[Why&Next] US Tariffs Trigger Trade Diversion... Corporate Supply Chain Design Also Changing

Spread of Protectionist Measures in Third Countries Due to Shift in Chinese Export Volumes
FTA, Rules of Origin, and Procurement Conditions Emerge as New Variables for Companies

Following the United States' implementation of tariffs on Chinese goods, Chinese exports have shifted to third countries such as ASEAN, India, and Latin America, with these countries now integrating this trend into their industrial and supply chain policies. Whereas protectionism in the past mainly involved market defense measures such as tariffs and safeguards, there is now an expansion toward integrating policy tools such as subsidies, procurement, standards, rules of origin, foreign direct investment (FDI), and data regulations. As the dispute settlement function of the World Trade Organization (WTO) has effectively been suspended, there is a clear shift in the global system where industrial policy is taking precedence over trade norms.

Spread of Protectionist Measures in Third Countries...Transition to 'Second Wave Protectionism'

According to the Korea International Trade Association's report, "The Age of Protectionism: Global Spread of US-Led Regulations," published on January 22, Chinese exports to the United States from January to November last year fell by 18.9% compared to the previous year, while exports to regions excluding the United States increased by 9.6% during the same period. The increase was particularly notable in ASEAN (13.7%), India (11.9%), and Latin America (7.1%). This "trade diversion" phenomenon, where Chinese goods blocked by US tariffs are redirected to third countries, is evident in export statistics.

As import pressures rose in these regions, a series of protectionist measures were introduced. The European Union (EU) reduced duty-free quotas in the steel sector and imposed a 50% tariff on volumes exceeding the quota through the TRQ (Tariff Rate Quota) system, while also adding new crude steel production process verification requirements. Canada and India implemented quota and provisional safeguard measures, respectively, and South Africa is reviewing adjustments to its bound tariff rates.

The objectives of these policies are also changing. While protectionism in the past was primarily about "market defense" against cheap imports, the current focus is on "attracting supply chains" and "fostering strategic industries" by bringing factories and investments into domestic markets. The US Inflation Reduction Act (IRA) and CHIPS Act, as well as the EU's Net Zero Industry Act and Critical Raw Materials Act, are classic examples of industrial policy-based trade instruments. These laws bundle together subsidies, public procurement, tax incentives, and environmental regulations to incentivize domestic production and investment.

Japan and India are also adopting similar policy combinations in the semiconductor and battery sectors to increase the domestic production share of specific items. A system is rapidly taking shape in which trade policy is closely intertwined with industrial, supply chain, and technology policies.

Korean Companies Must Inevitably Revise Market Access Strategies

The Korean semiconductor industry, in response to the US's moves to impose semiconductor tariffs, is working with the government to negotiate tariff terms with the United States. The Office of the President and trade authorities have stated that they are continuing discussions to ensure that Korean semiconductors are not treated less favorably than those from major competing countries.

The US government recently officially mentioned the possibility of imposing tariffs of up to 100% if there is no domestic production, thereby increasing pressure on companies to invest. This statement is seen as targeting major Korean memory semiconductor companies Samsung Electronics and SK Hynix. Both companies are pursuing investments in production and packaging facilities in Texas and Indiana, and are now reviewing their investment and production strategies in light of changes in the global trade environment.

With US policymakers linking tariff reductions, procurement, subsidies, and permitting conditions to investment, it is observed that companies are now required to consider trade factors alongside their decisions on production, site selection, and investment. At the same time, the US government is considering an annual licensing system for semiconductor equipment supplied to the Chinese factories of Samsung Electronics and SK Hynix, raising concerns that policy changes could affect the flexibility of global operations.

Adjustments are also taking place in the automotive industry. As US tariff burdens increase, Hyundai Motor Company is reportedly increasing the proportion of popular SUV models produced in the United States and considering expanding its local parts procurement strategy. The combination of tariffs, procurement regulations, subsidies, and local production requirements is reshaping production bases from a traditional focus on low labor costs and cost efficiency to a multi-layered approach that includes procurement accessibility and policy alignment. With US electric vehicle procurement rules, battery origin requirements, and IRA subsidy conditions all coming into play, automakers are now required to design supply chains that comprehensively account for regulatory costs.

The global spread of protectionist measures is now closely linked with export companies' decisions on production locations, supply chain configuration, origin management, utilization of free trade agreements (FTAs), participation in subsidy and procurement markets, and FDI strategies, highlighting the need for coordination between trade and industrial policies. While Korea has secured some institutional buffers in select markets through FTAs with the EU, United Kingdom, and Canada, it is pointed out that the country has limited capacity to respond to protectionist measures in regions where FTAs are absent, such as Mexico, India, and Brazil.

Lee Yujin, Senior Research Fellow at the Korea International Trade Association, stated in the report, "If tariffs were the biggest challenge in the trade environment in 2025, in 2026, protectionism in third countries affected by tariffs is expected to become a burden for our export companies," adding, "The strategic effectiveness of FTAs is being maintained even in the current phase of regulatory expansion."