[Economy Pulse] The Era of 'De-Chinaization' Certificates of Origin

The United States continues to pursue policies aimed at reducing its dependence on China for key national security-related intermediate goods. While the strategy has shifted from comprehensive decoupling to strategic de-risking, the U.S. still maintains a decoupling approach in advanced industries. Recently, the U.S. Congress included a provision to regulate investment in strategic technology sectors related to China in the National Defense Authorization Act (NDAA) for the coming year.

In the past, Chinese companies have sought to circumvent U.S. restrictions by exporting through third countries. As a result, the share of Chinese intermediate goods exports has risen rapidly. The United States, having imposed high tariff barriers on Chinese products, now seeks to block imports of intermediate goods that have been rerouted through third countries. During mutual tariff negotiations, many countries were skeptical of the U.S. demand to block indirect Chinese exports. However, when it was made clear that a 40% tariff would be imposed if such rerouting was detected, the seriousness of the situation became apparent.

Country-of-origin labeling is a system designed to inform consumers accurately about where an imported product was produced. When all stages of production took place in a single country, the concept of origin was simple. The 'wholly processed' standard, which refers to the country where the raw materials were extracted, produced, manufactured, or processed, was established, and there were no issues regarding intermediate goods.

However, as trade volumes expanded and intermediate goods trade developed, with production processes spanning multiple countries, it became more complicated to determine the country of origin. As a result, considerations such as whether substantial transformation occurred in the final assembly country, the value-added ratio, and whether specific processes were performed became important. While allowing intermediate goods trade, countries set their own origin standards, taking industrial policy into account. Currently, intermediate goods trade accounts for more than half of global trade.

Due to U.S. policy, the steel sector's exports to the U.S. have already achieved de-Chinaization. However, in response to the U.S. policy on intermediate goods, Korea should not pursue full decoupling, but rather focus on supply chain diversification, localization, and alliance-based industrial strategies. Through measures such as the Supply Chain Stabilization Act, Korea has already adopted policies to reduce dependence on specific countries by diversifying import sources and enhancing self-sufficiency.

Korea should participate in the U.S.-led supply chain realignment among allies, but maintain a balanced approach that allows continued economic exchange with China, taking into account the de-risking strategy. Korea must establish a system to check whether Chinese intermediate goods are used in products exported to the United States. Soon, the U.S. is expected to require exporting countries to perform such checks. As reciprocal tariffs effectively eliminate preferential tariffs under free trade agreements (FTAs), the item-specific rules of origin in the Korea-U.S. FTA are likely to be replaced by de-Chinaization certificates of origin.

As a major intermediate goods producer, Korea should view the U.S. de-Chinaization policy as both a challenge and an opportunity. Above all, Korea must pursue substantial efforts to strengthen cooperation with the U.S. in key industries, strategically restructure supply chains to build domestic ecosystems, increase the localization rate of intermediate goods production, secure critical minerals, and utilize friend-shoring strategies.

The U.S. investment plans agreed upon during Korea-U.S. tariff negotiations should be designed to enable Korean companies to become key players in U.S. advanced industries and supply chains. In addition, a strategic public-private consultation channel should be operated effectively so that $350 billion in government funds and $150 billion in private sector investment can generate synergies.

Amid the uncertainty of global supply chain restructuring and the de-Chinaization of intermediate goods, many small and medium-sized enterprises are reporting management difficulties. It is no exaggeration to say that the intermediate goods ecosystem relies on these small and medium-sized enterprises. Financial support such as 13.6 trillion won in policy funds for companies affected by tariffs, increased loan limits for individual companies, and expanded trade insurance for exporters is essential to strengthen the intermediate goods industrial ecosystem.

Jung Ingyo, Professor of International Trade at Inha University (former Chief Trade Negotiator)