[EAI Working Paper] 2022 EAI New Government Foreign Policy Recommendations Series ⑧_South Korea's Multidimensional Response to Changes in the 21st Century World Trade Order

[Editor's Note]

In this working paper, Lee Seung-joo, Director of the Trade, Technology, and Transformation Center at the East Asia Institute (and Professor at Chung-Ang University), explains the Biden administration's multilateralism strategy, which differentiates itself from the protectionism of the Trump administration, and states that this strategy targets China. While traditional protectionism involved restricting imports from other countries, a new phenomenon has emerged globally due to COVID-19, where export restrictions are pursued alongside import expansion measures. Amidst the US-China tech competition and the heightened uncertainty in the trade order due to COVID-19, the paper emphasizes the need for South Korea's next government to establish systematic response strategies for strengthening international cooperation at bilateral, regional, and multilateral levels, and for linking economic and security domains at the domestic institutional level.

Three Major Trade Policy Tasks

1. It is necessary to productively upgrade ROK-US cooperation by enhancing strategic value through leveraging the ongoing supply chain reorganization driven by US-China strategic competition, while gradually pursuing diversification in trade and production relations with China. Based on this strategic direction, it is also necessary to simultaneously pursue cooperation among middle powers to take a leading role in establishing 21st-century trade rules.

2. If RCEP comes into effect in the Asian region, efforts should be made to preemptively block potential functional inefficiencies and geopolitical competition arising from the operation of two mega FTAs. To this end, the RCEP should be addressed early within the framework of ROK-US-Japan cooperation by joining the CPTPP, and diplomatic solidarity with regional countries should be actively pursued to exercise leadership in narrowing the gap between the CPTPP and RCEP for the stability of the regional economic order.

3. Amidst the expanding US-China strategic competition, it is necessary to rapidly establish domestic institutional foundations to strategically respond to the global trend of strengthening the linkage between economy and security. The establishment of institutions integrating economy and security should begin with a 'whole-of-government' approach based on inter-agency cooperation, as well as the establishment of a 'whole-of-nation' system that allows for constant communication and cooperation between the government and the private sector.

I. Introduction

Protectionism, triggered by the unilateralism of the Trump administration, and COVID-19 have plunged the 21st-century world trade order into a vortex of uncertainty. As the Biden administration declares a strengthening of US leadership for the restoration of multilateralism, competition between the US and China for the reorganization of the trade order is expected to expand across bilateral, regional, and multilateral fronts. At the bilateral level, the US is pursuing a strategy of increasing pressure on China by further refining the scope of its offensive. In terms of trade, rather than a tariff war, the US and China are increasing the level of linkage between economy and security, maintaining or further intensifying export controls on key technologies and industries. While engaging in competition at the bilateral level, the US and China are also strengthening international cooperation to establish regional and multilateral trade orders, which could further intensify the US-China competition surrounding the reorganization of the future world trade order.

Uncertainty in the trade order is also increasing at the regional level. The conclusion of RCEP, following the existing CPTPP, makes changes in the Asian regional economic order inevitable. With the US not participating in either of the two mega FTAs, the conclusion of RCEP is expected to have a certain impact on the maintenance or expansion of China-centric supply chains. The Biden administration, which is pursuing supply chain reorganization centered on reshoring, is in a situation where it cannot help but seek institutional alternatives to prepare for the reorganization of the regional economic order. South Korea holds significant strategic value as a country that can provide institutional channels for the Biden administration's supply chain reorganization strategy and the reorganization of the Asian order. The ROK-US summit in May 2021 holds significance in this regard as a comprehensive agreement for cooperation at regional and multilateral levels, beyond bilateral economic cooperation. Cooperation in the semiconductor and battery sectors is not only bilateral economic cooperation between South Korea and the US but also closely related to regional supply chain reorganization, thus serving as part of a regional cooperation strategy. The global vaccine partnership is a multilateral cooperation to respond to global challenges, and it is also regional cooperation in that it focuses on vaccine production and distribution in the Indo-Pacific region. Future ROK-US economic cooperation needs to explore complex cooperation at bilateral, regional, and multilateral levels.

