[The Editors' Verdict] "All Talk" Support for Reshoring Companies

Amid the unprecedented human and material losses caused by the novel coronavirus disease (COVID-19) pandemic, which has frozen the global economy, countries around the world are pouring out every possible measure they can mobilize.

South Korea has also decided, for the first time in history, to provide up to 1 million won in cash to every household of four people. There is an urgent need to inject emergency measures before the economic ecosystem collapses to at least sustain it temporarily. However, with the COVID-19 crisis and economic recession showing no signs of ending, there are calls to conserve fiscal resources to prepare for even tougher times ahead and to increase support for the production sector.

Major countries such as the United States, Japan, and Europe are injecting emergency funds while encouraging the relocation of production bases back to their own countries. The prolonged COVID-19 crisis and the inevitable contraction of global supply chains have been recognized as an opportunity for reshoring and the revival of manufacturing industries in their home countries. Didn’t many countries painfully realize the importance of manufacturing for expanding a stable domestic demand base and maintaining jobs during the recovery from the 2008 global financial crisis?

Reshoring gained global attention in 2013 when then U.S. President Barack Obama encouraged companies to return to the United States by offering incentives such as corporate tax cuts and relocation cost support. During this period, China’s minimum wage rose rapidly, and the Xi Jinping administration tightened regulations. Moreover, losses from intellectual property rights infringements, which had been overlooked to facilitate business activities in the Chinese market, increased, causing companies operating in China to reconsider their business activities there.

When Donald Trump took office in 2017 and further lowered the corporate tax rate to 21%, announcing penalties for U.S. companies operating overseas, American companies found it increasingly difficult to hold out. As U.S.-China tensions deepened recently, with concerns over tariff disadvantages, many companies joined the wave of returning to the U.S. mainland. Caterpillar returned from Japan to Georgia, and global companies such as Ford, Intel, and Apple established new production bases in the U.S., with more than 3,300 companies reshoring over the past decade.

In 2013, when the Obama administration’s reshoring policy was gaining worldwide attention, South Korea also enacted the U-Turn Support Act. This law exempted income and corporate taxes for five years after reshoring and provided site and facility subsidies from both central and local governments.

Following the enactment of this law, fashion jewelry companies that had expanded into Qingdao reshored to the Iksan Industrial Complex in North Jeolla Province. However, due to various reasons, the initially expected support was canceled, and many companies faced bankruptcy due to management difficulties or were forced to go overseas again.

With the COVID-19 crisis bringing reshoring policies back into the spotlight, the Ministry of Trade, Industry and Energy has once again announced support for companies returning from overseas. At the end of last month, the ministry decided to launch a 'Public-Private Joint U-Turn Support Task Force.' This consortium, composed of local governments, the Export-Import Bank, the Korea Trade Insurance Corporation, industry associations, KOTRA, and other trade support organizations, plans to mobilize all systems to attract and support reshoring companies.

Leaving the impractical U-Turn Support Act as it is, one cannot help but ask what support government-affiliated organizations can realistically provide to reshoring companies. Given the lack of competitiveness in corporate taxes, labor costs, and factory sites, expecting reshoring companies is unrealistic.

Due to the COVID-19 crisis, revitalizing manufacturing activities domestically is necessary not only for companies but also for the national economy. Japan has announced it will support two-thirds of relocation costs for reshoring companies. Even a portion of the approximately 240 trillion won COVID-19 response funds should be allocated to firmly support companies returning home.

Jin-Kyo Jung, Professor, Department of International Trade, Inha University