[New Year Special Commentary Series] ⑦ Changes in the Global Economic Order and South Korea's Response Strategies

1. Introduction

2022 was a year of chaos. While prospects for the direction of the global economic order remain divided at the beginning of 2023, one point of consensus is that uncertainty will persist throughout 2023. Factors such as protectionism, strategic competition between the US and China, and the interactions of COVID-19, along with geopolitical factors like the war between Ukraine and Russia, are contributing to this ongoing uncertainty. In 2023, amidst continued uncertainty, the possibility of re-globalization will be explored from a state of de-globalization, and the US and China are expected to escalate their competition for influence in the Indo-Pacific region.

2. The Global Economic Order in 2022

1) Deglobalization and Protectionism: Domestic Origins

The economic inequality that fueled deglobalization has yet to be resolved. According to the World Inequality Database, as of 2021, the top 10% income share accounted for an average of 52.5% globally. The figures for the US and China were 45.6% and 43.4%, respectively. Japan, known for its high proportion of middle-income earners, has also seen a continuous worsening of income inequality since the collapse of its bubble economy in the early 1990s, reaching 44.2% in 2021. While the situations in Germany (37.8%), France (31.2%), and the UK (35.8%) are somewhat better, the difference is only a matter of degree and not enough to weaken the drivers of deglobalization. Developing countries are not exempt from inequality either. Income inequality in countries playing a crucial role in the formation of global value chains, such as India (57.1%), Brazil (58.3%), and Mexico (64.3%), remains at very high levels.[1]

As the domestic foundation for globalization weakened, protectionist tendencies in foreign economic policy intensified. While the 2008 global financial crisis accumulated energy for the spread of protectionism, the spread of COVID-19 in 2020, combined with US-China strategic competition, became the decisive catalyst for protectionism to surface. According to Global Trade Alert, which tracks changes in government intervention in trade, the number of protectionist measures introduced worldwide more than doubled from 2,608 in 2019 to 5,262 in 2020, indicating the intensity and scope of protectionism. Although protectionist measures decreased to 3,027 in 2022, this level remains high compared to before 2019, prior to the full-scale US-China strategic competition and the outbreak of COVID-19.[2]

What is noteworthy here is that in 2022, not only were protectionist measures overwhelmingly more numerous than trade liberalization measures (858 cases), but the main actors implementing these protectionist measures were major powers like the US and China. By 2022, the US and China had introduced 8,234 and 5,936 protectionist measures, respectively, a significantly higher number than other countries. While Western developed countries such as Germany (2,988 cases), France (1,526 cases), and the UK (1,568 cases) introduced numerous protectionist measures reflecting domestic backlash against globalization, the US and China introduced more than twice to five times as many protectionist measures as these countries.[3] The two countries that should be demonstrating leadership for the stability and development of the global economic order are instead leading the charge in protectionism.

The spread of inequality at the domestic level and protectionism at the global level are not separate phenomena but two sides of the same coin. Hyper-globalization promoted deep integration between nations by pursuing not only the dismantling of traditional border barriers but also the relaxation of internal barriers. However, as governments showed limitations in their ability to provide safety nets for those adversely affected by deep integration, demands for protectionism rapidly increased.

2) US-China Strategic Competition and COVID-19: Supply Chain Realignment

US-China strategic competition and COVID-19 have resulted in an amplification of uncertainty in the global economic order. While seemingly unrelated, US-China strategic competition and COVID-19 have exposed the inherent problems in the efficiency-centric paradigm that contributed to the expansion of globalization. COVID-19 made it clear that supply chains, which operated with high efficiency worldwide, are structurally very vulnerable to external shocks. The structural vulnerability where a small bottleneck in one location could cause disruptions in global supply chains became apparent. Furthermore, disruptions in logistics and distribution networks caused widespread shortages on a global scale, which in turn fueled protectionism in a vicious cycle.

US-China strategic competition has fostered a public perception that reliance on overseas supply chains can threaten national security. From the perspective of the American public, dependence on China, the strategic competitor, for critical manufacturing capabilities is recognized as a threat not only to economic vulnerability but also to individual survival and national security. This background underlies the Biden administration's pursuit of supply chain realignment focused on reducing dependence on China. In particular, the Biden administration's supply chain realignment strategy has manifested as reshoring, combined with a 'worker-focused trade policy'.