II. Current Status of the Trade Order

1. Multilateralism of the Biden Administration

The core of the Biden administration's foreign policy is the strengthening of multilateralism and the restoration of US leadership. The Biden administration's foreign policy stance is welcomed by countries worldwide as a fundamental revision of the Trump administration's unilateralism. Signals of the restoration of multilateralism are detected in the strengthening of cooperation between the US and Europe. The agreement reached at the G7 summit in June 2021 to suspend the dispute over subsidies for Boeing and Airbus, which had lasted for 17 years, for five years symbolically demonstrates the will of the US and Europe for the restoration and new transformation of the multilateral trade order.

The target of the Biden administration's strengthening of multilateralism is clearly China. The US and Europe have formed a consensus that it is necessary to respond to China's infringement of the multilateral trade order in a wide range of areas, including subsidies, state-owned enterprises, government procurement, environment, and labor, based on universal values and norms, triggered by the spread of COVID-19 and the passage of the Hong Kong security law. The Biden administration's ban on investment in 59 companies in the military and intelligence technology industry sectors, and the EU's decision to suspend the ratification of the 'EU-China Comprehensive Agreement on Investment (EU-China CAI)' are in a similar context.

The Biden administration is actively pursuing economic cooperation with Asian countries to strengthen the resilience of supply chains. The report titled 'Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth,' released in June 2021 following the '100-day Supply Chain Review' executive order by President Biden, posits that a stable and resilient supply chain is necessary for US 'economic security.' It concludes that the formation of an ecosystem of unparalleled innovation, technology, and production facilities is essential for the US to build resilient supply chains, and that a diverse and healthy ecosystem of suppliers must be formed. This is why cooperation with countries possessing technological and production capabilities, such as Japan and Taiwan, including South Korea, has emerged as a more important task than ever before.

Meanwhile, the Biden administration is likely to pursue multilateralism within certain boundaries, as it closely links its foreign policy with its domestic political agenda. The supply chain review report introduced above also focuses on creating quality jobs, alleviating income inequality, and rebuilding small and medium-sized manufacturing enterprises to prevent the hollowing out of American manufacturing, in order to improve the innovation infrastructure. The Biden administration's active pursuit of reshoring in key industries is also because it can directly contribute to creating quality jobs, which are central to the restoration of the middle class. The fact that the Biden administration has not only used "Made in All of America" as political rhetoric but also established the Made in America Office and appointed Celeste Drake, formerly of the AFL-CIO, as its director in April 2021, provides a full glimpse into the scope of multilateralism and international cooperation advocated by the Biden administration. In this way, the Biden administration seeks a balance between the external dimension of US-China strategic competition and the domestic political dimension of middle-class restoration.

2. Multilateral Trade Order Amidst COVID-19 and Uncertainty

The crisis in the world trade order is no longer new. The US-China trade war, which began in 2018 with the imposition of tariffs and retaliatory tariffs between the US and China, triggered protectionism in major countries, further increasing the uncertainty of the world trade order that had been precariously maintained since the 2008 global financial crisis. The WTO's dysfunction during the spread of protectionism, sparked by the US-China trade war, accelerated the crisis in the world trade order. The WTO's dysfunction led to a situation where protectionism, which began as a backlash against globalization and economic integration, erupted directly without institutional filtering, while the multilateral trade order drifted. The crisis in the multilateral trade order signifies the need for a new ideological and institutional foundation to resolve the 'trilemma between globalization, democracy, and sovereignty.'

COVID-19 has further amplified the crisis in the world trade order by heightening the wave of protectionism. According to IMF estimates, world trade decreased by 3.5% in 2020. The contraction in world trade was primarily due to disruptions in supply chains, but it was also a result of major countries competitively pursuing national interests under the pretext of COVID-19. The rapid spread of COVID-19 caused bottlenecks at key junctures of global value chains (GVCs), and the resulting delays and shortages in supply exposed the vulnerability of GVCs, which had been formed and operated with a focus on optimizing efficiency.

Following COVID-19, major countries worldwide have shown a phenomenon of pursuing export restrictions alongside import expansion measures, rather than traditional protectionism that restricts imports from other countries. As GVCs were severely disrupted by COVID-19, countries producing personal protective equipment, pharmaceuticals, medical equipment, and daily necessities imposed export restrictions, while countries with an urgent need for imports rapidly expanded imports of these products by taking extensive liberalization measures. From January 2020 to September 2020, 91 countries imposed 202 export restriction measures, and 105 countries imposed 228 import expansion measures. The fact that most protectionist measures do not have an expiration date suggests that new protectionism may not be a temporary phenomenon. Furthermore, unlike protectionism driven by economic gains and losses, post-COVID-19 protectionism is differentiated from traditional protectionism in that the vulnerability of GVCs has been imprinted on the general public, leading to a shift in perception of the issue as a national security concern.

