Time to leave China?

Lee Sang-ryeol
The author is chief editor of content production at the JoongAng Ilbo.

The IMF is predicting a 1.2 percent contraction in the Korean economy this year, the first negative growth since the 1997 Asian currency crisis that forced the country to seek an international bailout. That downgrading of Korean growth was its mildest among 36 members of the Organisation for Economic Cooperation and Development (OECD) and contrast with the IMF’s negative 6.1 percent growth projection for 39 countries in the advanced category. The data suggests the havoc the new coronavirus (Covid-19) is wreaking on the global economy — and Korea’s relatively capable response to the virus crisis.

The situation for next year is different. The growth projection for the Korean economy in 2021 is 3.4 percent, below the average 4.5 percent estimate for advanced economies. Others in the advanced category are well positioned to bounce back in a V-shaped turnaround after lockdowns prompted by the virus. The IMF estimate places Korea in the front group in economic performance for this and next year. But a recession will be harsh on the nation, especially for the lower-income class with less stable work.

The virus will eventually be combated. But the world will never go back to the pre-Covid-19 period. Nationalistic protectionism could overwhelm the free trade order. The global supply chain will undergo sweeping adjustments. The environment will get harsher for Korea, which relies on external trade.

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One eventuality Korea must prepare for is a new relationship with China. Scholars believe western economies will no longer rely on China as their factory base. Multinational manufacturers’ parts and equipment supply bases will be relocated out of China after they experienced output disruptions from shutdown in Chinese factories. Western societies have grown more suspicious and skeptical of Pax Sinica. They have begun to restrict Chinese takeovers of companies in their territories.

The clash between the United States and China could turn rougher. Covid-19 caused 67,674 American deaths, exceeding 58,220 deaths from the Vietnamese War. Tens of bodies had to be stored in trucks due to a lack of hospital space in New York City. Americans will unlikely take the Covid-19 shock lightly. The United States went after Islamic extremists after the Sept. 11 terrorist attacks that took the lives of 3,000. The U.S. mainland was devastated by the virus outbreak. President Donald Trump may not be bluffing when he threatened $1 trillion worth of punitive tariffs on China for its responsibility for the deadly virus. If conflict between the world’s two largest economies intensifies, Korea will suffer due to losses in its two biggest markets.

China poses the most challenging variable in Korean commerce and industrial strategy. China is responsible for 25.1 percent of Korean exports and 21.3 percent of imports. Such a high reliance exposes the economy to greater Chinese risk. Hyundai Motor had to stop production at all of its lines in Korea due to a shutdown of its wiring harness suppliers in China.

Korean companies are vulnerable to Chinese whims. Lotte and other Korean companies endured losses in the billions of dollars in 2017 because of punitive actions from Beijing over Seoul’s acceptance of a U.S. antimissile system. The Korean government offered no protection for its companies. It won’t be easy for Korean companies to exit from China in fear of unofficial retaliatory actions from Beijing.

Finding replacements for manufacturing bases in China also may not be easy. Companies returning home averaged 10.4 a year from 2014 to 2018, compared with 482 in the United States. High labor costs, stifling regulation and notoriously selfish unions sent companies overseas in the first place and deter their return.

But there must be an exit strategy from China. It must take into account the changes in the international order, geopolitical risks and transitions in the global supply chain.

JoongAng Ilbo, May 5, Page 21