IPEF, Korea and the China factor

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IPEF, Korea and the China factor

Kim Doo-sik
The author is the managing partner of Shin & Kim and chair of the law firm’s international dispute resolution practice group.

The South Korea-U.S. relationship is evolving to a comprehensive strategic alliance to include economy and technology in addition to security. U.S. President Joe Biden’s visit to the Samsung Electronics chip complex in Pyeongtaek, Gyeonggi, highlighted technology cooperation as the U.S. strengthens the supply chain with “value-sharing” countries.

While pointing out how the Covid-19 pandemic exposed the fragility of just-in-time supply chains, Biden stressed “the need to secure our critical supply chains so that our economy — our economic and our national security — are not dependent on countries that don’t share our values.” His tour of a chip complex in Korea has sent a message to China that America will enhance chip-supply resilience among allies.

President Yoon Suk-yeol accompanying Biden expressed similar sentiments.
“I hope that Korea-U.S. relations can be born again as an economic-security alliance based on the cutting-edge technology and supply-chain partnerships with the visit today,” he said, but with a subtly different focus. Instead of checking China, Yoon emphasized technology cooperation between Korea and the U.S. for future chip competitiveness. His comment reflects the reality that Korea relies on America for 45 percent of its equipment for chip production and needs U.S. chip-design capabilities for its own foundry work.

The political meaning behind the Korea-U.S. technology alliance is complex. If it means excluding China from the supply chain for high-tech products, Seoul risks ruining ties with Beijing. Korea also relies on raw materials, rare minerals and other inputs from China. Above all, it is Korea’s biggest market and accounts for one fourth of its exports. Chinese media warn that if Korea joins the U.S.-led containment campaign against China, it could pay a dear price in terms of its economic and trade relationship with China and on issues related to the Korean Peninsula.

As long as South Korea supplies chips to China, ties will not likely be affected greatly. But the U.S. could be more hesitant in full-fledged chip cooperation with Korea. The U.S. has been negotiating chip-technology cooperation bordering on a technology alliance with the European Union (EU). After two rounds of talks under the Trade and Technology Council (TTC), the U.S. and EU agreed to conduct joint research and development on next-generation chip technology through colossal spending. A technology alliance between Seoul and Washington has given South Korea tricky homework in technology cooperation with America without irking Beijing.

China-led RCEP and reciprocity
Under these circumstances, South Korea has joined the U.S-led Indo-Pacific Economic Framework (IPEF), which was established on May 23. Its joining could suggest Seoul backing the U.S. design to isolate China in a new supply order led by America. Chinese Foreign Minister Wang Yi held a videoconference with his Korean and Japanese counterparts to oppose their joining the IPEF, claiming that the U.S. Indo-Pacific strategy is aimed at encircling China.
You cannot deny that the U.S. proposed the IPEF as part of its strategy to contain China’s rise in the Indo-Pacific. But it goes too far if you think the pact aims to exclude China from the supply chain. The IPEF’s agenda briefly covers four areas — fair trade, supply chains, clean energy and decarbonization, and tax and anticorruption. Supply chain is just one of the themes to be addressed through the economic framework. It remains to be seen what details will be included in the IPEF.
The IPEF will likely complement the China-led RCEP rather than rivaling it. Members also overlap. IPEF took off with 13 member countries, and was recently joined by Fiji, an island state in South Pacific. Among the members, seven are from Asean — Malaysia, Indonesia, Singapore, the Philippines, Thailand, Vietnam and Brunei — and South Korea, Japan, Australia and New Zealand are also members of RCEP. All 10 Asean states have joined the RCEP.
Time to show negotiating ability
Many of the IPEF members worry about the possibility of the new pact turning into an anti-China alliance. According to a report by the Korea Institute for International Economic Policy, some Asean members oppose Taiwan’s participation in IPEF as it can anger China. As a result, the U.S. goal to exclude China through the IPEF won’t likely work out as it hopes.
For Korea’s part, it has no reason to go along with IPEF procedures to isolate China. The technology alliance with the U.S. can be pursued unrelated to the IPEF. That’s why our government emphasized that IPEF should not exclude a certain country and instead respect openness, transparency and comprehensiveness in the new pact. Although tariff cuts for advantages in market access are excluded in the IPEF, other agenda items — on economy, environment, clean energy and decarbonization — are essential to Korea’s future competitiveness. The IPEF offers a good opportunity for Korea to demonstrate its independent and flexible negotiating capabilities befitting its goal to become a core state in global commerce. Korea must use the IPEF to pursue universal values and maximize national interest.
Employing IPEF for national interest
To achieve such goals, we need to pay attention to several preconditions. First, IPEF should be useful in securing raw materials and other necessities for Korea. The country is a powerhouse in high tech, like chips and batteries, but relies heavily on imports for raw materials. It must be able to establish a network with resource-rich IPEF members to effectively address supply crises.
Second, IPEF should not develop into a multilateral containment system for high tech exports. Export curbs can influence security. Each nation must act on export barriers according to its own circumstance and international relationships. For instance, in the case of sanctions on Russia for its invasion of Ukraine, countries representing half the global population have not joined the sanctions. India — a member of the Quadrilateral Security Dialogue (Quad) with the U.S., Japan and Australia — refused to join the U.S.-led sanctions on Russia. Saudi Arabia, which is close to the U.S. and other Middle East nations, and most African states have not complied with the sanctions. Even Mexico and Brazil declined. Each nation decides on sanctions according to its national interests.
Avoid anti-globalization pact
Third, IPEF could toughen or set new rules on digital commerce, labor, environment, clean energy, decarbonization, tax and anticorruption. Korea must exercise leadership in the process of making new rules on new trade.
Some could be burdensome on Korean industries. For instance, labor guidelines could be strengthened with tougher liability for companies violating labor laws, decarbonization road maps could be established or environmental protection clauses in trade could be toughened. Steel, cement and power generating sectors also could come under greater pressure to buy low-carbon and clean energy. The U.S. could demand the highest-level rules in digital commerce. Seoul must take care that new rules do not hurt Korean industries while complying with reasonable demands.
Lastly, the IPEF agenda should be in compliance with the existing international trade order led by the World Trade Organization (WTO). It must not drive deglobalization. The U.S. and the EU are competing with subsidies for the chip sector to fortify supply chains within their territories. In the second TTC meeting in May, the U.S. and the EU set guidelines for subsidies in the chip sector by restricting them to next-generation technology development and the public policy purpose of enhancing supply-chain security. But it is questionable whether the measures can address the incongruousness to WTO rules. Labor, environmental protection and decarbonization support could also conflict with the WTO rules. Such concerns should be addressed during IPEF negotiations. 
Translation by the Korea JoongAng Daily staff.
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