3. Asia, the Main Stage for Mega FTAs

The conclusion of the RCEP negotiations signals the full-fledged arrival of the mega FTA era. Following the entry into force of the CPTPP in December 2018, the conclusion of RCEP negotiations in November 2020 has led to the coexistence of two mega FTAs in the Asian region. Asian countries are facing new possibilities and challenges. RCEP and CPTPP are heterogeneous in many aspects. RCEP, with its symbolic meaning as a 'pan-Asian FTA' composed of Asian countries, takes the form of ASEAN leadership and has led to a de facto expansion of China's influence. In particular, the cumulative rules of origin in RCEP can act as compensation for companies in the supply chain reorganization, thus serving as an institutional factor that solidifies the existing China-centric supply chain. This can serve as an important institutional basis for China to alleviate the US pressure regarding supply chain reorganization.

The strategic implications of the advent of the mega FTA era in the Asian region are also significant. RCEP encompasses both China and Japan, who are competing for regional cooperation leadership, and is a mega FTA from which the US has withdrawn and India has exited. Despite the Biden administration's strong commitment to strengthening multilateralism, there is a dilemma for the US due to the lack of institutional means for economic linkage to contain China in the Asian region. While the US is pursuing infrastructure cooperation within the framework of its Indo-Pacific strategy and 5G cooperation within the Quad framework, the need for an economic Indo-Pacific strategy remains. Japan, Australia, and India's pursuit of the 'Resilient Supply Chain Initiative (RSCI)' is an attempt to strengthen supply chain resilience through diversification. Strategically, it can be seen as strengthening cooperation within the Quad framework to mitigate China's centrality in regional supply chains.

III. Evaluation of South Korea's Policy

1. Pursuing International Cooperation to Combat Protectionism

Amidst rising global economic uncertainty due to US-China strategic competition and COVID-19, the top priority of South Korea's trade policy has been to curb the spread of protectionism. US-China strategic competition has rapidly expanded from trade disputes to technological competition, including export controls on cutting-edge technologies, intensified scrutiny of foreign investments, and enhancement of innovation capabilities. As uncertainty escalates, major countries are prioritizing protectionism, making the establishment of a 21st-century multilateral trade order increasingly distant. South Korea has made efforts at bilateral, regional, and multilateral levels to combat protectionism. Firstly, South Korea demonstrated a proactive response to the Trump administration's unilateral offensive by promptly handling the renegotiation of the ROK-US FTA and striving to reduce the ROK-US trade imbalance. At the regional level, through initiatives such as the New Southern Policy, South Korea has played a constructive role in urging international cooperation to combat protectionism with like-minded countries. As Southeast Asian countries have emerged as new investment destinations in the process of GVC reorganization after COVID-19, the need to maintain a free trade order at regional and global levels has increased. Meanwhile, at the multilateral level, South Korea announced on October 21, 2019, that it would no longer claim developing country status in the WTO, signaling that its efforts to combat protectionism would not remain merely rhetorical.

However, 21st-century protectionism exhibits aspects of technological protectionism, unlike in the past, and preparations and multilateral efforts in this regard need to be supplemented in the future. The core of establishing 21st-century trade rules lies in bridging the gap between '21st-century trade realities and 20th-century trade rules.' At the multilateral level, discussions are underway in the 'WTO E-commerce Negotiations' regarding norms and rules for digital trade, which are central to 21st-century trade, such as cross-border data flows, personal data protection, and digital taxation. These issues are also key points of contention in the US-China strategic competition. South Korea needs to prepare for the intense discussions on these increasingly important issues at the WTO level and, at the same time, take a leading role in establishing digital trade rules at the bilateral and regional levels as a precedent.

