[Han-Jung-Il Economic Upheaval]⑤ "Reduce Dependence on China and Utilize Southeast Asia... Need to Restore Relations with Japan"

"The structural problem of our country's exports is the excessive dependence on China. Just as Japan did in the past, it is necessary to disperse production factories located in China to Southeast Asian countries and gradually reduce the export share to China."

Professor Song Baek-hoon of Dongguk University's Department of International Trade, who was inaugurated as the president of the Korean International Trade Association this year, said this in an interview with Asia Economy on the 18th regarding the recent economic upheaval surrounding Northeast Asia, including Korea, China, and Japan. Korea has rapidly grown with a trade surplus against China, but due to the US-China conflict and supply chain restructuring, it will not be easy going forward, so the intention is to reduce dependence on China by utilizing Southeast Asian countries.

President Song emphasized the importance of restoring relations with Japan, a "near yet distant country," as Korea has a high dependence on materials and parts necessary for the semiconductor industry. He said, "To join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is under Japan's influence, we must first resolve issues such as historical problems. While re-pursuing the Korea-Japan FTA (Free Trade Agreement), it is also important to drastically expand support for the 'SoBuJang (materials, parts, and equipment)' industry to increase production self-reliance."

Below is a Q&A with President Song.

-Our country's trade deficit has been continuously increasing recently. This year also seems challenging. What is the outlook going forward?

▲Last year, we recorded a trade deficit of $47.5 billion. During the 1997 financial crisis, the deficit was $8.4 billion, and during the 2008 financial crisis, it was $13.3 billion, but last year marked the largest deficit in 14 years. Exports increased by 6% compared to the previous year, but imports surged by 19%. The causes include exchange rate and oil price increases, but the sharp decline in trade surplus with China had a significant impact. Amid the US-China conflict, China is still being difficult with Korea, so this year is expected to show a similar trend as last year.

-What is the biggest structural problem in our country's exports?

▲The excessive dependence on China. Last year, the export dependence on China was 21.9%. Although it dropped about 2 percentage points in one year, it is still problematic that one country accounts for one-fifth of our total exports. Hong Kong, influenced by China, also saw a significant decrease in surplus. Since the surplus from traditional trade surplus countries China and Hong Kong decreased by $32.6 billion, it inevitably turned into a deficit. Imports of crude oil and raw materials from Saudi Arabia, UAE, Australia, etc., are issues we cannot change, so the structural problem that can be improved is undoubtedly the 'dependence on China.'

-The US-China hegemonic competition is intensifying. How should Korea, caught in the middle, set its direction?

▲It is not an easy issue. It is difficult to ignore the US's opinion, and it is also hard to neglect China. Therefore, we must try to maintain balance. Recently, as economic security has become more important, all countries are pursuing the establishment of reliable supply chains. Around us, there are US-centered frameworks such as the Indo-Pacific Economic Framework (IPEF), Quad Plus, and AUKUS. If we participate in all these fronts, it is practically an economic declaration of war against China. The alliance with the US includes security and economic aspects, so we need to develop a strategy to approach them separately. Otherwise, there is a high possibility of economic retaliation from China.

Chinese President Xi Jinping [Photo by Yonhap News]

-How should we reduce dependence on China?

▲It is easy to say but realistically difficult. Looking at Japan's past case, after Prime Minister Koizumi's visit to Yasukuni Shrine in 2005 triggered anti-Japanese protests in China, Japan used the 'China+1' strategy to reduce trade dependence on China. This involved relocating production bases not only to China but also to Southeast Asian countries. It is a kind of 'nearshoring.' Also, when Japan signed the Korea-ASEAN FTA in the past, it pursued FTAs individually with ASEAN countries. Japan recognized the importance of Southeast Asian countries earlier than us and created an environment for production and investment. To reduce dependence on China, we too must actively utilize the Southeast Asian market as the best option.

-Japan has a high dependence on imports of materials and parts, but there was conflict such as export regulations in 2019. How should we form relations going forward?

▲There are quite a few items we import from Japan that are irreplaceable. Since we depend on them in strategic industries such as the semiconductor industry, we need to improve relations. Also, we want to join the CPTPP, which is under Japan's influence. Japan's position is that Korea cannot join unless historical issues such as comfort women and forced labor are resolved. It is not easy, but from an economic perspective, we should start by resolving issues that can be solved.

Japanese Prime Minister Fumio Kishida
[Photo by Yonhap News]

-What should we do first to improve economic cooperation with Japan?

▲We need to re-pursue the Korea-Japan FTA. Discussions on the FTA were suspended due to Dokdo and historical issues, and Japan still maintains export control items against Korea, but we should improve relations by re-pursuing the FTA while negotiating supply chain-related matters. However, to improve the chronic trade deficit with Japan, the development of the domestic 'SoBuJang' industry is also important. Although there is a special law supporting SoBuJang, the R&D support scale is only 2 trillion won, which is much less compared to the semiconductor support law. There should be more groundbreaking policies in terms of production self-reliance against Japan.

-What kind of 'groundbreaking support' is there?

▲Looking at the semiconductor special law, the tax credit rates for large corporations, mid-sized companies, and SMEs for investment in national strategic technologies differ. The tax credit for large corporations is the smallest. However, in reality, the companies investing in SoBuJang or semiconductors are large and mid-sized companies. While balancing SMEs and large corporations is necessary, efficiency must be considered. When large and mid-sized companies receive support comparable to SMEs, they gain the courage to take the first step in investment.

-There is a global craze for 'reshoring' (return of overseas companies to domestic). Korea is also making efforts but results are poor.

▲Korea has had reshoring support policies for quite some time, but the results are not good. This is because the reshoring targets were unclear. Mainly, companies operating in China were targeted, but these companies went abroad to reduce production costs such as labor costs, so even with some tax benefits, they cannot return domestically. Now, globally, the weight is shifting from the 'Global Value Chain (GVC)' to the 'National Value Chain (NVC),' so companies that can help the NVC should be brought back domestically. For this, slight tax support is not enough.

-How should reshoring be expanded?

▲Since our labor costs are high, we need to induce returning companies to build 'smart factories' and support construction costs. Also, most companies want to be in the metropolitan area, but due to the 'Metropolitan Factory Total Quantity System,' it is not easy. We cannot allow all reshoring companies, but for companies belonging to national strategic industries, exceptions should be applied. Another reason companies find it difficult to come to Korea is the excessive rigidity of the labor market. Even if not employment, flexibility in (working) hours needs to be expanded.

-Are there any additional policies needed for the semiconductor industry revival?

▲The government has increased tax support for large corporations related to national strategic technologies. But the problem is that this is only temporary for this year. Of course, it can be extended for another year, but from an investor's perspective, the business does not end in one year. The Ministry of Strategy and Finance decided this considering the budget, but if the direction we are heading is semiconductors, one-year temporary support is weak. To send a 'signal' to the market, it is appropriate to say it will be supported throughout the five years of this government.