The US-China battle for hegemony and the South Korean economy

Posted on : 2020-06-03 17:40 KST Modified on : 2020-06-03 17:40 KST
Seoul needs to carefully maintain a balance so as not to veer too much to one side
Global leaders including German Chancellor Angela Merkel, French President Emmanuel Macron, and US President Donald Trump during the G7 summit in Quebec City, Canada, on June 9, 2018. (AP/Yonhap News)
Global leaders including German Chancellor Angela Merkel, French President Emmanuel Macron, and US President Donald Trump during the G7 summit in Quebec City, Canada, on June 9, 2018. (AP/Yonhap News)

Trade, finance, and all aspects of the economy are becoming the front lines in the hegemonic struggle between the US and China. After slapping sanctions on Chinese telecommunications giant Huawei, US President Donald Trump is now pushing to build a global supply network dubbed the “Economic Prosperity Network” that would leave China in the cold and likely suck the South Korean economy into the maelstrom. With Seoul forced to decide whether or not to join the anti-China coalition, the conflict between the two countries will have major consequences for the Korean economy.

These challenges were voiced by South Korean President Moon Jae-in during the Blue House’s sixth emergency economic meeting on June 1. “The South Korean economy is under considerable pressure because of growing unilateralism and protectionism and the conflict between the great powers,” Moon said.

Both the US and China are extremely significant for the South Korean economy, which is highly dependent on foreign trade. Combined, the two countries account for 38.6% of Korea’s exports and 33.6% of its imports. China was South Korea’s biggest trade partner last year, holding the top position both in exports (US$126.21 billion) and imports (US$107.22 billion). The US came in second in both categories, accounting for US$73.35 billion in exports and US$61.87 billion in imports. The three economies with which South Korea has the biggest trade surplus are Hong Kong (US$31.04 billion), China (US$28.99 billion), and the US (US$11.48 billion) — the same economies that are at the center of the current conflict.

Even worse, the Hong Kong security law that the Chinese government recently pushed through, ratcheting up its dispute with the US, represents a major risk to the South Korean economy. “If South Korean industry is targeted for retaliation amid the sharpening conflict between the US and China, we couldn’t avoid a short-term impact. Since the recent affair is linked with Hong Kong, we expect a shock in areas in which we do a lot of business with Hong Kong, including the finance industry, the service sector, and logistics and shipping,” said Kim Su-dong, head of trade policy for the Korea Institute for Industrial Economics and Trade.

But given South Korea’s share of the global economy, others think it won’t be brought to its knees by the US-China conflict. In short, the specific impact will vary with each industry. As Korea learned during the controversial THAAD deployment, the sector exposed to the greatest danger is logistics and distribution, given the massive influence of Chinese consumers.

“We greatly expanded our operations in Southeast Asia while retrenching in China during the THAAD controversy, and I guess we’ll have to maintain that approach,” said a source at Lotte Holdings. “It’s not so much opening up operations in China that we’re worried about as it is our domestic duty-free stores and department stores, where our main customers are Chinese.”

In contrast, some think that the strategic position of South Korean firms in some industries, including semiconductors and telecommunications equipment, could actually serve as an opportunity. “The Trump administration probably won’t directly ask companies like Samsung to stop supplying semiconductors to Chinese companies. Instead, what we’ll see is Samsung taking steps independently in order to manage risk,” said a senior researcher at a state-funded institute who spoke on condition of anonymity.

“Companies have no choice to decouple from China. But rather than closing facilities currently operating in China, they’re more likely to look outside of China, to countries like the US and Vietnam, for investment aimed at 10 years in the future, such as next-generation semiconductors and cutting-edge technology,” this researcher said.

Nevertheless, increasing uncertainty has created a grave dilemma for industry as a whole. “The most important thing is to maintain balance because it would be costly to create the appearance of moving too close to either the US or China. We’ve maintained that balance so far, but there are concerns about what remarks might come out of the summit,” said a source in the South Korean semiconductor industry, referring to the US’ invitation for South Korea to attend the G7 summit.

“In terms of running a business, uncertainty is the worst possible factor. The very fact that Korean companies keep getting mentioned in this situation is undesirable,” said another source in the semiconductor industry.

By Koo Bon-kwon, Song Chae Kyung-hwa, and Shin Min-jung, staff reporters

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