2. Continuous Conclusion and Upgrade of FTAs

The government has focused on concluding FTAs as a primary means of responding to protectionism. The ROK-UK FTA (June 2019), ROK-Israel FTA (August 2019), and the substantial conclusion of the ROK-Indonesia Comprehensive Economic Partnership Agreement (CEPA) (October 2019) are results of these efforts. RCEP was concluded through South Korea's active role based on cooperation with ASEAN, despite unfavorable conditions such as China and Japan maintaining their existing positions and India's withdrawal from negotiations. In addition, the government is continuously pursuing the expansion of FTAs by negotiating the ROK-Ecuador Strategic Economic Complementation Agreement (SECA), ROK-MERCOSUR FTA, ROK-Philippines FTA, ROK-Russia Services and Investment FTA, and ROK-Malaysia FTA, and by creating conditions for negotiations on the ROK-PA FTA and ROK-Eurasian Economic Union (EAEU) FTA. Furthermore, the government's pursuit of additional liberalization of the ROK-ASEAN FTA, improvement of the ROK-CEPA, improvement of the ROK-Chile FTA, and follow-up negotiations on the ROK-China FTA for services and investment can be seen as efforts to reflect changing economic realities. The continuous pursuit of FTAs is a particularly viable alternative that can be prioritized in the short term, as it can be expected to have a certain effect as a means of responding to protectionism. However, given the increasing phenomenon of 'weaponization of interdependence' centered around major countries, a strategy that combines existing FTA strategies with multilateral trade strategies is necessary, as multilateral cooperation is urgently needed as an alternative to mitigate this.

3. Response to US-China Tech Competition: From Strategic Ambiguity to Comprehensive Partnership

As the US-China strategic competition expands into the technology sector, numerous issues have emerged requiring South Korea to make concrete decisions between the US and China, including not only individual advanced technologies like 5G and semiconductors but also supply chain reorganization and Quad participation. Since the first half of 2020, as the number of countries cooperating with the US's 5G international cooperation demands has increased, South Korea has faced growing difficulties in maintaining its existing stance. Furthermore, regarding the US State Department's request to participate in the Clean Network initiative, South Korea's KT and SKT were included in the 'Clean Telcos'.

Meanwhile, as the Biden administration further accelerates supply chain reorganization and emphasizes international cooperation, South Korea is seeking a new approach beyond the existing defensive method of balancing cooperation with the US and choices that do not provoke economic retaliation from China. The movement towards change began to materialize with the ROK-US summit. As evidenced by the agreement to strengthen bilateral cooperation and build a global vaccine partnership, South Korea has enhanced regional and multilateral cooperation in response to the Biden administration's efforts to strengthen supply chain resilience and expand production capacity in key advanced industries. The South Korean government's ability to seek a shift in the direction of ROK-US cooperation is a result of leveraging the new environment of international cooperation based on universal values and norms pursued by the Biden administration.

IV. Recommendations for the Next Government

1. Bilateral Level

1) Combining Bilateral and Regional Cooperation to Form a 'Technology-Production-Consumption Ecosystem'

A systematic response strategy is needed for the strengthening of international cooperation at bilateral, regional, and multilateral levels by the Biden administration in the context of US-China tech competition. The Biden administration is expected to pursue a strategy of forming a 'technology-production' ecosystem based on the Indo-Pacific strategy in the regional dimension, and a 'techno-democracies' versus 'techno-autocracies' framework in the multilateral dimension. At the bilateral level, the Biden administration is expected to flexibly pursue cooperation with countries necessary for technology-production partnerships and to use bilateral FTAs reflecting US preferences on key issues such as digital trade, environment, and labor as precedents for multilateral trade negotiations.

The Biden administration faces numerous challenges in pursuing US-led multilateralism, and international cooperation with allies, including South Korea, is essential. South Korea needs to pursue strategic cooperation with the Biden administration's multilateralism based on a detailed understanding of the strategic intentions behind the US-led pursuit of multilateralism. The Biden administration is increasing the level of its strategy to pressure China through technology in the context of strategic competition, enhancing supply chain stability, and pursuing international cooperation for the expansion of production capacity in the US and for reshoring or near-shoring.

The primary direction of strategic cooperation that South Korea should seek is a partnership linking technology and production with the US. South Korea needs to prioritize cooperation in areas that can satisfy both the foreign economic policy and domestic political needs of the Biden administration. The fact that President Biden is hosting a summit of semiconductor CEOs and that Samsung Electronics is seriously considering investment in semiconductor production facilities in the US is a viable way to meet both the external goal of strategic competition with China and the internal goal of expanding US production capacity. The US is concerned about its semiconductor market share of 47% compared to its production share of only 12%. To bridge this gap, the Biden administration is providing $50 billion in support for the domestic semiconductor industry while pursuing partnerships with South Korea and Taiwan to ensure supply chain stability. This is why reshoring and international cooperation can coexist in the Biden administration's foreign economic policy. South Korea needs to pursue cooperation with the US in this direction.