3) Geopolitical Impact: The Ukraine-Russia War and the Spread of New Economic Sanctions

The Ukraine-Russia war was akin to a comprehensive set of 21st-century economic sanctions. Sanctions imposed by the US and the West on Russia were extensive, encompassing both traditional economic sanctions and new 21st-century economic sanctions. According to the Atlantic Council, a US think tank, the number of economic sanctions imposed by the US and the West on Russia increased from 2,124 in December 2021 to 11,008 by August 2022. The number of sanctioned entities or individuals also increased to 740.

What is noteworthy is the emergence of numerous 21st-century economic sanctions during the process of sanctioning Russia, serving as a testing ground for new economic sanctions. Traditional economic sanctions have two limitations: first, maximizing damage to the target country inevitably incurs some damage to the sanctioning country itself; and second, large-scale sanctions inevitably cause harm to innocent ordinary citizens of the targeted country. The former makes it difficult to sustain large-scale economic sanctions for extended periods due to domestic political considerations, while the latter cannot help but lead to humanitarian considerations to minimize harm to ordinary citizens unrelated to the war.

This is the background for the emergence of 21st-century economic sanctions. In the case of financial sanctions, which the US frequently employs, the US and Western countries focused sanctions on four banks closely linked to Vladimir Putin and his associates, thereby narrowing the scope of sanctions while maximizing their impact. In the manufacturing sector, the US sought to maximize the impact of sanctions by controlling the export of semiconductors essential for Russia's war efforts. Indeed, semiconductor exports to Russia reportedly decreased by 70%.

Conversely, countries subject to economic sanctions face difficulties in responding flexibly to the rapidly changing methods of economic sanctions. Despite the 'weaponization of the dollar' being a classic method of economic sanctions, the global dollar reserves only decreased slightly from $7.085 trillion to $6.652 trillion. This reflects the reality that it is difficult to actively seek alternatives to the dollar even amidst expanding economic sanctions and increasing uncertainty.

3. The Global Economic Order in 2023

1) Amplification of Uncertainty and the Vicious Cycle of Protectionism

In 2022, deglobalization movements surfaced as a backlash against hyper-globalization, domestic inequality manifested as external protectionism, and the interaction between US-China strategic competition and COVID-19 led to qualitative changes in the global economy, such as supply chain realignments. In 2023, the amplification of uncertainty is expected to continue. The Economic Policy Uncertainty Index has reported a continuous increase in global economic uncertainty throughout the 2010s. Economic uncertainty increased from 88 in May 2014 to 343 in October 2022. While this figure is somewhat lower than the 437 recorded in April 2020, shortly after the outbreak of COVID-19, it is significantly higher than the 107 recorded in 2010.[4] The problem lies in the fact that protectionism and increased uncertainty form a vicious cycle. The greater the uncertainty, the greater the temptation to pursue one's own national interests in a short-sighted and exclusive manner. It is difficult to break the link between uncertainty and protectionism in the current crisis of the liberal international order.

2) Exploring the Possibility of Re-globalization

2022 clarified the problems of hyper-globalization, but it also made clear that de-globalization is not the alternative. 2023 may become a year for exploring the possibility of re-globalization, which is neither hyper-globalization nor de-globalization. For re-globalization to become our reality, certain preconditions must be met. First, there must be a change in the ideological and policy foundations at the domestic level that support the rule-based order at the international level. As mentioned above, the expansion of domestic inequality projects external protectionism. Conversely, only when the ideology and policies for managing domestic inequality are reconstructed can the temptation of protectionism be overcome. Second, the geopolitical context of re-globalization cannot be ignored. In the context of intensifying US-China strategic competition, it is difficult for the US and China to maintain the same high level of interdependence as before. However, it is also clear that complete decoupling is neither possible nor desirable. Ultimately, the US and China will pursue 'strategic recoupling,' disentangling relationships in areas that could be sources of vulnerability while maintaining relationships in other areas where commercial interests can be pursued.

3) Dynamic Changes in Regional Economic Orders

In 2023, the growth engine for global trade may weaken. The WTO projects that global merchandise trade growth will fall to 1% in 2023 from 3.5% in 2022. If the high tide of protectionism cannot be subdued in the short term, the era where trade drives global economic growth may be gradually approaching its end. On the other hand, differentiation in economic changes at the regional level is likely to become more apparent. The Indo-Pacific region is an area where not only countries within the region, including the US and China, but also countries outside the region are making multifaceted efforts to connect economically. This is to secure new growth engines by linking to the economic vitality of the Indo-Pacific region.

The Indo-Pacific region is the only region where two mega FTAs, RCEP and CPTPP, are in effect. These two mega FTAs promote economic cooperation among countries in the region while also serving as arenas for strategic competition. In particular, there are concerns that RCEP may expand China's influence in the process of reshaping the regional economic order. As diversification away from China intensifies due to US-China strategic competition and COVID-19, the impact of RCEP on China's position in regional value chains will become apparent.

