based on U.S. policy impacts at the moment. A grand strategy must precede this, focusing on which industries and markets our companies and government aim to gain competitive advantages in from a long-term perspective. Based on this, supply chain strategies can be formulated.

▲ Cho: This change does not simply end with Trump's second term. It has been a growing trend since his first term. Our companies have somewhat neglected geopolitical risks. This means there has been excessive dependence on certain countries. A system to monitor and respond to global changes must be established.

It may not be easy to withdraw and relocate factories immediately when regional conditions worsen, but if looking 20 years or more ahead, it is appropriate to move if deemed necessary. For companies choosing many investment locations, costs must be low, and a local market must be established. Also, it is important to consider whether the environment facilitates exports to other third countries if not that market.

- Amid the ongoing tariff crisis triggered by Trump, companies are deeply considering where to locate production bases.

▲ Lee: Currently, investment in the U.S. is likely to be further promoted. The U.S. remains an important market from a supply chain perspective.

▲ Cho: For companies that currently lack the capacity to switch to alternative markets or domestic sales, going to the U.S. is the right choice. The U.S. economy is expected to continue growing for the time being, and it is a huge market with a population of over 300 million. However, it is necessary to set long-term investment strategies using the period before and after President Trump's term as a turning point.

- What are the alternative production regions to replace the U.S.?

▲ Cho: India and Vietnam could be good options. Although President Trump may push for reciprocal tariff adjustments due to high tariffs in India, it fundamentally has a large population and a solid domestic market. Also, Prime Minister Modi is actively promoting manufacturing, increasing its attractiveness as a production base. Singapore is also actively working to attract investment. Especially companies seeking alternative production bases from China or Vietnam are positively considering Singapore.

▲ Lee: Recently, companies building factories in India likely planned this before the Trump tariff policies. India has traditionally been a protectionist country, so a long-term strategy is necessary for local entry. Companies that have evaluated India's market potential from the past are now making full-scale investments. The European Union (EU) countries can also be considered as markets to replace the U.S. Poland and the Czech Republic are major destinations for Korean companies, with solid manufacturing bases and relatively low production costs. They have a high level of science and engineering talent and well-connected supply chains with neighboring countries, allowing active utilization of the European market. Additionally, their strategic location allows consideration of trade possibilities with Russia and Ukraine.

- Opinions differ on the possibility of South Korea gaining a windfall benefit from tariff measures.

▲ Cho: If tariffs are imposed on products from countries competing with South Korea, our price competitiveness will increase accordingly. For example, Chinese electric vehicles have faced extremely high tariffs in the U.S., making market entry almost impossible. While Korean companies have produced good products, they have also gained some windfall benefits.

▲ Lee: In the long term, gaining windfall benefits is not necessarily entirely positive. If Korean companies increase exports to the U.S. by replacing Chinese companies, it will lead to an expansion of the U.S. trade surplus with Korea. This means Korean companies could also become targets of additional U.S. tariffs. It is appropriate to prepare for the damage expected from U.S. tariff policies based on a 'worst-case scenario' that excludes considerations of windfall benefits. Subsequently, efforts should be made to maximize gains by preparing for 'best-case scenarios' involving new opportunities arising from changes in U.S. policy directions.

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