Korea Inc. caught between external, internal risks

Korea Inc. is being squeezed between growing risks from its two largest trading partners and a raft of anti-business policies pushed by President Moon Jae-in’s administration.

The country’s manufacturing exporters have faced mounting protectionism in the US and intensifying competition with their Chinese rivals both in traditional and high-tech sectors.

Under recommendations made last week by the US Department of Commerce to President Donald Trump, steelmakers from Korea and 11 other countries could be subject to tariffs of at least 53 percent on their exports to the world’s largest economy.

The tariff, if chosen over two other proposed curbs in April, would be yet another trade remedy undertaken by the Trump administration following January’s imposition of safeguard tariffs on imports of washing machines and solar panels made by Korean and other companies.

Concerns are growing here that US import restrictions might extend to semiconductors, which have bolstered Korea’s exports in recent years.

President Moon came forward Monday to instruct his aides to confidently and resolutely deal with what he called “unreasonable” US protectionist measures.

His call for firm response to trade barriers erected by the Trump administration seemed to contrast with his emphasis on measured ways to cope with China’s economic reprisals against Seoul’s hosting of an advanced US anti-missile system last year.

Korea and China are now in the same position against US trade restrictions.

In response to the US Commerce Department’s report, China warned it would take necessary measures to protect its interests if the US imposes curbs on its steel and aluminum exports.

Observers say China might go further to draw Korea into its fold to present a united front in a possible trade war with the US.

But China’s rise as a manufacturing powerhouse could pose more serious risks to Korean industries in the longer term than tougher protectionist measures taken by the US.

Over the past years, China has changed from a lucrative market for Korean exporters to a dangerous competitor.

Traditional mainstays of Korea’s economy such as shipbuilding, carmaking and chemicals have been overtaken or challenged by Chinese companies.

China is also accelerating efforts to narrow the gap with Korea in semiconductors and other high-tech industries.

A yearlong Chinese boycott of Korean products and cultural contents over the deployment of the US anti-missile shield here, though it was put to an official end in October, served as a reminder of how ready China would be to use its economic clout in a diplomatic standoff.

The increasing trade pressure from the US has also prompted speculation that Washington is linking trade issues to security considerations to check against what it views as the Moon administration’s push to strengthen ties with Beijing and hold unprincipled talks with Pyongyang.

Commentators note Korea is subject to the harshest treatment by the Trump administration though its trade surplus with the US dropped significantly last year while the US imbalances with other major economies widened.

Officials at the Ministry of Trade, Industry and Energy caution against the view the Trump administration has deliberately targeted Korea out of discontent with Seoul’s diplomatic course.

“The key motive behind US protectionist moves is to keep China’s growing economic power in check,” a senior ministry official said, asking not to be named.

“In some respects, it may be unavoidable that Korea is exposed to the fallout from the escalating trade conflict between the US and China.”

The official also noted Trump would pay no heed to the criticism that his protectionist actions violate multilateral trade rules as he is preoccupied with consolidating his support base by showing achievements of his “America First” policy ahead of mid-term elections in November.

Experts advise the Moon government to mobilize the country’s all economic and diplomatic capacity to cope with the mounting US trade pressure, enlisting support from business circles to reach out to the Congress and state governments as well as the Trump administration.

Deteriorating external conditions have strengthened calls for Moon and his aides to reconsider pushing for policies that have increased corporate costs to propel their income-led growth drive.

Pro-labor measures and half-hearted deregulation have weakened the vitality of the country’s manufacturing sector since Moon took office in May.

According to data from Statistics Korea, factories around the country ran at 71.9 percent on average of full capacity last year, the lowest level since 1998 in the aftermath of a devastating foreign exchange crisis. Facility investment dropped 3.1 percent on-quarter in the final three months of 2017, following a 0.4 percent decrease in the prior quarter.

A study released by a local research institute after the US lowered its maximum corporate tax rate to 21 percent, compared to Korea’s 25 percent, suggested the reversal of rates would reduce Korea’s gross domestic product, investments and wages by 1.7 percent, 4.9 percent and 0.3 percent, respectively, over a decade through 2027.

What worries experts here is that mounting US trade barriers coupled with its more business-friendly conditions would prompt more Korean companies, particularly highly efficient and high-tech firms, to move production to the US.

This corporate exodus would result in further aggravating unemployment in the country to the embarrassment of the Moon administration that has vowed to put top priority on creating more jobs.

“The government should look squarely into the reality faced by local companies in drawing up industrial policies,” said Cho Dong-geun, a professor of economics at Myongji University.

By Kim Kyung-ho 
(khkim@heraldcorp.com)