[Collapse of Trade Theory, New Supply Chain Era]③ "The Market Is the Production Base"... 'Cost Efficiency' Dominating 40 Years of Trade Collapses

The Collapse of Efficiency and Division of Labor in Global Supply Chains
Production Bases Relocate One After Another Centered on the North American Market
When Tariffs Are Imposed: Minimizing Logistics Costs or Targeting Domestic Demand
Semiconductors in Tariff Crosshairs... Memory Production in China Faces a Blow

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. In the past, 'optimal cost' was the top priority in building supply chains, but 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 establishing production bases centered on the North American market. Korean companies are at a crossroads, wondering whether to overhaul their production strategies according to U.S. trade policies or to pioneer new markets. Asia Economy conducts an in-depth analysis in six parts on how our companies are responding amid the tectonic shifts in the global supply chain.

Since the 1980s, when free trade gradually began to take root, the global trade order has been summarized as 'rational division of labor' based on cost efficiency. Low-income countries earn money through resources, middle-income countries secure finances through exports, and advanced countries consume efficiently produced products cheaply while focusing on the development of high-tech industries. The search for regions with cheap raw materials and labor costs, especially the Just in Time inventory system created by Japan's Toyota, has been the dominant trade theory governing the global economy for the past 40 years. However, with the inauguration of U.S. President Donald Trump in 2017, the 2020 pandemic, and the second Trump administration in 2025, this has gradually lost its footing.

The key change for global companies after President Trump's administration is that they are relocating production bases centered on the 'market' rather than 'cost.' His demand is simple: 'If you want to sell in the U.S. market, produce in the U.S.' Korean companies are relocating production bases to the Americas to target the North American market instead of following the previous rule of low cost and high efficiency. The task of reducing dependence on China to lower geopolitical risks also played a role.

◆Consolidation of factories outside the U.S.= The change in traditional trade theory became evident after Trump's inauguration in 2017. Samsung Electronics and LG Electronics expanded their TV and home appliance production bases in Mexico during this period. In November 2018, during Trump's first term, the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), was signed, and the two companies expanded strategic production bases targeting the North American market. They utilized the principle of tariff-free treatment for electronics while choosing regions with relatively lower labor costs than the U.S.

However, with high tariffs also being threatened for Mexico and Canada during Trump's second term, companies are seeking new survival strategies.

LG Electronics recently closed its Mexicali plant in Mexico and consolidated TV production at the Reynosa plant. The Reynosa plant is close to the U.S. border. Although it cannot completely escape tariff threats, it survives by at least reducing logistics costs.

Samsung Electro-Mechanics recently liquidated its Kunshan subsidiary in China after 15 years and has suspended and is reviewing plans to establish a production subsidiary for automotive camera modules in Mexico. While agreeing on the necessity of having a production subsidiary in North America, the company has begun to reconsider the factory location amid Trump's administration. A Samsung Electro-Mechanics official said, "For the time being, we plan to focus on high value-added products and look for a third region."

Of course, from a company's perspective, moving all manufacturing plants to the U.S. is a very difficult choice. Aside from the large costs required to build new factories, relocating to the U.S. inevitably leads to increased labor costs due to hiring workers. Also, importing raw materials into the U.S. incurs logistics costs plus tariffs. Ultimately, companies face increased cost burdens. To capture the U.S. market, the supply chain principle of 'cost efficiency' must be abandoned. Peter Goodman, author of The Collapse of the Supply Chain Era, pointed out, "Global supply chains are shifting from the traditional 'Just in Time' production method to the 'Just in Case' concept."

◆"Targeting local demand in Latin America" amid U.S. tariff burdens= Therefore, some companies are considering diversifying demand by targeting local domestic markets in Latin America, where they have established production bases. LS Cable & System found a breakthrough locally in Mexico. They are building battery parts and power equipment factories in Quer?taro, and if tariffs are imposed, the local partner company will bear the cost. An LS Cable & System official explained, "Power products have sufficient local demand, so switching to the domestic market is also being considered."

◆Complex semiconductor supply chain= The semiconductor sector, a core of Korea's export industry, cannot avoid supply chain restructuring. The problematic item is memory, especially 'DRAM.' Samsung Electronics and SK Hynix's memory production lines are concentrated in Korea and China, both within tariff jurisdictions. An industry insider noted, "NAND flash mostly absorbs demand in the domestic market, but DRAM is subject to global demand variables." Last year, the semiconductor export amount was $141.9 billion, with 7.2% exported to the U.S., while U.S. company Micron produces a significant amount of DRAM locally. If tariffs are imposed, the price competitiveness of Korean products will decline. A semiconductor industry official said, "Since semiconductors are exported not only directly to the U.S. but also via countries like Taiwan, we must prepare for how intermediary countries will pass on tariff burdens rather than just direct impacts." He added, "Production in China will gradually be reduced."

Trade experts worry that Korean companies relocating production bases following market trends may face various difficulties.

Han Areum, senior researcher at the Korea International Trade Association, said, "Moving to the U.S. involves not only costs but also various factors such as policy volatility depending on the U.S. midterm election results two years later." She added, "Our companies are also exploring new market development, but wherever they go globally, Chinese products have a significant market share due to low prices. China maintains price competitiveness while rapidly advancing technology and infrastructure, even targeting high value-added markets, so multifaceted measures such as securing technological capabilities are necessary."

Jang Sang-sik, director of the International Trade and Commerce Research Institute at the Korea International Trade Association, predicted, "Not only the U.S. but demands for 'onshoring' are spreading to various countries," and "a 'multi-layered supply chain' will be formed in the future." He analyzed, "In the past, supply chains were built based on cost, but now countries' demands are diversifying," and "companies will face situations where they must devise separate entry strategies by region beyond 'nearshoring.'"

He also expressed concern that President Trump might consider the origin ratio even at the intermediate goods stage. Director Jang said, "In addition to production requirements within the U.S., it means related parts must also be procured from the U.S. or allied countries," and diagnosed, "Companies will change toward establishing separate production bases by hub or trading through agreements that relax supply chain regulations among allies."