[Exclusive] "Buying Taiwanese Parts Will Cause Big Trouble"... China Imposes Sanctions on Korean Companies

Chinese Customs Notifies Local Korean Companies to Use 'Chinese Taiwan' Instead of 'Made in Taiwan' for Taiwanese Parts

Taiwan President Tsai Ing-wen (right) standing alongside Nancy Pelosi, Speaker of the U.S. House of Representatives [Image source=Yonhap News]

[Asia Economy Reporters Kim Bo-kyung and Kim Hee-yoon] Amid the rapidly deteriorating U.S.-China relations following U.S. House Speaker Nancy Pelosi's visit to Taiwan, China has ultimately begun imposing sanctions on South Korean companies operating on the Chinese mainland.

The sanctions include electronic components such as batteries, which are expected to cause significant damage to Korean companies that have factories in China and import parts from Taiwan to manufacture finished products.

According to companies and local sources in China on the 5th, Chinese customs notified Korean companies with factories in China on the 4th that if they import parts labeled with Taiwanese origin (Made in Taiwan or R.O.C: Republic of China), those parts will be fully confiscated. The items warned for confiscation by China include key products such as batteries and other electronic components. It is not yet clear whether only Korean companies are targeted or if all foreign companies on the Chinese mainland are subject to this.

However, Chinese customs informed Korean companies that instead of the sole label 'Taiwan,' the use of 'Taiwan province of China,' 'Taiwan China,' or 'Chinese Taiwan' is permitted. This means that Korean companies importing parts from Taiwanese companies or Taiwanese parts within mainland China must acknowledge the 'one country, two systems' principle in the origin labeling to be allowed to import the parts.

The 'one country, two systems' principle refers to the governance framework for Hong Kong and Macau under China and represents the principle for Taiwan's unification.

The Chinese government announced that it legalized the origin labeling of "One Country, Two Systems" in 2015.

◆ Expected Damage to Korean Companies with Production Bases in China = As a result, Korean companies with production bases in China are on high alert. One Korean company that imports battery parts from Taiwan, assembles them in China, and exports products worldwide is busy preparing countermeasures.

The company’s CEO explained, “We are considering measures such as replacing the origin label as requested by China, but we expect serious issues such as rework costs and delivery delays,” adding, “If the origin label is changed, there may also be problems such as having to reacquire various certifications required for the product.”

According to the Korean company with a factory in China, all packaging of products already shipped from Taiwan must be opened to change the origin label, and products already shipped must be returned or unloaded for reprocessing. Additionally, if re-certification is required due to the origin label change, time and cost issues may arise.

Furthermore, if the origin labeling change is unilaterally enforced, diplomatic issues with Taiwan and relations with the United States cannot be ignored.

The origin labeling indicating the 'one country, two systems' principle was legalized by China in 2015, but it appears this is the first time it is being fully applied to Korean companies.

China had previously suspended imports of fruits, frozen mackerel pike, hairtail fish, and processed foods around Speaker Pelosi’s visit to Taiwan on the 2nd, and this measure is understood to be an additional step.

◆ High Dependence on China... Rising Anxiety Among Korean Companies = As U.S.-China relations rapidly cool, trade sanctions by China against Taiwan and neighboring countries are just beginning, which is expected to heighten anxiety among Korean companies. Small and medium-sized enterprises (SMEs) with production bases in China or high export ratios to China, as well as large corporations with significant business scale, are expected to feel particularly uneasy.

Korean SMEs’ exports to China in the first half of this year amounted to $11.42 billion, accounting for 19% of the total SME exports ($60.5 billion) in the first half, indicating a high proportion. Although the total exports to China, including large corporations, decreased to $13.2 billion in July alone, dependence on China remains the highest.

Officials from the Ministry of Trade, Industry and Energy and the Ministry of SMEs and Startups stated, “There have been no formal reports from domestic companies regarding China’s origin labeling so far,” and added, “We will investigate the matter.”

Meanwhile, Taiwan, which produces about half of the world’s semiconductors, sold $104.3 billion (approximately 137 trillion KRW) worth of advanced technology products to Chinese manufacturing plants last year. Despite tensions with Taiwan, cross-strait trade volume increased by 26% to $328.3 billion (approximately 430 trillion KRW) last year.