In the case of batteries, as the Biden administration emphasizes a multilateral approach through rejoining the Paris Agreement on climate change, expanding domestic production capacity and forming supply chains are essential for the US to foster eco-friendly industries domestically and reduce dependence on China. The formation of supply chains by South Korean battery manufacturers such as LG Energy Solution, SK Innovation, and Samsung SDI with US automakers like GM, Ford, and Stellantis aligns with the emphasis on 'secure an end-to-end domestic supply chain for advanced batteries' in the Biden administration's '100-day Supply Chain Review.'

South Korea needs to play a supporting role in enabling the Biden administration to pursue international cooperation for a more complete 'technology-production-consumption ecosystem' based on 'technology-production' cooperation. Considering that China accounted for 36% of US semiconductor exports in 2019, it is important for both Korean and US companies to form a cooperative ecosystem that includes consumption. The sustainability of technology-production cooperation cannot be guaranteed without consumption. Expanding international cooperation as a means to enhance the effectiveness of pressure on China and to expand domestic production capacity in the US is essential for sustainability.

2) Policy Support for Supply Chain Diversification

The US attempt to reorganize supply chains also presents a challenge for South Korea. Although Secretary of State Antony Blinken emphasized supply chain stability during his visit to South Korea and Japan in March 2021, he expressed the view that complete decoupling between the US and China is neither possible nor desirable. In light of this, the US's future decoupling strategy is likely to be partial decoupling or strategic recoupling after partial decoupling, rather than complete decoupling.

South Korea needs to conduct multifaceted reviews of industrial decoupling and recoupling between the US and China, but approach it from the perspective of strengthening and enhancing the resilience of supply chains, rather than as a choice between the US and China in the context of US-China strategic competition. Specifically, South Korea needs to pursue 'China+α' in preparation for the reorganization of US-China supply chains. According to a survey conducted by the US Chamber of Commerce in March 2020, 84% of companies had no plans to relocate production facilities and supply chains to other regions within China or to third countries in the short term, while only 12% planned to relocate production and supply chains to other regions within China or to third countries. US companies in China are not attempting to de-Chinaize their supply chains, at least in the short term, despite the accelerating US-China strategic competition. This is because the attractiveness of China as the center of supply chains and its consumer market remain. However, the fact that 24% of companies plan to procure parts from other regions within China or from third countries suggests that US companies are pursuing supply chain diversification rather than de-Chinaization. Furthermore, the proportion of US companies that believe US-China decoupling is unlikely has decreased by more than 20% from 66% in 2019 to 44% in just one year, indicating a change in the perspective of companies on supply chains in the context of US-China strategic competition. In this regard, South Korea needs to pursue 'China+α' from the perspective of strengthening resilience through supply chain diversification. However, South Korea needs to send out careful and consistent signals so that these efforts are not perceived as de-Chinaization or containment of China.

3) Strengthening ROK-US-Japan Cooperation and Restoring ROK-Japan Cooperation for Reorganization of the Regional Economic Order

South Korea needs to actively respond to the mega FTA era, which has begun in earnest with the entry into force of the CPTPP and the conclusion of RCEP. South Korea played a leading role in the conclusion of RCEP negotiations, despite the unfavorable conditions of India's withdrawal, based on its cooperation with ASEAN. South Korea's response in the mega FTA era can be considered in two dimensions. The South Korean government should establish a concrete roadmap and strategy for joining the CPTPP. Since the South Korean government has already decided on the CPTPP, the timing and specific methodology of accession remain pending. The CPTPP does not include the US, and China has also expressed interest in joining, so the strategic burden of South Korea joining the CPTPP is relatively low. If South Korea joins the CPTPP alone, there is an effect of increasing GDP by 1.09%, and if both the US and China join, the GDP increase effect is larger at 6.39%. As countries like Australia, Canada, New Zealand, Chile, and Singapore are known to be positive about South Korea's accession, South Korea needs to leverage this to persuade Japan.

Cooperation with Japan is essential for South Korea to join the CPTPP and secure a position to actively respond to the mega FTA era. First, Japan demonstrated 'exceptional leadership' in concluding and bringing the CPTPP into force, even after the US withdrew from the TPP. In terms of content, it addressed issues that could affect US interests with a freeze clause, leaving open the possibility of US return. Furthermore, by participating in RCEP, Japan has become a 'pivotal state' among the three countries of South Korea, China, and Japan, participating in both CPTPP and RCEP. It is necessary to continuously communicate that South Korea's accession to the CPTPP will contribute to increasing the predictability of the reorganization of the regional economic order, and that South Korea's role is particularly needed for establishing relations with RCEP. By enhancing South Korea's strategic value, it is necessary to explore possibilities for improving relations and cooperation with Japan, using the reorganization of the regional order as a leverage.

