As the trade war between the United States (US) and China intensifies, South Korea faces the brunt of relocating its production bases out of China. The US government is said to be pressurising South Korea to join the Economic Prosperity Network (EPN), which seeks to isolate China and diversify its supply chains. Traditionally, South Korea has depended on the US for its security needs and built robust economic relations with China, its largest trading partner.
Keith Krach, the undersecretary for Economic Growth, Energy, and the Environment at the State Department, explained that the US is “turbo-charging” its initiative to shift global supply chains out of China. Another US official maintained that the Covid-19 pandemic furthers such an effort, stating, “This moment is a perfect storm; the pandemic has crystallised all the worries that people have had about doing business with China.”
South Korea’s Foreign Ministry has maintained that the EPN is more conceptual and added that Washington made no formal request for Seoul’s participation. However, some reports claim that South Korea was officially requested to join the EPN initiative in May 2020. The South Korean business community viewed Krach’s statement as a “political act aimed at making Korea an axis of the envisioned EPN”.
It is not the first time Seoul has been victim to deteriorating US-China relations. Back in 2017, China objected to the deployment of US missile system Terminal High Altitude Area Defense (THAAD) in Osan, South Korea. While the Trump administration pressured South Korea to deploy the system, Beijing in retaliation called for a boycott of South Korean companies and halted Chinese tourism to South Korea.
South Korea has since been a victim of the US-China trade war, and, in 2019, its shipments to China as a share of its total shipment exports plummeted from 26% to 20%. The East Asian island faced further economic losses when the US imposed sanctions on China’s Huawei Technologies. Huawei’s mass orders for chips from South Korean companies were cancelled following the sanctions and negatively impacted Samsung’s semiconductor business. South Korea’s three major mobile carriers chose not to work with Huawei, further dampening relations with Beijing.
For its part, the US has denied pressuring South Korea to join EPN. However, given the impact of the deployment of THAAD and American sanctions on Chinese companies, Seoul is looking for alternative bases to move its production.
Like Japan, South Korea, too, has been opting to diversify its production bases. Seoul has faced the heat of the US-China trade standoff more so than Tokyo. India has been as a viable option, with South Korean companies such as Posco and Hyundai Steel looking to set up manufacturing units in Andhra Pradesh. Although the plans face delays due to the pandemic, Yup Lee, the deputy consul general for the Consulate General of South Korea in Chennai remains optimistic. “We have requests from two iron and steel companies, some startups and one from the hospitality sector which wants to come to India from China,” Lee said.
Some South Korean companies may decide to respond to the Trump administration’s pressure and move towards “additional facility investments and job creation in the US”. Therefore, South Korea will have to carefully calibrate economic costs while juggling its strategic and national interests.
South Korea Caught in the Crossfire of US-China Trade War
The US is placing increasing pressure on its allies to move production bases out of China.
August 5, 2020
South Korean President Moon Jae-in and his Chinese counterpart Xi Jinping SOURCE: ASSOCIATED PRESS