In era of economic security, what can Korea’s counter strategy be?

From the perspective of international politics, the existing spectrum of national security, which mainly focuses on military security, is gradually expanding to new areas including economy, food security and environmental or social factors. The global supply chain that has been driving the growth of the global economy amid the expansion of globalization is becoming an unstable factor that can weaken and worsen national competitiveness through the weaponization of interdependence.

In particular, the US is promoting new types of economic security policies as economic statecraft to cope with the threat toward its hegemony raised by China’s economic rise, such as restructuring the supply chain or industry-promoting policies, as well as trade policy measures such as import and export regulations.

Following the Trump period and due to the intensifying strategic competition between the US and China as well as the COVID-19 pandemic over the past few years, the foundation of the international economic order, which has been fundamentally maintained since World War II, has been greatly shaken.

Amid the era of intensifying self-sufficient economic security, where no one backs anyone up and protectionism is rampant, what should be Korea’s response strategy? How can we protect both the economy and security?

This week, two experts contributed in an interview to discuss the issue. Professor Lee Ji-pyeong is a specially appointed professor at the division of integrated Japanese studies at Hankuk University of Foreign Studies and has served at the LG Economic Research Institute since 1988. Choi Pil-Soo is a professor of the department of international studies at Sejong University and was a research fellow on the China team for the Korea Institute for International Economic Policy.

Hwang: What is the impact of the war in Ukraine and the US-China strategic competition on the global economy?

Lee: The US-China strategic competition is further destabilizing the global supply chain, heightens inflationary pressure in the global economy and fuels the surging interest rate. Each country’s emphasis on economic security is being a burden on companies in respective countries and is expanding uncertainties in promoting businesses.

Also, the US-China competition and the attitudes emphasizing economic security can cause problems by providing an excuse to expand protectionist policies. The US-China competition is intensified as the Ukraine war broke out, and if this trend leads to the division of the US-China economy and blocization of countries around the world, it could negatively affect peace and friendship based on economic interdependence. Frictions and distrust between countries can increase uncertainties that can misjudge the security circumstances and increase the risk of a sudden war.

Choi: The most direct and long-term impact of the Russia-Ukraine war came from the energy sector. The surge in prices due to energy supply and demand is already a problem itself, however the rise of energy security issues is a bigger issue. This is because it happened amid the international community’s efforts to reduce carbon emissions to prevent climate change.

Since eco-friendly renewable energy is not sufficient or stable yet, a stable supply of carbon energy is paradoxically required for the world’s conversion to renewable energy. However, as the supply and demand of carbon energy such as oil and natural gas become unstable, there are competitive efforts to secure it. Eventually this flow leads to the replacement of energy conversion issues with energy security issues. In the end, it will bring a fatal adverse effect on driving the global carbon neutrality.

Hwang: Then what would be the impact of the war in Ukraine and the US-China strategic competition on China’s economy?

Choi: The US’ constraints are persistent in revealing China’s critical weaknesses, especially the area of semiconductors. Therefore, it will delay China’s rise in high-tech fields for a considerable amount of time. Accordingly, China is implementing a defensive industrial policy from the economic security standpoint.

Under the free trade order, if we focused on what we did the best based on comparative advantage, now we focus on defending all weak sectors in the face of economic security.

There are two representative aspects of China’s defensive industrial policy in its high-tech field. Firstly, the proportion of manufacturing is increasing again. The second can be referred as a kind of frugal innovation, which means an active development in customized products for low-income markets.

Lee: The Russian economy’s dependence on China is rising as the export of Russian energy to China is expanding due to the Ukrainian war and US-led economic sanctions. From China’s point of view, this flow brings the effect of easing the problem of oil import procurement, which is its weak point.

In this respect, the US seems to set its direction of using semiconductors as a more important means of containing China rather than energy. In order to curb China's development in the artificial intelligence industry along with advanced weapons, the US is expected to further strengthen its policy to block the transfer of advanced semiconductor technology and production bases into China.

This seems to negatively affect the advancement of the Chinese industry and "China Manufacturing 2025," however in fact, China is expected to seek technological breakthroughs by promoting inventions in new technology systems that do not depend on Western countries. Of course, the advancement of the Chinese industry is likely to be temporarily restricted, as it has been constrained from accessing to the ecosystem of the semiconductor industry in which the complex division of labor production system is organically and globally linked.

