The reverse de-risking

HAN WOO-DUK
The author is a senior reporter of the China Lab.

When I visited Shanghai, a resident employee for a public agency said, “As the U.S.-China discords intensify, Chinese companies make inquiries on investing in Korea. But they are worried about technology leaks. They say that if they invest in Korea, their technology will be exposed.”

I thought “technology leak” is something that Korean companies mention when they invest in China. The employee explained that it is now the other way around. He said he realizes how the technological capabilities of Korea and China have changed from the past.

In fact, Korean technologies are behind those of China in many areas such as electric vehicles, IoT and robots. Even the Korean government admits that the technology levels of Korea and China in the high-tech sector have reversed.

Technology is the driving force behind economic cooperation with China. Many Korean products such as refrigerators, mobile phones, automobiles and cosmetics entered the Chinese market with technological competitiveness. This way, the economies of the two countries have been coupled with technology as a link. Now, it is reversed. We need to worry about Chinese technological products flooding into Korea. Chinese-made robot vacuum cleaners are cleaning our living room, and Chinese electric cars will soon be on the road. The coupling structure is working the opposite way now.

What created the technology gap between the two countries is the “intermediary goods trade.” Korea produced intermediary goods with high added values — such as parts and semi-finished products — to China, whereas China assembled and exported the finished products to third countries. Now, that structure is also reversed. As China’s technology level is enhanced, it produces decent intermediary goods at good prices. The intermediary goods still make up more than 75 percent of our imports to China. Products are “Made in Korea,” but when you look inside, many parts are from China.

In a recent report, the Bank of Korea pointed out that imports of intermediate goods from China have more benefits to the Korean economy than otherwise. Analysts say that Chinese intermediate goods reduce our production costs and eventually raise the global competitiveness of our industry.

But the negative aspect cannot be overlooked. The higher the dependence on Chinese intermediate goods, the greater our industry’s dependence on China will be. In other words, Korea could be easily swayed by China, as seen in the urea crisis three years ago. Electric batteries, Korea’s competitive product in the future, fell into the same trap.

Western countries are discussing decoupling and de-risking to reduce the China risk. But that sounds naïve, as Korea has to worry about “reverse coupling,” in which the country should worry about being dragged by Chinese technology.