The Korea Herald

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[Editorial] Unexpected opportunity

Pandemic crisis could help Korea become a new hub of global production

By Korea Herald

Published : May 7, 2020 - 10:00

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The world’s major economies are stepping up efforts to bring home manufacturers operating abroad amid the novel coronavirus-caused disruption to global supply chains.

Such efforts are focused particularly on reducing excessive reliance on parts and components production in China, where the COVID-19 pandemic originated in December.

Factory shutdowns imposed by Chinese authorities disrupted global supply chains, doing damage to manufacturing in many other countries.

With the global trade and economy hit by the crisis, corporate reshoring is more urgently needed to create jobs and boost the economic recovery.

Many South Korean manufacturing firms also feel compelled to reduce their overdependence on China-based supply chains. A recent survey of 302 domestic manufacturers operating abroad showed that 45.9 percent were considering returning home due to increased risks to supply chains.

This could and should give impetus to the nation’s efforts to get local manufacturers to move overseas production back home.

Korea’s corporate reshoring policy has been far from successful.

Only 68 manufacturing companies have transferred their overseas production back to the country since 2014, when a law aimed at promoting corporate reshoring took effect, according to figures from the Ministry of Trade, Industry and Energy.

Of them, just 38 firms still run factories here, employing 1,271 workers.

This is in sharp contrast with the US, which saw more than 2,400 companies make a U-turn and create about 260,000 jobs over the past five years. In 2017, jobs added by reshoring firms accounted for more than half of new employment in the US manufacturing sector.

Korea’s support for reshoring firms remains far from sufficient.

The 68 companies that have returned home since 2014 have received 24.6 billion won ($20.1 million) in subsidies and tax benefits while their combined investments here amounted to 879 billion won.

President Moon Jae-in’s government has emphasized the need to bring overseas production home to help ease the economic impact from the COVID-19 outbreak.

But its call for corporate reshoring has not been followed by drastic and substantial support measures.

By contrast, the Japanese government recently announced a measure to pay half of the costs of parts and materials manufacturers moving factories back from overseas. US President Donald Trump’s administration is moving to cover all the costs of American firms bringing home factories in China.

If it wants to induce more manufacturers to return home, the Moon government should redress its anti-corporate policy that has imposed heavy burdens on companies.

Since it took office in 2017, it has raised the maximum corporate tax rate, increased the minimum wage, shortened the workweek and toughened regulatory restrictions.

Not surprisingly, overseas investments by local firms reached a record high of $61.9 billion last year, nearly five times as much as foreign direct investments here in the same period.

It is necessary to match more financial incentives with a set of regulatory and labor reform measures if the country is to get large manufacturers to return home along with their subcontractors.

According to a study by the Korea Economic Research Institute, a private think tank, moving just around 5 percent of overseas output by major Korean manufacturers home would create more than 300,000 jobs.

It is all the more necessary to strengthen efforts to promote corporate reshoring, as Korea now finds itself in a good position to become a new hub of global production and supply, owing to the world’s enhanced trust in its ability to contain the spread of a pandemic.

The nation has been relatively successful in bringing the COVID-19 outbreak under control without imposing lockdowns and halting economic activity.

The pandemic is prompting a shift in global production and supply chains from low-cost countries to “optimum-cost” countries, which can be trusted to guarantee flexibility, stability and transparency in pandemic control as well as business operation.

Korea seems to be emerging as a place best fit for the transition.

Buoyed by this change, President Moon recently pledged to strengthen efforts to bring manufacturing back from overseas.

It should be noted that safety from the pandemic outbreak may be essential, but not sufficient, to induce domestic and foreign manufacturers to choose Korea as their new production base. A more corporate-friendly environment should be forged by lifting regulatory restrictions and making the labor market less rigid.

As the economic fallout from the coronavirus outbreak is expected to last longer than initially thought, the Moon government should not miss out the unexpected opportunity given by the crisis.