[EAI-MBN South Korea's Foreign Policy in 2021: Prospects and Strategies] The World Trade Order in Turmoil and South Korea's Response

YouTube Link: https://www.youtube.com/watch?v=ZfLaJlchlO4

The East Asia Institute (EAI) has planned the expert interview series "EAI-MBN South Korea's Foreign Policy in 2021: Prospects and Strategies" to propose foreign and security policy recommendations for South Korea ahead of the 20th presidential election. This series presents seven major tasks facing the South Korean government amidst the environmental variables of the launch of a new U.S. administration and COVID-19, and offers the vision and prospects for the new year and foreign policy strategies for South Korea as seen by experts in each field.

This is the fifth installment of the "EAI-MBN South Korea's Foreign Policy in 2021: Prospects and Strategies" expert interview series, featuring "The World Trade Order in Turmoil and South Korea's Response" by Lee Seung-joo, Director of the EAI Trade and Technology Transformation Research Center (Professor at Chung-Ang University). For more detailed expert commentary, please check the link below.

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EAI aims to provide timely and in-depth analysis of current issues through Q&A sessions with experts in relevant fields. The opinions expressed in this interview are those of the interviewed expert and do not represent the views of the East Asia Institute. Please cite the source when quoting this interview video.

• Managed and Edited by: Baek Jin-kyung, EAI Research Director

Inquiries: 02 2277 1683 (ext. 209) | j.baek@eai.or.kr

Video Transcript

Hello everyone, I am Jung Kwang-seob, head of MBN's Foreign Affairs and Security Team. Today, we will discuss trade and economic policies under the Biden administration. Joining us for this discussion is Lee Seung-joo, Director of the EAI Trade and Technology Transformation Center. What do you see as the biggest difference between the trade and economic policies of the previous Trump administration and the current administration? Well, to understand the Biden administration's trade policy, we need to consider not only the differences but also certain continuities. The Biden administration, upon taking office, has emphasized multilateralism, international cooperation, and the restoration of U.S. leadership to achieve these goals.

In contrast, the Trump administration tended to focus on unilateralism, bilateralism, or reciprocity. As you know, in early 2020, a Phase One agreement was reached between the U.S. and China. This was seen by some as a breakthrough that would ease the trade dispute between the two countries. However, due to unforeseen circumstances, such as the systematic spread of COVID-19, the U.S.-China Phase One agreement could not be fully implemented. This appears to have led to a shift in the Trump administration's China policy. While the Trump administration did achieve some concessions from China during its four years in office, the question remains whether these were truly successful outcomes in terms of enhancing U.S. competitiveness or securing its strategic advantage. There seemed to be a cautious re-evaluation of China policy within the Trump administration itself. From this perspective, the Trump administration's shift towards emphasizing international cooperation starting in the first half of 2020 was a significant change. Based on this, we saw a cooperative stance from the U.S. regarding Huawei sanctions by various European countries, and in East Asia, traditional Quad partners like India and Australia began to strengthen cooperation with the Trump administration through multilateral efforts.

This indicates a move towards strengthening international cooperation. Therefore, regarding the distinctiveness of the Biden administration's policy, it can be said that it continues some of the changes in international cooperation that emerged in the final year of the Trump administration. However, Trump narrowly lost the election, and many argue that his economic policies and COVID-19 response contributed to his defeat. Was Trump's economic policy not well-received in the U.S.?

Yes, there is that aspect. A significant political reason for this reception was Trump's emphasis on "America First," which aimed to create jobs in the U.S. and strengthen domestic industries through protectionism. These policies did have some positive effects, and it is true that there was a certain level of domestic political support for the Trump administration, particularly concerning U.S.-China relations.

However, as is well known, the process led to significant division and polarization within American politics. The Biden administration likely recognized that pursuing foreign policy within such a polarized political system would face considerable domestic constraints. Therefore, unlike the Trump administration, the Biden administration has prioritized the restoration of the American middle class. This means addressing the polarization of the economy and the resulting political polarization by strengthening the middle class. The administration appears to feel a strong need to undertake this task. Based on this, the Biden administration is pursuing a policy direction that links foreign policy, particularly China policy and trade policy, to these domestic goals. In this regard, a key difference from the Trump administration is the pursuit of a close connection between domestic and foreign policy.

4 However, as is well known, the US political landscape became highly polarized and divided in the process. The Biden administration's pursuit of foreign policy within this polarized political system faces significant domestic political constraints. Therefore, unlike the Trump administration, the Biden administration has put forth the restoration of the American middle class as its priority. In other words, it aims to rebuild the middle class, thereby alleviating economic inequality and the resulting political polarization within the US. This suggests a strong sense of necessity to undertake such measures.

