South Korea looks to break China import dependence and establish ‘supply chain alliances’

·5-min read

South Korea’s president Yoon Suk-yeol is gearing up to reorganise his country’s trade relations by reducing dependence on China and building “supply chain alliances”.

The world’s No 2 economy is by far South Korea’s largest trading partner, accounting for 25 per cent of total trade last year, followed by the United States’ share of 15 per cent.

But under Yoon’s new conservative administration – which is seen as more hawkish towards China – South Korea is looking to forge closer ties with a range of economies in the Indo-Pacific.

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“We need to diversify imports,” South Korean media cited a high-level presidential aide as saying during a briefing on Thursday. “We need supply chain alliances.

“It is an era where it has become important to build capacity to manage supply chains on a national level,” said the aide, who spoke on condition of anonymity. “The government will manage the supply chain which is core to the idea of economic security.”

Securing supply chains for critical goods and materials has emerged as a priority for many countries following the coronavirus pandemic and amid heightened tensions between China and the United States. But data shows South Korea has a long way to go.

In the first three quarters of last year, 3,941 out of 12,586 items that South Korea imported had a minimum 80 per cent dependency on a particular country, data from the Korea International Trade Association showed. Some 1,850 items, or almost half, had at least an 80 per cent dependency on China.

“Whether it be rare earth or noble gas – there are sufficient reserves elsewhere outside China,” said Kim Ba-woo, a senior researcher at the Korea Institute for Industrial Economics & Trade.

South Korea’s Yoon Suk-yeol to ‘keep a distance’ from China

“The problem is the costs of extracting the resources elsewhere are likely higher due to environmental regulations.”

South Korea is planning to make formal application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), whose signatories span economies in North and South America, as well as countries in the Asia-Pacific.

The Brookings Institution, a US think tank, estimated South Korea could gain US$86 billion annually by joining the trade bloc, as it would boost the country’s role “in Asian and North American supply chains by lowering tariffs and non-tariff barriers with economies such as Japan, Malaysia, Mexico and Vietnam”.

All 11 member nations of the CPTPP need to approve new members, with negotiations expected to take at least a year.

South Korea will also increase economic cooperation with countries in Southeast Asia after joining the Regional Comprehensive Economic Partnership (RCEP), which went into effect in January.

RCEP is the world’s largest trade bloc, with 15 member states centred on the Association of Southeast Asian Nations (Asean) but also including non-Asean economies.

The election of Yoon as South Korea’s president has raised questions over the future direction of relations between Seoul and Beijing.

He has taken a harder stance on China than his predecessor Moon Jae-in, but South Korea’s reliance on Chinese imports, especially those used in its world-leading electronics sector, will be hard to break.

Electrical and electronic equipment account for the largest portion of imports from China, including unfinished semiconductors that are completed in South Korea.

South Korea imported US$17.93 billion of semi-finished chips from China in 2020, which made up 39.5 per cent of the total value of imported semiconductors.

The country also relies on China for rare earths – a key component for electric vehicle batteries, of which Korea is a top five global producer. Rare earth minerals are also used in semiconductors and cars.

Semiconductors and rare earths are among the four items the Biden administration has identified as critical strategic assets, with electric vehicle batteries and pharmaceutical ingredients being the others.

Major economies are scrambling to ensure stable supply of these items, especially after the disruptions brought on by the pandemic.

Countries such as Germany, Japan and the US have sought to diversify their rare earth imports from China to other countries such as Brazil and Vietnam.

However, both countries still largely lack the technology needed to produce and refine the rare earth material in a form that can be used for industrial purposes. China produced 85 per cent of the world’s refined rare earths in 2020.

“Import diversification of key items many countries have relied on China for will depend on how fast the US and EU jump into development projects, and what the regulatory scheme looks like in the countries with the resources,” Kim said.

Environmental regulations in Southeast Asia are not stringent at the moment, but are likely to become stronger due to growing global demand, Kim said. China has benefited from decades of rare earth production free of such regulations.

“Meanwhile, items that can be immediately produced by making infrastructural investments, and other items that do not require an industrial ecosystem would likely be substituted in a short amount of time,” the researcher said.

US turning to aggressive ‘industrial policy’ to counter Beijing, experts say

In a phone call with his South Korean counterpart on Monday, China’s foreign minister Wang Yi said both countries should jointly oppose attempts at decoupling and maintain the global supply chain.

Wang said China’s massive market offers potential for South Korean businesses and cooperation in the digital economy, artificial intelligence and new energy would lead to greater benefits.

Moon Jong-chol, who is also a research fellow at Korea Institute for Industrial Economics & Trade, said it was possible for countries in the Indo-Pacific to “partially” substitute imports from China in “limited areas” when considering the tech capabilities and resources each had.

“The shift has been possible for, for example, the assembly of smartphones, which relatively do not require high levels of technology,” he said. “But China will still play a considerable role in trade with Korea.”

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