Second, in a situation where it is difficult to find realistic ways to restore ROK-Japan cooperation at the bilateral level, South Korea needs to explore ways to improve relations with Japan by strengthening ROK-US-Japan cooperation. Through the summit, South Korea and the US agreed on extensive cooperation, including key issues such as 5G, semiconductors, and vaccines. The outcome of this cooperation has significantly expanded the common ground between ROK-US cooperation and US-Japan cooperation, creating conditions for strengthening ROK-US-Japan cooperation. Strengthening ROK-US-Japan cooperation can indirectly act as a positive factor in restoring ROK-Japan cooperation. South Korea needs to explore ways to strengthen ROK-Japan cooperation through the linkage of ROK-US cooperation and ROK-US-Japan cooperation.

2. Regional Level

1) Preparation for the Dual Effects of Mega FTAs

The approaches of the US and China to the multilateral trade order are contrasting, and these differences are starkly revealed in the TPP, which largely reflects US intentions, and the RCEP, which reflects Chinese intentions. The TPP basically includes many provisions related to WTO plus issues for which it has been difficult to reach agreement in WTO multilateral trade negotiations, whereas the RCEP pursues a medium level of trade liberalization and includes numerous exceptions for new issues, making it relatively WTO-consistent. This is a point of expected conflict between the US and China in reforming the multilateral trade order.

Mega FTAs are positive in that they maintain the momentum of free trade and economic integration while the WTO DDA is deadlocked. However, it is necessary to identify the inherent risks in mega FTAs and prepare for them strategically. First, although mega FTAs are a viable way to overcome the problems of bilateral FTAs, they entail security externalities as much as they promise significant economic effects. As major countries worldwide use mega FTAs as a means to closely link economy and security, meticulous response to the excessive securitization of mega FTAs is necessary.

Second, in the digital economy era, technology companies aim for global services. However, as US-China tech competition accelerates, the possibility of a 'splinternet' where the US and China, pursuing conflicting paradigms for digital industries, form independent blocs is increasing. The fact that Europe and India are also taking approaches differentiated from both the US and China in the digital or data industries is another factor that increases the complexity of the issue. In a situation where a multilateral trade order is not established, the spread of mega FTAs is likely to provide an institutional framework for conflicting or differentiated approaches. South Korea needs to make collective efforts to lead in establishing digital trade-related rules to preemptively block the fragmentation, and further, the fragmentation of the world trade order in the process of expanding mega FTAs.

2) Middle Power Cooperation for Balance Between RCEP and CPTPP

If South Korea joins the CPTPP, it needs to lead efforts for balance and harmony between RCEP and CPTPP. RCEP and CPTPP differ significantly in terms of the scope of trade liberalization and the extent to which new issues are included. CPTPP has boldly introduced specific norms and regulations related to new trade issues such as digital trade, labor, environment, and state-owned enterprises. On the other hand, RCEP is expected to have significant economic effects through its cumulative rules of origin. The conclusion of RCEP regarding new issues like digital trade also has considerable significance in that it confirms the acceptable level for China, which will engage in fierce competition with the US regarding future digital trade norms and rules, as it implies that China can accept RCEP-level digital trade regulations. The fact that the basic provisions of RCEP include e-commerce as an independent chapter, almost similar to CPTPP, is a step forward, and the fact that China has accepted digital trade-related regulations is also significant.

However, a major difference is that RCEP provisions leave it to member states to decide on the requirement to install computing facilities within their own territories. While it essentially supports the free movement of data, it effectively allows member states to autonomously implement data localization. Furthermore, it allows any measures to be taken to protect essential security interests. The decision to leave data localization to the autonomous implementation of individual member states in the e-commerce chapter was the result of excluding all clauses unacceptable to China. In contrast, the e-commerce chapter of CPTPP, another mega FTA in the Asian region, is based on the TPP, which was primarily led by the US, and reflects strong US preferences, as it is applied in accordance with the ROK-US digital trade agreement and the USMCA e-commerce chapter. In this regard, the conflict between the US, which demands a high level of data liberalization, and China, which demands broad exceptions based on security interests and sovereignty, will intensify.

