The tour of an LG Display factory in Guangzhou by Chinese President Xi Jinping signaled China’s friendly partnership with Korean technology companies. However, this visit also underscored the delicate position South Korea finds itself in between China and the US, its two largest trading partners and opponents in the escalating technology war. Korean companies, particularly in sectors crucial to national security and industrial strategy, are major players in both Washington and Beijing.
To attract Korean technology and manufacturing expertise, the Biden administration plans to provide billions of dollars in subsidies to chipmakers like Samsung Electronics and SK Hynix, as well as battery manufacturers such as LG Energy Solution, SK On, and Samsung SDI. However, in exchange for these subsidies, these companies will have to comply with a range of US restrictions on their activities in China and their partnerships with Chinese companies. This raises concerns about potential retaliation from Beijing, as China has already responded to US-led restrictions on semiconductor sales by imposing its own export restrictions.
In addition to economic tensions, there are also political tensions between China and South Korea. China’s ambassador in Seoul warned South Korea against “decoupling” from the Chinese economy under US influence. While some ministers in South Korea have taken a more conciliatory approach, stating they have no intentions of decoupling from China, the country has already shown signs of shifting away from its dependence on the Chinese economy.
Data from the Bank of Korea reveals that in 2022, South Korea’s exports to the US surpassed those to China for the first time since 2004. This shift is driven by China’s policies interfering with businesses and its focus on import substitution, which has pushed Korean companies to diversify away from China.
The question now for Korean policymakers is how to navigate this changing geopolitical environment. They must seize the opportunities offered by the US while minimizing any potential backlash from China. This requires leveraging the inducements provided by the US while protecting key industries like semiconductors and carmaking.
South Korea’s economic relationship with China transformed after establishing diplomatic relations in 1992. The trade between the two countries grew significantly, fueled by China’s demand for Korean expertise in manufacturing components for its technology sector, particularly semiconductors. South Korea pursued a “dual approach” with the US as its security partner and China as its economic partner. However, this approach was disrupted in 2016 when South Korea acquired the Thaad anti-ballistic missile system, leading to retaliatory actions from China.
The improved relations between the US and South Korea under the Biden administration have provided some reassurance, but anxieties remain about the potential consequences of US protectionist industrial policies on key Korean industries. The Inflation Reduction Act, which offers subsidies for clean energy projects, raised concerns when it excluded vehicles assembled in Korea from consumer tax credits. Further legislation and export controls targeting chip manufacturing have also raised uncertainties for Korean policymakers.
Overall, South Korea is navigating a complex landscape, seeking to balance its relationships with China and the US while protecting its economic interests and key industries.
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