Former President Trump strongly pursued a confrontational approach in trade policy with China, focusing on the rivalry for hegemony. Will this approach to trade policy with China continue under the Biden administration?

This relates to the distinctiveness of the Biden administration's policy that you asked about earlier. While the Trump administration aggressively pressured China, it is necessary to assess the outcomes of that approach. There are cautious but critical evaluations within the U.S. regarding whether key U.S. industries' competitiveness has been secured or if preemptive measures have been successful in securing future competitiveness. Furthermore, when considering the broader context of strategic competition between the U.S. and China, rather than competition in individual industries, the Biden administration believes that cooperation with major countries is crucial. This means that while the U.S. may still hold a superior position in terms of national power, its unilateral approach towards China has clear limitations. To effectively contain China, cooperation with key allies and partners, as the Trump and Biden administrations refer to them, is essential. This approach, emphasizing multilateralism and international cooperation, is what the Biden administration is pursuing. Restoring U.S. leadership in this context is seen as crucial for China policy.

What do you see as the opportunities and risks for South Korea in its trade policy, given this situation? I believe there are both opportunities and risks. The opportunity lies in the fact that RCEP is the first mega-FTA signed among Asian countries. Economically, a mega-FTA like RCEP can significantly contribute to expanding or strengthening supply chain-based trade through rules of origin. Another reason many countries are interested in RCEP is that while numerous bilateral FTAs have been signed among East Asian countries, the lack of consistency and coherence among these bilateral FTAs has prevented them from realizing their full potential. RCEP has the effect of integrating these inconsistent bilateral FTAs. Therefore, there are expectations of significant economic benefits. However, it is also true that the economic benefits may not be maximized, as RCEP is not as high-standard an FTA as CPTPP or CPTPP.

The strategic implications are also significant. Strategically, the symbolic significance lies in it being the first mega-FTA signed among Asian countries. While TPP and CPTPP exist, they were not exclusively composed of Asian countries. Another point is that, as is well known, India was initially scheduled to participate in RCEP. One of the reasons for India's decision to participate was not only economic considerations but also strategic considerations regarding China. However, India's withdrawal in the final negotiation stage means that we need to re-evaluate the strategic implications of RCEP for the economic and trade order in the Asian region. A significant challenge for South Korea is that while it can gain various economic and strategic benefits by joining RCEP, a crucial mega-FTA in the region, it has not yet joined CPTPP, another leading mega-FTA in Asia.

Many countries are simultaneously participating in both CPTPP and RCEP. In this context, Japan, a competitor of ours, not only exercised significant leadership in the formation of CPTPP but also participates in RCEP. This places Japan in an advantageous position to exert leadership in the ongoing restructuring of the regional economic order in East Asia. Therefore, South Korea should consider developing a roadmap for joining CPTPP, using its accession to RCEP as an opportunity.

Would a return to multilateralism be more advantageous for us, or would a Trump-style one-on-one approach be better? Generally speaking, the restoration of multilateralism holds significant meaning for a country like South Korea, which has a high degree of external dependency. South Korea has structural limitations that prevent it from reducing this external dependency in the short term. Therefore, the restoration of multilateralism by the U.S. can be seen as a positive signal for South Korea. However, as the Biden administration has repeatedly stated, it will not immediately change the Trump administration's trade policy towards China. This is because the Trump administration's policies had both successes and limitations, and a thorough review process is underway. Based on this review, a new China policy will be formulated. The multilateralism pursued by the U.S. in the future will likely aim to find common ground between the foreign policy objective of maintaining a global order based on rules and the domestic policy objective of enhancing U.S. competitiveness, rather than pursuing multilateralism for its own sake.

What opportunities do you see for us amidst the economic and hegemonic conflict between the U.S. and China? Both opportunities and challenges exist. Regarding China, we need to consider two aspects separately. While the decoupling of supply chains is likely to continue amidst the U.S.-China strategic competition, the importance of China as a market is expected to continue growing. This applies not only to Korean companies but also to American companies. Therefore, the U.S., even while engaging in strategic competition, will continue to seek access to or expand its market access in China. In this regard, the interdependence between the U.S. and China is unlikely to decrease rapidly. However, the new strategy pursued by the U.S. towards China is the protection of core technologies and core products. High dependency on China in these areas is detrimental not only to future U.S. competitiveness but also to its security. Therefore, the U.S. is highly likely to pursue technology alliances based on these core technologies.