Hwang: What about the Korean case? What can be the impact of the war in Ukraine and US-China strategic competition on Korea?

Lee: The contraction of the global economy, the rise in international interest rates and the surge in raw material prices due to the Ukraine war have negative influence on the growth of the Korean economy.

The Korean economic growth rate is expected to slow down significantly from 4.1 percent in 2021 to 2 percent this year, but still, the growth is likely to fall further to 1 percent in 2023. In the aftermath of the US-China competition, the Chinese economic decline in terms of growth vitality will have a great negative influence on the Korean economy. In particular, as the European countries, which are suffering from unstable import of Russian gas, are competing with Asian countries including Korea in the liquefied natural gas market, the soaring gas price is becoming a great burden.

Meanwhile, Korea’s arms exports of fighter jets and tanks have been boosted by the Ukraine war. The fact that China’s automobile and battery industries have difficulty accessing the US market due to the US-China competition also provides a positive effect on Korea’s battery industry.

Choi: In the case of Korea, it relies heavily on the export market. In this sense, the collapse of the global value chain and self-sufficient-oriented industrial policies around the world is like a disaster for Korea.

The situation in which the US, China and Europe are competitively establishing foundries and each automobile company is seeking to procure its own batteries is never good for Korea, since Korea has a reputation as the best supplier of semiconductors and batteries.

Furthermore, if this leads to an oversupply in respective industries, it could have a devastating impact not only on Korea, but also on the global economy.

Hwang: What are the challenging factors for Korea in the era of economic security?

Choi: Korea is forced to make decisions in two key areas, semiconductors and batteries, from the US.

In semiconductors, the US demands Korea to make a choice when it is possessing both the market and technology in control. Given that China has only the market, the demand from the US cannot be ignored.

However, when it comes to the battery market, the decision has to be made simply between the US market and China market, therefore, Korea can just choose the bigger market. Whether the two are separate choices or not will be answered only by solving the complex high-degree equation between the US and China and between the US and Korea.

Lee: In the era of economic security, countries’ behavior to use economic power as a political tool is escalating, and there is a problem of inefficiency at the global economic level.

Furthermore, it is the time for a fundamental response for the Korean economy, which has been supported by the major companies’ global strategies, as Korea largely depends on export and import.

Measures to stabilize the supply chain are critical policy tasks, and it will be important to further strengthen cooperation with allies such as the US and Japan in order to reach the stabilization, while maintaining friendly relations with China’s supply chain and strengthening monitoring system for supply instability from China as it is the factory of the world.

Hwang: What are the challenging factors between Korea and the US, such as the Inflation Reduction Act, and Korea's further counterstrategy?

Lee: It is important to continue strengthening the competitiveness of electric vehicles without subsidies that will be impossible in the mid- to long-term, and to strengthen self-sustainability by improving the technology and functions of Korean electric vehicles, reducing costs and promoting supplies within Korea.

It is also necessary to upgrade the division of labor ecosystem in electric vehicle fields in the form of platforms supported by digital technology. Moreover, it is significant to support Korean companies’ conversion of existing factory production lines in America into electric vehicle productions.

On the other hand, there is a concern that Korea and its allies strengthening of regulations and decoupling from the Chinese semiconductor industry through Chip 4 will hinder the development of the Korean semiconductors industry.

Even for the US, the safety and differentiation of the alliance-led supply chain can be achieved only when the competitiveness and soundness of allies’ companies are sustained. In that respect, Chip 4 needs to convey the importance of controlling China’s regulatory items and deterring the Korean companies’ management aggravation.

In case China fails to expand its production of low-level semiconductors to some extent, it could be a global supply instability factor, therefore, it is also essential for Korea and Japan to co-request the US to adjust the intensity of the regulation on Chinese semiconductors.

Choi: It is the fact that the US is being more obvious in containing China and that the US is being more obvious in not caring about Korea as before.

Although it was a remarkable case when the US was not considering Korea in the electric vehicle battery subsidies, and although the US says it will give one year of grace period, the circumstances are making it difficult for Korean companies to attract investment under this great uncertainty.

At the end of 2021, SK hynix acquired Intel’s Dalian NAND flash plant for $9 billion. At that time, we predicted that US’ semiconductor manufacturing would remain in the system semiconductor sector, like TSMC. However, less than a year after Intel sold its Chinese plant, the US began sanctions on China’s memory semiconductor production facilities.