The coexistence of mega FTAs with different levels and scopes means that, from South Korea's perspective, economic effects may be diminished and geopolitical risks may increase. If the Biden administration decides to rejoin the CPTPP in the medium to long term, competition between the US and China over new issues such as digital trade could intensify. South Korea needs to work with major member states to narrow the gap between CPTPP and RCEP on issues with a high potential for conflict. South Korea needs to strengthen cooperation with countries with similar positions before the competition, which serves as a prelude to the US and China establishing a multilateral trade order in their favor, intensifies. The ROK-Singapore Digital Trade Agreement, the Singapore-New Zealand-Chile Digital Economy Partnership Agreement (DEPA), and the Australia-Singapore Digital Economy Agreement can serve as precedents for digital trade, partially mitigating the conflict between the US and China.

3. Multilateral Level

1) Preparation for the Emergence of 21st-Century Issues

The Biden administration declared its intention shortly after the conclusion of RCEP that the US, not China, should write the rules for the world order. This suggests that the US and China are increasingly likely to compete for leadership in establishing order not only at the regional level but also at the multilateral level. The restoration of the multilateral trade order will begin with normalizing the WTO dispute settlement mechanism, as evidenced by the Trump administration's neutralization of the appellate body. Given the increasing trend of member states refusing to provide timely information on subsidies, normalizing the dispute settlement mechanism is urgent. Normalizing the dispute settlement mechanism, including the appellate body, can be expected to have various effects, such as member states providing information and complying with trade liberalization. More fundamental reforms involve the WTO's core functions of providing a forum for multilateral trade negotiations and establishing new trade rules. The issues for which the WTO needs to establish rules are numerous, ranging from 21st-century issues such as digital trade, climate change, labor, environment, and competition, to key issues of the US-China trade war, such as intellectual property theft, forced technology transfer, subsidies, and state-owned enterprises.

In the short term, the US and Europe are expected to prioritize placing the issue of subsidies targeting China on the multilateral trade negotiation table. The temporary suspension of the Boeing-Airbus subsidy dispute between the US and Europe is paradoxically an expression of their intention to resolve the issue of Chinese subsidies first. The US perception is that Chinese state-owned enterprises are exploiting loopholes in the existing WTO subsidy regulations because the definition of 'government and public bodies' is narrowly defined. The Biden administration is expected to pursue changes such as expanding the definition of subsidies, lowering the burden of proof for subsidies, and strengthening reporting obligations for subsidy payments. Preparation for the full-scale discussion of new issues in multilateral trade negotiations requires careful review of various possibilities and the establishment of a comprehensive response strategy.

2) Preparing for Potential Changes in Multilateral Negotiation Approaches

As changes may occur in the negotiation approach for establishing rules on new issues, it is necessary to establish proactive and multifaceted response strategies for such possibilities. The resolution of issues is not straightforward because the establishment of new rules is occurring within overlapping conflict structures of developed vs. developing countries or the US vs. China. To address this, it is expected that a flexible approach will be sought, moving away from the WTO's

Regarding WTO e-commerce negotiations on digital trade, over 80 countries that have expressed their intention to participate in the WTO e-commerce negotiations have submitted position papers. While broad consensus exists on the necessity of e-commerce negotiations, developing countries are demanding measures to expand the benefits of digital trade for sustainable development. Developed and developing countries hold different views not on the goals of e-commerce negotiations, but on the path to reach the final objective. Korea needs to prepare for the possibility that the WTO may adopt a flexible approach to both existing multilateral negotiations and plurilateral negotiations for conducting e-commerce negotiations, and to create an environment that allows for the realization of effective negotiation methods when necessary.

3) Qualitative Upgrade of Economic Cooperation

For Korea to respond agilely to the rapid changes in the global economic order of the 21st century, it is necessary to actively pursue efforts to qualitatively upgrade existing economic cooperation. Until recently, Korea has maintained a mercantilist tendency in its foreign economic policy. To gain first-mover advantages in the FTA landscape, it has signed FTAs with numerous countries and continues to strive to expand FTAs by identifying their blind spots. Negotiations with Ecuador, MERCOSUR, Uzbekistan, and the EAEU, or efforts to create conditions for such negotiations, are representative examples. As a result of these efforts, Korea has achieved the so-called 'third-largest economic territory in the world.' Meanwhile, in a situation requiring the rewriting of 21st-century global economic rules, the qualitative upgrade of economic cooperation is as important as the horizontal expansion of economic cooperation. Considering that many issues, such as labor, environment, investment, government procurement, subsidies, digital trade, and state-owned enterprises, have not been established as multilateral trade rules despite their significance, a strategy of continuously upgrading existing FTAs is necessary for Korea to play a leading role in the establishment of 21st-century trade rules.

