KDI: "Korea Must Join Global Supply Chain Restructuring to Reduce GDP Decline"

Recently, as the United States and the European Union (EU) aim to restructure supply chains in key strategic industries to strengthen regional competitiveness, a national research institute analyzed that South Korea should also participate in supply chain restructuring to reduce the decline in its gross domestic product (GDP).

On the 24th, Im Hee-hyun, a research fellow at the Korea Development Institute (KDI), revealed this in a report titled 'Supply Chain Restructuring Policies of Major Countries' Strategic Industries and Their Impact on the External Vulnerability of Our Economy' published in the 'KDI Global Economic Review.'

The United States is advancing supply chain restructuring through the CHIPS and Science Act and the Inflation Reduction Act, while the EU is doing so through the Semiconductor Act and the Green Deal industrial plan.

These laws aim to strengthen regional competitiveness in the semiconductor and eco-friendly industries and reduce dependence on external sources. They intend to reduce supply chain dependence on specific countries such as China. South Korea's export share to China accounts for 13% of GDP (based on 2019), and the share of intermediate goods imports from China is 20.5% (based on 2019), the highest, indicating a significant level of dependence on China in export demand and intermediate goods imports.

Research fellow Im predicted that if both the United States and the EU cease trade with China in the semiconductor and battery industries and the United States sources 60% of these industries from North America, the decline in South Korea's GDP would be minimal, ranging from 0.004 to 0.016 percentage points.

[Image source=Yonhap News]

However, in a scenario where both the United States and the EU stop trading with China in the semiconductor and battery industries, the United States sources 100% of these industries from North America, and allies including South Korea also cease trade with China in these industries, the decline in South Korea's GDP due to China-origin trade sanctions is expected to narrow to 0.427 to 0.641 percentage points.

This phenomenon occurs as China's share in South Korea's production and demand significantly decreases due to the cessation of semiconductor and battery trade with China. This takes into account that 23.8% of South Korea's semiconductor and battery production intermediate goods exports are destined for China.

Research fellow Im stated, "It is important to strengthen the stability of supply chains in strategic industries and reduce the impact of external shocks through independent supply chain restructuring efforts," adding, "Beyond responding to major countries' supply chain policies, it is necessary to introduce policy measures domestically to diversify supply chains in strategic industries and to promote bilateral and multilateral international cooperation externally."