However, a technology alliance alone may not be sufficient. The semiconductor issue, currently a hot topic, illustrates this. The U.S. holds the core technologies for semiconductors, but most semiconductor production takes place overseas. This presents a challenge for the U.S. in linking technology with production. Therefore, in addition to pursuing technology alliances, as seen in the Huawei issue, the Biden administration is likely to pursue production alliances as well. In terms of declarations, this is being expressed as cooperation with democratic countries.

How should Korean companies respond to the trade policies of the Biden era? It would be beneficial to approach this from the following perspective: Overemphasizing U.S.-China strategic competition may force companies to choose between the U.S. and China, posing a significant risk. However, the global spread of COVID-19 last year has led to a widespread recognition of supply chain vulnerabilities. Companies worldwide, especially those that lead and participate in supply chains, are contemplating how to mitigate these vulnerabilities. Therefore, rather than approaching the issue as a choice between the U.S. and China, it is advisable for Korean companies to focus on diversifying and expanding their supply chains. While it may be judged that there is a high dependency on China, the problem is not the dependency itself, but rather that excessive dependency can be a source of supply chain vulnerability. Therefore, it is necessary to consider how to address this issue. If approached from the perspective of U.S.-China strategic competition, the immediate response might be focused on how to exit China. However, a more prudent approach would be to consider "China plus Alpha" – diversifying supply chains to other countries in addition to China. Given the significant importance of the Chinese market, as mentioned earlier, leaving China is a difficult decision for companies. Therefore, considering how to diversify supply chains to countries other than China and how to mitigate supply chain vulnerabilities through this diversification may be a more appropriate choice for managing risks.

Korea, due to its structural limitations, cannot reduce its external dependency in the short term. Therefore, the US's restoration of strategic autonomy can be interpreted as a positive signal for Korea. However, as the Biden administration has repeatedly stated, it will not immediately pursue a change in trade policy towards China compared to the Trump administration.

This is because the Trump administration's policies had both successes and limitations, and a thorough review process is underway. Based on this review, new China policies will be introduced. The strategic autonomy that the US seeks in the future is not merely for the sake of autonomy itself, but rather a process of finding common ground between the foreign policy objective of maintaining global order and the domestic political objective of enhancing US competitiveness.

In the context of the economic hegemony conflict between the US and China, there may be limited opportunities for us. These opportunities, however, coexist with challenges. Regarding China, we need to consider two distinct aspects. While the decoupling of supply chains is likely to continue amidst the US-China strategic competition, the importance of China as a market is expected to grow further. This applies not only to Korean companies but also to American companies.

Therefore, even for the US, which is engaged in strategic competition, efforts to maintain or expand its domestic companies' access to the Chinese market will continue. In this regard, the interdependence between the US and China is unlikely to decrease rapidly. However, the new strategy the US is pursuing towards China involves protecting core technologies and products.

High dependency on China for these matters is detrimental to US future competitiveness and security. Consequently, the US is highly likely to pursue technology alliances based on core technologies. However, pursuing only technology alliances may not be sufficient. For instance, considering the current heated issue of semiconductors, the US holds core semiconductor technologies, but most semiconductor production occurs overseas. This presents an interesting phenomenon.

Therefore, the US is contemplating how to strengthen the link between technology and production. Thus, while pursuing technology alliances similar to the Huawei issue, the Biden administration is likely to pursue production alliances as well. At a declarative level, this appears to be expressed as cooperation with democratic nations.

How should Korean companies respond to the trade policies of the Biden era? The approach should be as follows: Overemphasizing US-China strategic competition may force companies to choose between the US and China, posing a significant risk. However, with the global spread of COVID-19 last year, a broad recognition of supply chain vulnerabilities emerged. Consequently, companies worldwide, especially those that proactively shape and participate in supply chains, are contemplating how to mitigate these vulnerabilities.

The global pandemic of COVID-19 has put globalization, which began in the 1980s, in jeopardy. How will this affect global economic growth? It is difficult to predict the short-term impact of COVID-19. However, due to the low economic growth rates in major countries last year, there may be a rebound effect this year due to the base effect. However, it is likely that the impact on the economic system itself will be greater than the impact on economic growth rates. This is because, as you mentioned, numerous problems have emerged and accumulated during the process of globalization, and these problems have continued to grow. Major countries have not adequately managed these issues. Paradoxically, COVID-19, as an external shock, has brought these long-standing problems to the surface simultaneously. This has led to demands for systemic reform. In the future, this is likely to lead to changes in economic systems or the broader political and social systems that encompass them in major countries. As such, these systemic changes involve high uncertainty, and there is a possibility that confusion will persist amidst considerable uncertainty for some time.

Thank you for your insightful remarks today. Thank you.

Thank you.

Thank you.

Thank you.

Yes, thank you for your valuable insights today. It was a pleasure.