[ANALYSIS] Korean exporters start rethinking 'China strategy'

Country asked to maintain strategic balance between US, China

By Kim Yoo-chul

There was a period when top-tier U.S. tech leaders were just "all-in" when it came to China, followed by Korea's leading exporters including the tech affiliates of Samsung, LG, SK and Hyundai.

Given its vast population of some 1.5 billion, hugely growing middle-class, loosening economic restrictions, low-cost and high-labor-intensity manufacturing centers, China remains an indispensable market for these Korean exporters. Still, without a sizable presence in China, it will be difficult for Korean exporters to position themselves as "global" in nature and vice versa for multinational businesses.

Seoul's renewed focus in regard to China as well as both NATO and Washington's Indo-Pacific strategy ― in terms of strengthening its relationships and also regarding trade matters ― is making Korea's leading exporters rethink their business strategies in China, according to government officials and company executives contacted by The Korea Times.

However, some consider President Yoon Suk-yeol's NATO Summit invitation acceptance as a kind of reward for recently aligning Seoul's foreign policy more closely with Washington and its democratic allies. However, it doesn't make sense at all for South Korea and Korean exporters to keep a distance from China, according to some political experts.

South Korea is just one of the few countries in Asia with long-standing historical relations with China while also being an important partner in Washington's Indo-Pacific strategy. China accounted for a quarter of South Korea's total exports, data provided by the Korea International Trade Association (KITA) showed.

Other data, from the Korea Customs Service (KCS), said Korea's total exports to China reached $301.5 billion by 2021 from $6.3 billion in 1992. Korea exported $6.84 billion worth of goods to China during the January-May period of this year, up 8.5 percent year-on-year.

On the other hand, China is North Korea's sole backer on all fronts and a critical patron. Additionally, China holds the key to solving North Korean nuclear issues.

"Recent developments regarding President Yoon's participation at this year's NATO Summit as well as the country joining the Washington-led Indo-Pacific Economic Framework (IPEF) illustrate that Korean companies follow the United States at the cost of their interests. We have to reassess and rethink our company's strategies in China amid the Joe Biden administration's 'shape the strategic environment' agenda," a senior executive familiar with financial planning at one of Korea's top-tier chip-making companies said via a telephone interview.

The United States designated semiconductors, batteries and electric vehicles as nationally important industries as the COVID-19 crisis has revealed the fragility of global supply chains. Korea is home to the world's two-largest memory chipmakers: Samsung and SK. It also houses the world's leading battery manufacturers ― LG Energy Solution (LGES), Samsung SDI and SK.

'Decoupling' from China

Company executives said they have been holding off any large-scale investment decisions in China until they see visible developments regarding the continued conflict between the United States and China.

U.S. President Joe Biden, left, and Chinese President Xi Jinping, right / Yonhap

"There were already 'policy risks' for doing businesses in China. That means that while China is the world's second-largest economy and remains a transitional economy, a lot of aspects are not fair and fully transparent. Plus, China is increasingly being asked to manage itself better so as to avoid the possibility of falling into a middle-income trap. Essentially, because of the ongoing internal troubles with COVID-19 and rising debt, China is becoming a bit less attractive than it was in the past," said an executive at a company that supplies batteries to carmakers in China.

Samsung Display and LG Electronics closed some of their factories in China due to concerns regarding the future path of the Chinese economy, after moves by the United States for heavy investment in critical infrastructure aimed at bolstering supply chain security with its Asian allies. Korea's top cosmetics company AmorePacific closed more than 100 outlets in China, which had generated 200 billion won there before South Korea decided to deploy a THAAD missile defense system. Now the cosmetics company is focusing on promoting premium brands via online channels instead.

A recent survey released by U.S.-based Pew Research Center showed that eight out of 10 South Koreans remained negative toward China, the highest since it started polling on Chinese issues. "South Korea is also the only country surveyed where young people have more unfavorable views of China than older people," it said.

An official at the country's trade promotion agency simply said China is no longer "a land of opportunity" for Korean exporters. More Korean exporters are considering moving production plants outside of China and relocating these operations to IPEF member countries with lower levels of regulatory risks and cheaper labor costs. Representatives at Samsung, SK and LG said they have no official comments regarding their factory relocation plans.

Nonetheless, political analysts say that because the Biden administration is only supporting the idea of "delinking" some key industries from their reliance on China and diversifying key supply chains for national security reasons and not actually seeking a total decoupling of China from the global economy, South Korea, therefore, is being asked to maintain its "strategic ambiguity" regarding "sensitive issues" from China's standpoint.

An aide to former President Moon Jae-in said via telephone interview that the United States doesn't want to see any drastic separation from China despite Biden's tough stance on Beijing. "A complete decoupling between the world's two largest economies could cause the U.S. to fall short of economic growth and force even Washington's allies to rethink their relationships with the United States," he said.

What's happening between the United States and China and the Western emphasis on NATO's role in the wake of Russia's invasion of Ukraine also does not mean that the world will see a new Cold War, because global economic systems are closely connected. China's economy also relies on NATO and IPEF member countries including the EU, the United States, Southeast Asia and Japan.

People watch a television at Seoul Station showing North Korean leader Kim Jong-un shaking hands with Chinese President Xi Jinping, in this file photo taken on June 20, 2019. AP-Yonhap

"Despite Washington's request to join the anti-China agenda, the Korean government would take a phased and cautious approach in dealing with issues on China given the significance of the Chinese market. South Korea should join the IPEF, and yes, the country could be able to support Biden's agenda as a political ally. But I think it's not necessary to express active concerns regarding issues that are too sensitive to China," said Choi Nam-suk, a professor of international trade at Jeonbuk National University.

Korea's strategic positioning

The question is how South Korea should react to the U.S.-China conflict.

From a business standpoint, a possible strategy is to solidify the country's manufacturing supply chains to be less reliant on China. From a political standpoint, because South Korea isn't a member of the U.S.-led Quad alliance unlike Japan, India and Australia, the country could play "some role" in limiting the influence of China and Russia on the peninsula and maintaining U.S. influence.

"Chances are very low for the United States to include South Korea as a member of Quad as Washington wants Seoul to join its moves for supply chain resilience to counter China. Because China is viewing Quad as an Asian version of NATO, then China would apply retaliatory measures to Korean businesses if South Korea joins the alliance," said Kim Kyung-min, a professor of international relations at Seoul's Hanyang University.

Military analysts say that Russia's invasion of Ukraine, the launch of IPEF and moves by the U.S. to strengthen the role of NATO are pushing North Korea to further strengthen its military alliance with China. While China has been consistently opposed to the idea of the North actually conducting a nuclear test, it has yet to respond to the U.S.' requests to persuade the North not to do this. Any nuclear test will depend on what Beijing is willing to tolerate.

There is a possibility for Korea to join various working groups within the alliance, said Kim Hyun-wook, a professor at Korea National Diplomatic Academy (KNDA). "But whether or not to join a security alliance targeting a specific country is a matter of judgment that requires thorough discussions."