Did Intel really not know about this plan by the US Department of Commerce?

Hwang: What is Korea's economic security strategy in the era of the US-China strategic competition?

Choi: First of all, the problem should be brought to multilateralism as much as possible. The position to choose between the US and China cannot be concentrated only on Korea. Korea should approach the problem along with other countries that are in a similar dilemma of "security on the US, economy on China," such as Europe and India.

Also, we need to think of the solutions by splitting the issue.

There are big agendas and IPEF (Indo-Pacific Economic Framework, launched by the US) or BRI (China's Belt and Road Initiative) belong here. However, such a large agenda can be broken down into several subissues.

IPEF has four pillars, and BRI also has several factors such as intergovernmental memorandums of understanding, joint entry into third countries, simple construction orders and others.

We should stop asking large questions about whether Korea is participating in IPEF or BRI, but should rather asking how Korea is approaching subagendas. That is the way we can easily find the answers.

Lee: In order to stabilize the supply chain, we should strengthen the cooperation system between the government and the industries, and also should prepare to promptly identify abnormalities in the supply chain and effectively respond. Regarding the major materials in the supply chain, it is also necessary to focus on easing the behavior of relying too much on specific countries.

In addition, we should focus on supporting our industries to build strategic indispensability at least in certain areas of important fields that are also applied to military fields such as semiconductors, batteries, hydrogen, AI and quantum computers.

Last, we need to focus on strengthening friendly, open and free trade economic relations with countries around the world, including Japan. In particular, it is also essential to strengthen economic relations between Korea and Japan through RCEP (Regional Comprehensive Economic Partnership) and participation in CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) membership, while taking joint assistance under the direction of mitigating the US-China friction amid the ties between Korea and Japan + ASEAN.

Hwang: What should Korea’s economic security strategy toward China be like in the era of the US-China strategic competition?

Lee: While cooperation in supply chains centered on the US is strengthening in semiconductors and batteries, China needs to focus on preventing any friction between China and Korea, for instance China’s retaliation against Korea.

Elaborations, including Korea's efforts in the Korea-US negotiations, will also be important. At the same time, it is necessary to consult with the US as much as possible on the US strategy’s further direction and intensity in containing China, so that Korea's business with China is not disturbed by the US.

In addition, while focusing on information exchange and joint response to risk factors in the supply chain with China, efforts to diversify import lines will be critical for areas that are excessively dependent on China. Moreover, we need to focus more on the security of knowledge property in important fields, namely semiconductors, while further strengthening the prevention of illegal leakage of important technologies abroad.

Choi: In any case China can provide a replaceable market for the US and the key currency, it must be easy for Korea to find a balance in between the US and China.

However, considering China’s recent policies, China is not like the global power, willing to provide markets and currencies through trade deficits, but is likely to obsess to competitiveness and surpluses like Japan in the 1980s. Even in the vision of China 2035 or 2049, which appeared around its 20th party congress, there is no long-term and inclusive outlook for neighboring countries.

Hwang: Do you have any policy suggestion for the Korean government?

Choi: Both the US and China are showing protectionist aspects to Korea. China actively favors Korean companies in semiconductors, where China is desperate, but in terms of batteries where China has nothing to be desperate for, China did not subsidize products made by a Korean company even if they were manufactured in China.

Recently, however, Korean battery company LG Ensol has become the second battery exporter in China by supplying batteries to Tesla models manufactured and exported in China. This can be said to be an example of breaking through protectionism with competitiveness. As such, sophisticated policy "fine-tuning" is required, so as not to destroy the global economy and industrial markets. We are facing a difficult time to intensively enhance the Korean government's trade capabilities.

Lee: It is important to focus on the growth of industries supported by next-generation technologies while also concentrating on stabilizing supply chains, securing strategic imperatives, enhancing supply chain autonomy, easing dependence on specific countries and strengthening high-tech promising areas.

---

Hwang Jae-ho is a professor of the division of international studies at the Hankuk University of Foreign Studies. He is also the director of the Institute for Global Strategy and Cooperation and a current member of the Presidential Committee on Policy and Planning. This discussion was assisted by researchers Ko Sung-hwah and Shin Eui-chan.