[Collapse of Trade Theory, New Supply Chain Era] ① Globalization → Localization... US Tariff War That Changed the Map

The Reorganization of Global Supply Chains Accelerates Under Trump's Second Term
Strong Onshoring and the U.S. Pursuit of Manufacturing Revival
Korean Exports Face Up to 20 Trillion Won in Losses... Seeking New Market Opportunities

Editor's NoteThe tariff war triggered by the 'Trump administration' is shaking the global supply chain. Since the establishment of the World Trade Organization (WTO) in 1995, globalization, which had been sustained for 30 years based on low tariffs, has entered a decline. Instead, localization, which emerged after the COVID-19 pandemic, has begun to take hold as the new trend. Whereas in the past, 'optimal cost' was the top priority in building supply chains, now minimizing supply risks has become the foremost priority for companies. Especially through two terms of the Trump administration, there has been a trend of production bases being established centered around the North American market. Korean companies are at a crossroads, wondering whether they should overhaul their production strategies according to U.S. trade policies or pioneer new markets. Asia Economy conducts an in-depth analysis over six installments on how our companies are responding amid the tectonic shifts in the global supply chain.

Over the past eight years, the number of corporations established by Korean companies in the United States has been about twice that of those established in China. Until 2017, the first year of Donald Trump's first term as U.S. president, the number of corporations established by domestic companies in both the U.S. and China was roughly similar, but since then, the gap has widened. The supply chain changes have gradually progressed since the Trump administration took office.

According to an analysis by Asia Economy on the 26th of statistics from the Korea Eximbank and the relocation of overseas production bases by Korean companies, the average annual number of corporations established by Korean companies in the U.S. during this period was 604, twice as many as in China (324). In 2017, the number of new corporations established by Korean companies in the U.S. and China regions was similarly in the mid-500s. In fact, Samsung Electronics closed its Tianjin, China corporation last September, marking the end of the withdrawal from smartphone and TV factories carried out between 2018 and 2020, and LG Electronics moved its premium refrigerator production base, which exported to the U.S., from its Taizhou, China factory to its domestic Changwon factory in 2019, earlier than Samsung.

Shin Won-kyu, a visiting researcher at the Korea Economic Research Institute, said, "Companies inevitably move toward consumer markets, and the value chain is being rearranged."

The existing supply chain, characterized by 'low cost and high efficiency,' has undergone rapid changes due to the COVID-19 pandemic and the U.S.-China hegemony competition. During his first term, President Trump ignited the trend of decoupling from China and is now targeting 'tariff bombs' indiscriminately at allies and friends alike. The uncertainty in the trade environment is accelerating the timetable for supply chain restructuring.

Leading Korean export companies in semiconductors, home appliances, power equipment, automobiles, and batteries began relocating their overseas production bases, which were centered in China, to the American continent starting from Trump's first term. In particular, production lines in Latin America, which were entered in the 1990s, saw new investments such as facility expansions after President Trump took office. Given the nature of the shipping industry, this is interpreted as an effort to reduce uncertainties and minimize congestion risks caused by port labor shortages. On the other hand, factory closures and downsizing continued in China.

This shift in production bases occurred because reducing risks, rather than costs, became the top priority in supply chain considerations. In 2020, Hyundai Motor halted new car production when the supply of the general-purpose part 'wiring harness' produced in China was interrupted. Based on this experience, companies have moved to place supply chains closer to production bases, and with the tariff bombs dropped shortly after the start of Trump's second term, the relocation accelerated.

Investment has also clearly shifted from China to the U.S. According to the Korea Eximbank, Korea's investment in the U.S. surged from $15.331 billion in 2017, when President Trump first took office, to $28.045 billion in 2023. That year, the U.S. accounted for 43.7% of Korea's overseas direct investment (ODI). The temporary decline last year is attributed to increased uncertainty ahead of the U.S. presidential election.

Investment in China has sharply decreased, dropping from $3.226 billion in 2017 to $1.144 billion last year. In contrast, investments in Mexico and Canada increased from $497 million and $449 million, respectively, to $1.297 billion and $3.061 billion during the same period, significantly surpassing investments in China. The temporary recovery in investment during 2021-2022 appears to reflect policies such as the Chinese government's removal of restrictions on foreign investment.

'Nearshoring' Is Not Enough... 'Onshoring' Is Required

During Trump's first term, the United States-Mexico-Canada Agreement (USMCA) was concluded, giving momentum to the nearshoring policy, which means 'come closer to the U.S.' Now, Korean companies face demands to 'come inside the U.S.'?a stronger form of onshoring.

President Trump used 'tariffs' as a means to accelerate supply chain restructuring. Korean companies are building production bases within the U.S. or expanding local assembly lines to avoid risk factors. Investments in neighboring North and Latin American regions are also expanding, with production bases gathering around markets.

Samsung Electronics is building a foundry (semiconductor contract manufacturing) plant in Taylor, Texas, with an investment of $40 billion (about 55 trillion KRW), and SK Hynix invested $3.87 billion (about 5 trillion KRW) in Indiana for the same reason. Since the enactment of the Inflation Reduction Act (IRA) in 2022, three domestic battery companies operate or are constructing 15 production bases in the U.S. On the other hand, Mexico and Canada, which entered under the nearshoring policy, have fallen under Trump's tariff scope, so companies operating in these regions inevitably face impacts.

The goal of the 'tariff war' triggered by President Trump is to restore American manufacturing and foster advanced industries. Onshoring is bound to grow further. Supply chain changes are fatal to Korea, which has an export-oriented economic structure. Trade experts and research institutions estimate that the export damage to Korean companies could reach up to 20 trillion KRW. The Korea International Trade Association analyzed that if the U.S. imposes universal tariffs on all countries following measures against China, Mexico, and Canada, Korea's exports to the U.S. would decrease by $10.03 billion, exports to Mexico by $1.57 billion, resulting in a total export reduction of $13.2 billion (about 19 trillion KRW). This accounts for about 2% of Korea's total exports of $683.8 billion (about 984 trillion KRW) last year.

Alternative Markets Such as the Middle East and India Must Also Be Explored

The supply chain changes triggered by the U.S. are expected to expand to other regions as well. There is analysis that supply chain diversification will be sought toward third regions and emerging markets. Samsung Electronics, LG Electronics, and Hyundai Motor are actively targeting the Indian market recently. India, which has surpassed China to become the most populous country in the world, is regarded as a 'land of opportunity.' Placing production bases close to markets is becoming a rule outside the U.S. as well. The Indian government is already promoting manufacturing investment through policy reforms such as tax reductions.

Eastern Europe and Southeast Asia are also considered regions of supply chain change. Eastern European hub countries connecting Asia and Europe, such as Poland and Hungary, are attracting attention due to low labor costs and Europe's eco-friendly policies. Indonesia, Vietnam, and the Philippines are regarded as the 'Big 3' of ASEAN (Association of Southeast Asian Nations). National-level industrial promotion policies have rapidly enhanced their competitiveness as domestic markets and production bases.

Han Areum, a senior researcher at the Korea International Trade Association, said, "Many companies are currently considering local investment in the U.S., but they cannot make investment decisions solely based on immediate policy factors such as tariff imposition. They need to concretely consider various factors such as policy volatility, realistic costs, and changes in congressional composition following the U.S. midterm elections two years from now."

Hyundai Motor India Chennai Manufacturing Plant. Photo by Hyundai Motor Company