[Collapse of Trade Theory, New Supply Chain Era] ⑤ "What if everything goes overseas? What about Korea?" Hyundai Motor's US Plant Construction Leads Suppliers to Leave Too

Editor's NoteThe tariff war triggered by the 'Trump administration' is shaking the global supply chain. Since the launch 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. While 'optimal cost' used to be the top priority in building supply chains, minimizing supply risks has now 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 they should overhaul their production strategies according to U.S. trade policies or pioneer new markets. Asia Economy will conduct an in-depth analysis in six parts on how our companies are responding amid the tectonic shifts in the global supply chain.

When Hyundai Motor Group built an electric vehicle factory in Georgia, USA, its first-tier suppliers in Korea, including parts affiliate Hyundai Mobis, PHA which produces door modules, Seohan Auto which manufactures brake systems, and Seoyeon Ihwa which makes door trims and consoles, followed suit by moving to the U.S. Not only automotive parts but also LG Energy Solution, which produces batteries?key components of electric vehicles?built a factory in Georgia. Following the battery plant, EcoPro in Korea has begun considering building a factory in the U.S. for raw material procurement. In total, five major Korean companies have established local factories following Hyundai Motor. Lee Taekyu, senior researcher at the Korea Economic Research Institute, said, "Due to the nature of manufacturing that requires parts procurement, there is no choice but to follow large corporations."

Under the new trade order, Korean companies seeking the U.S. and third markets is not just an issue for individual companies. It connects to a national survival issue: "What happens to the future of Korean manufacturing if everyone leaves?" The U.S.-originated tariff bomb could trigger a 'butterfly effect' of hollowing out Korean manufacturing.

Manufacturing Share of GDP Stagnates at Around 26%

A key indicator to gauge manufacturing hollowing out is Statistics Korea's 'Manufacturing Share of Gross Domestic Product (GDP).' Asia Economy analyzed this indicator from 2010 through last year and found that Korea maintained a manufacturing share of around 26% of GDP. This is ahead of advanced countries like the U.S. and Japan and about twice the OECD member average of 14%.

However, experts point out that looking beneath the surface, the situation is far from reassuring. Semiconductors are a prime example. While core technology sectors remain domestic, low value-added processes such as assembly and processing have already moved to Southeast Asia. The manufacturing share of GDP is maintained because high value-added processes are reflected. But if high value-added product production bases also move to the U.S., no infrastructure will remain domestically.

The same applies to display panels and battery materials. Since Korea's economy has grown centered on exports and manufacturing, if production plants continue to move overseas one after another, weakening national competitiveness is inevitable. Robert Lighthizer, former U.S. Trade Representative (USTR) during Trump's first term, emphasized in his book "The Illusion of Free Trade" that "the manufacturing share of GDP is more important than just a number." This underscores the significant role manufacturing plays in the national economy.

Professor Kang Insu of Sookmyung Women's University pointed out that "not only the overseas relocation of manufacturing plants but also the rigidity of the domestic labor market due to rising labor costs have transformed the manufacturing ecosystem into a capital-intensive and technology-intensive form," noting that statistical figures fail to capture the qualitative changes in Korean manufacturing overall. Professor Kang added, "The hollowing out of manufacturing directly relates to real economic problems such as job losses. Since it is still early in Trump's second term, overseas expansion by companies is expected to continue for some time, accelerating the hollowing out phenomenon." A semiconductor industry insider said, "Semiconductors move production lines and research and development (R&D) bases together. If production plants move overseas, material companies, partners, and equipment-related companies all leave together, so the economic impact will be considerable."

393 U.S. Jobs Created per Investment in the U.S.

Expansion of Korean companies' investment in the U.S. is also critical for domestic demand. According to Statistics Korea's industrial activity indicators for 2023?2024, while exports including investments increased by 4%, domestic demand decreased by 1.7%. Durable goods consumption dropped from -1.6% to -3.1%, and manufacturing domestic demand fell from -1.1% to -1.6%. According to the U.S. nonprofit reshoring initiative, Korea was the top country contributing to job creation in the U.S. as of the first half of last year. On average, one investment in the U.S. created 393 jobs. Meanwhile, manufacturing jobs in Korea barely avoided decline during this period.

The U.S. itself has directly experienced this problem. During the manufacturing boom from the 1970s to early 1980s, the U.S. added up to 20 million jobs. However, in the 1990s, as the global supply chain shifted to China, over one million jobs disappeared. Japan faced the same issue. Since the 1990s, slowed capital investment accelerated manufacturing hollowing out, plunging the national economy into recession.

Researcher Kang Seungwon of NH Investment & Securities expressed concern, saying, "After the COVID-19 pandemic, manufacturing capital investment concentrated in the U.S., but it did not lead to domestic demand recovery. At the same time, because of tariff impacts, blindly promoting domestic production is not an option."

There is also advice that export diversification policies are urgently needed. Kang Namhoon, chairman of the Korea Automobile Mobility Industry Association (KAMA), said, "As local production in the U.S. increases, domestic production (exports) will decrease. Domestic plants should strengthen plans to increase exports targeting third countries rather than the U.S."

Suggestions have been made that a safety net is needed to prevent domestic job losses amid supply chain restructuring. Professor Heo Yoon of Sogang University's Graduate School of International Studies advised, "If overseas factories increase and domestic factory investment decreases, the impact will go to regional economies. From a mid- to long-term perspective, discussions are needed on how to prevent rapid employment declines caused by companies' overseas expansion." He added, "For companies investing in the domestic market, much more aggressive government incentives such as tax credits or R&D support are necessary."