4. Domestic Institutional Dimension

1) Establishment of an Integrated Strategy System for Economic-Security Linkage

The boundary between economy and security is becoming blurred in the 21st century. While Article XXI of the GATT exceptionally permits trade restrictions for national security reasons, the weakening of the boundary between economy and security implies that the utilization of national security provisions may become routine rather than exceptional. This possibility has already materialized with the Trump administration's imposition of tariffs not only on China but also on allied nations, citing national security. In this context of strengthening economic-security linkages, Korea needs to establish an institutional foundation for proactive domestic response and strengthen cooperation with countries that have a vital interest in maintaining the free trade order.

The US-China strategic competition is leading to a 'normalization of the abnormal' wherein the linkage between economy and security has become commonplace. In particular, for South Korea, which experienced China's economic sanctions following the decision to deploy THAAD, the burden of choice inevitably increases as the US-China strategic competition intensifies. Specifically, as the Biden administration pursues supply chain restructuring and strengthens Quad cooperation, South Korea faces a renewed and growing burden regarding the consequences of enhanced cooperation with the United States. The US-China strategic competition closely links economy and security through technology, and a significant number of countries are incorporating 'security' considerations in their adoption of 5G network equipment.

Following Japan's establishment of an economic division within its National Security Secretariat (NSS), it has decided to establish a consultative body comprising government ministries such as the National Security Secretariat and the Ministry of Economy, Trade and Industry, along with economic organizations including Keidanren and major corporations, to formulate a medium-to-long-term economic security strategy. This body is expected to develop comprehensive measures from an economic security perspective, focusing on securing strategic materials like semiconductors and rare earths, and establishing supply chains. The Australian government's establishment of an Ambassador for Cyber Affairs and Critical Technology within its Department of Foreign Affairs in 2017 also demonstrates that the linkage between economy and security is no longer exclusive to major powers like the US and China. Based on the reality that linkage, rather than separation, of economy and security is the norm, there is a need to establish an integrated system for economic-security linkage at the national strategy level. For Korea, having experienced pressures from economic-security linkages such as the US's requests for technological cooperation to enhance deterrence against China, China's economic sanctions following the THAAD deployment, and the Japanese government's exclusion of Korea from its whitelist, it is necessary to review the need for economic governance in the era of 21st-century technological competition, which goes beyond the separation of economy and security.

The 21st century is an era of integrated strategies where major powers link economy and security. In this regard, it is crucial for the government and corporations to actively share perceptions regarding the current state of US-China strategic competition and the economic-security linkages occurring within it. Unlike the Trump administration, which pursued export controls and protectionism to counter China, demanding unilateral cooperation from businesses, it is noteworthy that the Biden administration is receiving cooperation from private companies in its pursuit of supply chain review and reorganization. The sharing of perceptions is the first step in developing response strategies, and its importance cannot be overstated.

In a situation where economy and security are linked, the government needs to broaden the scope of corporate choices by mitigating the risks that businesses may face. Supply chain reorganization is a task fraught with considerable uncertainty for businesses. The consistency, transparency, and openness of government policies will have the effect of reducing uncertainty and expanding choices for businesses in their decision-making. While it is true that expanding production facilities in the US and establishing supply chains in cooperation with the Biden administration's supply chain reorganization policy increases the risks associated with the geographical distancing of supply chains from a corporate perspective, the government needs to provide indirect support for corporate responses to the phenomenon of economic-security linkage by mitigating the increase in risks. ■

■ Author: Lee Seung-ju_ Director of the Trade, Technology, and Transformation Center at EAI; Professor of Political Science and International Relations at Chung-Ang University. He holds a Ph.D. in Political Science from the University of California, Berkeley. His main research areas include international political economy, the international politics of trade, and global digital governance. His major works and edited volumes include "The Political Economy of Cyberspace" (edited by Lee Seung-ju), "Institutional Balancing and the Politics of Mega FTAs in East Asia" (co-edited), and "Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions" (co-edited).

■ Management and Editing: Baek Jin-kyung Head of Research Office, EAI

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