4) Indo-Pacific Economic Framework (IPEF) and the Establishment of New Rules

2023 will be the year the US intensifies its economic engagement in the Indo-Pacific region. After the Trump administration's decision to withdraw from the TPP, the US faced a dilemma of lacking institutional means to engage economically in the Indo-Pacific region. With the launch of IPEF in May 2022, the US has created an opportunity to overcome its strategic disadvantage vis-à-vis China. However, IPEF extends beyond traditional trade to encompass issues such as the digital economy, supply chains, clean energy and decarbonization for climate change response, taxation, and anti-corruption. This is positive in terms of establishing rules that reflect the changing realities of the 21st century. However, due to conflicting national interests regarding the establishment of high-standard rules, the negotiation process will not be smooth.

In the process of launching IPEF, the US succeeded in attracting seven ASEAN countries as founding members through a flexible approach that allowed them to choose from four pillars. The next challenge for the US is to exert negotiating power to finalize IPEF. The Biden administration is not offering market access to the US as a carrot in the IPEF negotiations, unlike in FTAs. The key will be whether the US can demonstrate intellectual leadership to persuade participating countries without offering the most attractive incentive of market access.

4. South Korea's Response Strategies

What are the essential strategies required for South Korea to respond to changes such as re-globalization, shifts in regional economic orders, and the progress of IPEF negotiations? First, South Korea needs to secure domestic conditions for re-globalization and, based on this, seek ways to contribute to establishing a new rule-based order. Sustainable re-globalization requires the establishment of domestic governance capable of effectively managing side effects while adjusting the speed and scope of hyper-globalization.

Second, in an era of persistent uncertainty, risk management must be established as a national strategy. While it is true that greater uncertainty increases the tendency to prioritize narrow national interests, it is necessary to recognize that pursuing maximum gains in times of uncertainty can entail significant risks. Risk management involves simultaneously pursuing strategies that offset expected effects. It is important to note that if the linkage of different strategies is not effectively achieved, it can lead to a greater problem of strategic inconsistency.

Third, a diversification strategy that reflects supply chain realignments and the reality of US-China strategic competition is necessary. Diversification is inevitable given various factors such as the shift towards a horizontal relationship between the South Korean and Chinese economies, the increasing need to mitigate supply chain vulnerabilities, and the strengthening of cooperation on US reshoring initiatives. However, South Korea should pursue a supply chain strategy based on the universal trend of strengthening resilience rather than excessively pursuing the securitization of supply chains. In other words, supply chain strategies should be designed not for exclusion but for expanding cooperation to enhance supply chain stability.

Fourth, South Korea needs to organically combine the advancement of middle power cooperation with US-South Korea cooperation. The Indo-Pacific region is emerging as a venue for establishing new rules. The US prioritizes the establishment of high-standard rules to check China and secure leadership in the process of reshaping the regional economic order. However, it is a reality that developing countries in the region feel burdened by the short-term adoption of high-standard rules. To address this issue, the US is prioritizing cooperation with middle powers like South Korea. Specifically, it is expected that middle powers in the region, such as South Korea, Japan, Australia, and Singapore, will first accept high-standard rules and then gradually expand them to developing countries in the region. South Korea needs to pursue a strategy of advancing US-South Korea cooperation beyond bilateral cooperation to regional cooperation through rule-making, while simultaneously expanding its diplomatic horizons by increasing support for capacity building among middle powers in the region.■

[1] “Top 10% national income share.” World Inequality Database. https://wid.world/world/#sptinc_p90p100_z/US;FR;DE;CN;ZA;GB;WO;JP/last/eu/k/p/yearly/s/false/25.928500000000003/80/curve/false/country

[2] “Global Dynamics.” Global Trade Alert. https://www.globaltradealert.org

[3] “Global Dynamics.”

[4] “Economic Policy Uncertainty Index,” Economic Policy Uncertainty, https://www.policyuncertainty.com/index.html

■ Author: Lee Seung-joo_Director of EAI's Trade, Technology, and Transformation Center, 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 politics of trade, and global digital governance. His major works and edited volumes include "The Political Economy of Cyberspace" (edited by Lee Seung-joo), "Institutional Balancing and the Politics of Mega FTAs in East Asia," "Northeast Asia: Ripe for Integration?" (co-edited), and "Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions" (co-edited).

■ Responsible Editor: Park Han-soo_EAI Researcher

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