The Korea Herald


[Editorial] Minimize China risk

Unavoidable to modify export strategies amid new US ban and deflation in China

By Korea Herald

Published : Aug. 15, 2023 - 05:31

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US President Joe Biden signed an executive order last week that prohibits or restricts US investments in Chinese entities in three sectors: semiconductors and microelectronics, quantum computing and certain artificial intelligence systems.

The measure is expected to take effect in 2024. The order will also require outbound US investors to notify the Treasury Department.

This measure shows the US' intention to block Beijing's initiative in securing China's position as a global powerhouse in high-tech industries. It seems to seek to counter China's recent move to restrict exports of certain gallium and germanium products, which are rare metals used to manufacture semiconductors and electric vehicles.

Beijing opposed the US executive order and said it was another attempt to "politicize and weaponize trade" between the world's two largest economies. It vowed to firmly safeguard China's rights and interests.

The problem is, if Washington requests cooperation from South Korea over its measure against China, Seoul will likely find itself between a rock and a hard place. It is inevitable for the Korean economy, which heavily depends on China, to face more impact as the US has been steadily tightening the noose on China's tech sector. In particular, Korea's chip giants -- Samsung Electronics and SK hynix -- face risks as China accounts for a large chunk of their production capacity.

Seoul says it expects a limited impact on Korean industries from the latest US measure but that is a complacent prediction. Washington has escalated its restrictions on China, and is likely to take follow-up measures. Korea must identify opportunities in the US-China technology competition expected to last for decades.

To make matters worse, signs of deflation have become more prevalent in China in recent months, sparking concerns that the world's second-biggest economy could enter a prolonged period of stagnation.

Its consumer price index fell by 0.3 percent in July from a year ago. That's the first time the index has fallen since February 2021.

China's producer price index, which measures goods prices at the factory gate, also dropped 4.4 percent last month from the same month last year. It was the first time since 2020 that consumer and producer prices have fallen in the same month. Exports plunged 14.5 percent last month from a year ago, the biggest drop in more than three years. Foreign investment in China continued its downward slope.

China's share in Korea's exports plunged to 19.5 percent in the first half of this year from 26.8 percent in 2018, but China is still Korea's largest trading partner.

China's stagnation will directly lead to the shrinkage of Korean exports and hamper its growth rate. Its exports to China nosedived 25 percent from a year earlier last month.

It's about time Seoul drew up new export and growth strategies to minimize China risks. The Korean government and companies looked forward to seeing the Chinese economy recover in the second half of this year, but such expectation now seems to have flown out of the window. Korea's exports and growth strategies must be recalibrated, under the premise that a protracted slump of China's domestic demand and exports are constants.

Above all, Korea must diversify its export markets. The Economist presented a group of 14 Asian economies as an Asian alternative to replace China as the center of the global supply chain amid Sino-US tensions.

The group, dubbed "Altasia," surpasses China in terms of export value, workforce with higher education and the like. Korean companies need to develop markets and diversify supply routes around the group. At the same time, Korean industries should pay more attention to the rise in US manufacturing boosted by the CHIPS Act and Inflation Reduction Act.