KDI FOCUS The Global Trade Environment in the Biden Era and Response Strategies for Korea 2021.01.19
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Many expect that the trade war between the US and China will persist, and East Asia’s global value chains will undergo a significant transformation in the mid- to long-term, as China’s contracts while that of ASEAN expands. Please check out the video!
- Yeongkwan Song, Fellow at KDI
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- The Global Trade Environment in the Biden Era and Response Strategies for Korea
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The Biden adminstration appears to be taking a new stance on a wide array of issues, particularly focusing on multilateral cooperation, the environment, and labor.
On the other hand, however, the hardline policies towards China are expected to remain intact, dragging out the conflict.
Above all, the new government has expressed a strong determination to become the forerunner in future technologies such as 5G and AI — an agenda that could reshape East Asia’s global value chains, or GVCs, as the US’ conflict with China intensifies, especially in the electronics industry.
Much like Korea, China’s rapid growth is built on its processing trade, which imports capital and intermediate goods from countries such as Korea, Taiwan, and Japan, and exports the finished goods.
Take smart phones for example, which have over a thousand components.
To produce and ship iPhones to Apple, the Taiwanese company, Foxconn, built a factory in China that imports the intermediate goods from numerous neighboring countries and manufactures the phones.
As in this case, GVCs allow the intermediate goods of various countries to be used in the making of a single product.
In terms of East Asia, Korea, China, and Japan built and developed the region’s GVCs for the past 20 years.
But, these GVCs could weaken as we move forward as China’s share diminishes.
Then, what factors could do this?
Firstly, the focus of China’s growth strategy has shifted from bolstering exports to bolstering domestic consumption, and to reducing the import of capital and intermediate goods, and expanding domestic production.
This implies that China’s share in East Asia’s GVCs will gradually fall.
Secondly, under the current conditions,
China’s already shrinking intermediate goods import could dip even further as deteriorating relations with the US increase the possibility of blocked (China’s or its) export channels.
This will ultimately loosen the links in East Asia’s GVCs.
Thirdly, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, which entered into force at the end of 2018, could become an obstacle.
A notable aspect of the CPTPP is its rules of origin which aims to promote investment and (intermediate-good) trade between member countries.
For example, a Canadian company builds a factory in Vietnam that assembles parts from Japan, and exports the finished goods back to Canada.
Here, the CPTPP enables the company to benefit from preferential tariffs because all three countries are members.
On the other hand, if the parts were from Korea, the company would not be able to enjoy such advantages as Korea is not a member.
Ultimately, this diminishes the price competitiveness of Korean parts.
The rules of origin serve to invigorate the CPTPP through new GVCs that will form, especially among Japan and ASEAN members like Vietnam.
In all, these factors could become barriers for Korea who has a high dependence on China and is deeply embedded in East Asia’s GVCs.
Then, what can Korea do to turn a crisis into an opportunity?
Two key trade strategies are needed for Korea to take the reins of the changes that are expected in East Asia’s GVCs during the Biden era.
Above all, by joining the CPTPP, Korea will be able to lower its dependence on China, and diversify its export market. The price of not becoming a member will definitely be falling price competitiveness (of Korean exports) compared to those of member countries like Japan due to the rules of origin.
It is also important to attract high quality FDIs (to become a hub of new GVCs). In order to entice foreign companies looking to pull their investments from China due to the US-China conflict, efforts must be made to speed up the tariff eliminations in the(already implemented) Korea-China FTA.
□ Many expect that the trade war between the US and China will persist, and East Asia’s global value chains will undergo a significant transformation in the mid- to long-term, as China’s contracts while that of ASEAN expands. Accordingly, to effec-tively respond to the coming changes, Korea should adopt proactive strategies to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and attract quality FDI in an effort to realize sustainable growth.
- Biden’s trade policies highlight fair trade, which indicates that the US will maintain its hardline stance toward China.
- The policies of the new administration could drive the transformation of East Asia’s GVCs.
- It is too early to tell if China’s trade will remain sluggish. But, from a midto long-term perspective, East Asia’s GVCs will likely undergo some change due to China’s trade depression and diversion.
- Statistics confirm the structural changes in China which could diminish its share of East Asia’s GVCs.
- The US strategy of remodelling GVCs around itself, particularly in future technologies like 5G and AI, will likely have a huge impact on East Asia’s GVCs, especially in the electric/ electronic industry which accounts for 25% of China’s imports and exports.
- The CPTPP’s rules of origin could change the GVCs in East Asia via the trade diversion effect.
- Concerns over sensitive issues related to the CPTPP, such as market openness, policy loans, and fisheries subsidies are largely based on weak arguments.
- The longer Korea remains a non-member of the CPTPP, the bigger the decline will be in its exports. Accordingly, Korea must at least join the agreement before China.
- Attracting prime FDIs can serve as an effective policy to raise the investment necessary for sustainable growth.
- The US-China trade war presents Korea with an opportunity to attract more high-qualtiy FDIs.
- To take advantage of this opportunity, concession schedules in the Korea-China FTA should be pushed up.
- In the Korea-China FTA, the share of products subject to a five-plus-year tariff phaseout is relatively high in most industries.
- Joining the CPTPP is another effective policy to attract quality FDIs.
- A strategy to attract quality FDI is needed to drive the success of the ‘Korean New Deal’ initiative.
- From an economic policy perspective, the ultimate goal of trade liberalization is to improve the productivity of the overall economy which can be achieved through trade agreements such as the CPTPP.
- The fallout from firms exits due to the high level of trade liberalization should be not countered with trade policy, but with welfare policy.
- The emphasis of trade adjustment assistance should be placed on supporting workers. Meanwhile, agricultural policy should focus on preserving the income of farmers and strengthening their competence through a public-purpose direct payment system.
Ⅱ. Drivers of the Change in East Asia’s GVCs
Ⅲ. Korea’s Policy Response
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