Back To Top

[Editorial] Vulnerability laid bare

Coronavirus crisis heightens need for Korea to reduce economic reliance on China

The spread of the new coronavirus has laid bare the potential danger of South Korea’s economic overreliance on China.

Korea relies on the neighboring country with the world’s largest population and second-biggest economy for a quarter of its trade and a third of its inbound tourists.

Notably, materials and parts account for more than 60 percent of its imports from China, leaving many Korean manufacturers vulnerable to supply chain disruptions there.

The country’s largest carmaker Hyundai Motor and affiliate Kia Motors halted the operation of all local assembly lines Monday due to the lack of parts produced by their China-based suppliers. It marks the first time Hyundai’s domestic assembly lines have come to a complete halt since 1997, when one local manufacturer affected by the Asian financial crisis stopped supplying parts.

Chinese authorities called on manufacturers to stop operations until Sunday, a week after the end of the Lunar New Year holiday, in an effort to keep the virus epidemic, which originated in the central Chinese city of Wuhan, from spreading further.

Beijing’s decision not to extend the stoppage beyond Sunday raises expectations that Hyundai and Kia may normalize their domestic production, which accounts for about half of their total output, in the coming weeks.

There is still no guarantee that the resumed production in China will not be disrupted again if the coronavirus crisis is not contained soon.

Aside from their production loss, Hyundai and Kia have decided to extend 1 trillion won ($842 million) in financial support to help their domestic parts suppliers, which number more than 350, weather the fallout from the coronavirus outbreak.

The emergency of Korea’s automaker group stands in sharp contrast to Japanese rival Toyota Motor, whose production has remained largely unaffected by the spread of the coronavirus. The Japanese carmaker has had little trouble replacing disrupted supplies from China with parts produced locally and in Southeast Asian nations.

Japanese industries overall seem less worried than their Korean counterparts about supply chain disruptions in China as a result of efforts to build additional manufacturing bases outside China. The “China plus one” approach has been expedited especially since 2010 when Beijing took trade retaliation against Tokyo in a territorial dispute over islets claimed by both sides.

But Korea has not learned its lesson from China’s economic reprisals in 2017 over its decision to allow the US to deploy an advanced missile defense system here, which Beijing regards as a threat to its security.

The country’s economic reliance on China has continued to deepen across all sectors over the past years. Economists now estimate that a 1 percentage point reduction in China’s annual growth will result in trimming 0.5 percentage point from Korea’s yearly growth.

Major international investment banks recently forecast that China’s growth rate would remain at 4.8 percent this year, down 1.1 percentage point from their average estimates a month earlier. In that case, Korea’s economy might grow far below 2 percent -- following a 2 percent expansion last year -- the slowest pace in a decade.

Korea is in urgent need of reducing China’s excessive influence on its economy, given the possibility that a similar type of contagious disease could hit China again and Beijing will resort to yet another economic retaliation in the course of diplomatic disputes.

Local companies should accelerate efforts to diversify overseas supply chains and export markets. It is also necessary to expand local production of core materials and components.

What is needed most is a fundamental shift in the ill-conceived economic policies pursued by President Moon Jae-in’s government since it took office in 2017.

The government should ditch its dysfunctional income-led growth policy backed by a string of labor-friendly measures, which has dampened corporate activity. Instead it should carry out regulatory, labor and structural reforms more seriously to encourage corporate investment.

Last year, facility investment in the country dropped 8 percent on-year, while outward direct investment by local firms jumped 15 percent. Foreign direct investment in Korea’s manufacturing sector also recorded an on-year decrease of 18 percent.

Changes in the economic approach that have proven misguided are all the more necessary to prepare for a possible global rebalancing of supply chains in the aftermath of the coronavirus crisis. The Moon administration should be quick to improve business conditions to attract both foreign and local companies that would be seeking to reduce their production in China down the road.

Serious efforts to lift regulatory restrictions and make the labor market more flexible could turn the short-term predicament caused by the spread of the coronavirus into a long-term opportunity for Korea’s economy.

MOST POPULAR