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Urea water solution, used in diesel vehicles to cut exhaust emissions, can be seen being produced at a factory in Ansan, Gyeonggi Province, on Wednesday. This manufacturer usually makes 150 tons of the solution per day, but with urea becoming harder to come by, it is currently only putting out 5 to 10 tons per day. (Yonhap News)

Now that China has reportedly announced plans to proceed with exports of 18,700 tons of urea that Korean companies were under contract to receive, the panic over diesel exhaust fluid that spread through Korea over the past few weeks is expected to subside. This series of events revealed the vulnerability of the Korean economy, which is inextricably tied to the global supply chain. But aside from maintaining friendly relations with other countries, surefire solutions for overcoming that vulnerability are proving difficult to find.

The panic was set off by a terse notice that China’s customs authority sent out on Oct. 11. The notice said that as of Oct. 15, export inspections would be mandatory for 29 materials that hadn’t been previously subject to inspections, one of which being urea. Koreans took that as a de facto ban on exports, which led to panic buying of diesel exhaust fluid, an aqueous solution made with urea.

Large trucks, such as cargo and firetrucks, require a continuous supply of diesel exhaust fluid for their emissions reduction systems. There were fears that if those trucks stopped running, it would lead to a logistical logjam that would paralyze the entire economy. A shortage of coal and power in China had set off a butterfly effect that threatened the South Korean economy.

This is not the first time this kind of panic has played out in East Asia in the past decade. A territorial dispute between China and Japan over the Senkaku Islands — known as the Diaoyu Islands in China — in September 2010 led to China retaliating by halting exports of rare-earth elements to Japan. As recently as 2009, China was producing 97% of the world’s rare-earth elements and accounted for 92% of Japan’s total rare earth imports.

That opened Japan’s eyes to the strategic importance of rare-earth elements, and it attempted to diversify its supply chain to include countries in Asia and Africa.

Two years ago, in July 2019, the tables turned, and Japan took on the role of aggressor. In retaliation to a ruling by the South Korean Supreme Court ordering Japanese companies to pay damages to Koreans drafted for forced labor, Japan tightened export controls on hydrogen fluoride and two other materials that are essential for the manufacture of semiconductors.

While South Korea’s government has taken aggressive action to secure Korea against such commercial attacks, it has only been partially successful.

“After [Japan instituted] the export controls, South Korea reduced overall imports of Japanese parts, materials and equipment. But in 2020, imports increased again, showing the strong path dependence of imports from Japan,” said Kim Yang-hee, head of research in economics, trade and development at the Institute of Foreign Policy and National Security at the Korean National Diplomatic Academy, in a report published in July.

South Korean dependence on Japanese imports of 100 key parts, materials and equipment (as designated by the Korean government) was at 24.9% between January and May of this year, down from 31.4% two years ago. But Korea remains over 90% dependent on Japan for photoresist, a crucial light-sensitive material.

That illustrates the difficulty of artificially adjusting a global supply chain that formed naturally over a long period of time. Diversifying imports of important strategic materials is important, but it’s practically impossible to take measures for all the materials for which Korea depends heavily upon a particular country — which could be said about 3,941 materials, or more than 80% of the total.

On the other hand, when one country inflicts damage on the global supply chain for political reasons, the tactic can blow up in its face. China had learned that lesson, which is why, despite hinting that it might, it didn’t actually play the rare-earth materials card in its trade war with the US that began in 2018, as it had done in 2010. Even Japan, despite all its big talk, didn’t ban exports of those three key materials because of the liability of disrupting the semiconductor supply chain.

The long-term solution to the scarcity of diesel exhaust fluid is the one that President Moon Jae-in himself mentioned during a briefing about successes in the parts, materials, and equipment industries back in July. “I don’t think we need to achieve self-sufficiency in every area. Maintaining the international division of labor and supply chains remains important,” Moon said during the briefing.

The only solution is working to maintain the supply chains that have made Korea’s prosperity possible and to take prompt action whenever problems arise. Security against the choppy waters of supply chains means having the strength and the flexibility to hold on when someone rocks the boat.

By Gil Yun-hyung, staff reporter

Please direct questions or comments to [english@hani.co.kr]