[The Korea-China-Japan Economic Upheaval]② Deepening 'Every Man for Himself'... Korea-China-Japan Division of Labor Breaks Down

The triangular division of labor system among Korea, China, and Japan that has continued for over 20 years is heading toward its end. The cracks in the division of labor system, triggered when China began domesticating materials and components in the 2010s, moving beyond its role as the 'world's factory' simply exporting finished products, have recently accelerated due to China's declaration of 'self-reliance in advanced technology fields' and the intensifying U.S.-China conflict. Experts emphasize that since Korea's growth strategy relying on Japan and China has already expired, it must quickly seek new growth avenues through the development of high value-added industries and market diversification.

Cracks in the 'Japan→Korea→China' Division of Labor System

The Northeast Asian triangular division of labor system among Korea, China, and Japan was formed starting in the 2000s when China's economy began to grow rapidly. At that time, Japan, which had superior technology in key fields, exported materials and components to Korea, which then processed them into parts and semi-finished products and exported them to China. China assembled and processed these into finished products and exported them to the global market. Within this structure, Korea accumulated a current account surplus through exports for decades and succeeded in advancing to a developed country with a per capita income of $30,000.

However, the Korea-China-Japan triangular division of labor system was greatly shaken when China began promoting 'China Inside' beyond 'Made in China.' China has continuously increased the list of prohibited items for processing trade to strengthen its domestic materials and components competitiveness, and after the 2008 global financial crisis, China's parts self-sufficiency rate and manufacturing competitiveness improved significantly, threatening Korea's economy. Korea, which had advantages over China in semiconductors, displays, petrochemicals, and steel, saw its profit structure gradually weaken in imports and exports with China due to China's rapid technological advancement.

Moreover, the 'Japan risk' also contributed to the breakdown of the division of labor system. The termination of the Korea-Japan General Security of Military Information Agreement (GSOMIA) in 2019 and Japan's sudden export restrictions marked a turning point in Korea-Japan economic cooperation. At that time, Japan restricted exports of key semiconductor and display materials on which Korea heavily depended, strongly instilling the perception that Japan was no longer a stable supplier of materials and components. Subsequently, the government significantly strengthened support for domestic production of materials, components, and equipment (SoBuJang) to reduce dependence on Japan, leaving scars on Korea-Japan economic cooperation.

Growing Distance Among Korea, China, and Japan... The Decisive Blow of U.S.-China Hegemony Competition

The recent intensification of the U.S.-China competition for hegemony in advanced technology fields has ignited cracks in the Korea-U.S.-Japan triangular division of labor system. President Xi Jinping, starting his third term in October last year, once again declared self-reliance in advanced science and technology to achieve 'Chinese-style modernization.' China's securing of technological capabilities is negative for Korea, which has grown through exports to China. Additionally, Japan, under the pretext of containing China, has gained U.S. support for militarization, increasing uncertainty in Northeast Asia's economic and security landscape involving Korea, China, and Japan.

Song Young-kwan, Senior Research Fellow at the Korea Development Institute (KDI), said, "The electronics and petrochemical sectors involve significant trade among Korea, China, and Japan, but with the recent intensification of U.S.-China conflicts culminating in semiconductors becoming a security issue, the possibility of further division among Korea, China, and Japan has increased. The U.S. is politically unstable with high uncertainty, and Japan remains a risk factor as it could impose export restrictions again at any time."

The Yoon Suk-yeol administration has, for now, placed more weight on cooperation rather than division among Korea, China, and Japan, but many analyze that it is an unavoidable choice since it is difficult to seek growth recovery while being detached from China and Japan. In the final report of the 'Indo-Pacific Strategy' announced at the end of last year, the government explained, "We seek a future-oriented cooperative relationship with Japan that aligns with common interests and values, and with China, we aim to promote mutual interests based on mutual respect and reciprocity in accordance with international norms and rules." A presidential office official said, "Refusing cooperation with China is quite far from reality."

Diversification of Imports and Exports Essential... "Abandoning the Chinese Market is Not an Option"

Experts advise that since growth through international division of labor with Japan and China has already reached its limits, Korea should focus more on breaking new ground. According to the Korea International Trade Association, seven out of the top ten export items to China recorded negative growth last year, and the trade balance with China has been in deficit for three consecutive months since October last year. Although exports to China may increase again due to China's 'zero-COVID' policy, recent retaliatory measures such as suspending short-term and transit visa issuance for Koreans make the recovery of exports uncertain.

Kang Sung-jin, Professor of Economics at Korea University and President of the Korean International Economic Association, said, "Just as Korea's dependence on Japan is decreasing, China's technological advancement is increasing its self-reliance, so the method of importing intermediate goods from Korea and selling them in the global market will inevitably decrease. Ultimately, it revolves around the 'product cycle,' and how well Korea adapts to it is important."

Senior Research Fellow Song said, "Advanced industries should cooperate with the U.S. or Europe, but since China is such a large market, completely abandoning it is nonsense. While maintaining strategic policies between the U.S. and China, it is necessary to upgrade corporate added value and further expand entry into developed country markets." Professor Kang added, "We should diversify import routes to cheaper countries than China, such as Vietnam and Cambodia, while also diversifying export markets."