[New Year Special Commentary Series] ② Outlook for the Global Economic Order in 2024: US-China Strategic Competition, Supply Chain Realignment, and Re-globalization

1. Crossroads of US-China Strategic Competition: Thaw vs. Renewed Rupture

2024 will be a turning point determining whether the US and China will mend their conflict or embark on a path of renewed rupture. During the Asia-Pacific Economic Cooperation (APEC) summit in November 2023, the Biden-Xi summit served as a cautious exploration of a potential shift to a management mode, applying the brakes to the freefall of US-China relations. This resulted in the institutionalization of military dialogue, the interdiction of fentanyl precursor distribution, and a ban on AI-controlled nuclear weapons. While both sides reached a degree of consensus that the current situation could not be allowed to worsen, uncertainty remains regarding whether they will broaden the basis for cooperation, as strategic competition will continue to make it difficult for the US and China to escape the intertwined competition and conflict in advanced technologies and industries.

Whether the US and China can achieve some success in managing their conflict to expand cooperation in 2024 hinges on the mitigation or resolution of the dilemma they face in pursuing commercial interests amidst ongoing technological competition. The US will be in a difficult position, needing to maintain and widen the gap in advanced technologies to stay ahead of China, while also responding to the demands of US tech companies, which seek to maintain access to the Chinese market—the second-largest trading partner—in the lead-up to the 2024 presidential election. China, in response to US pressure, is expected to adopt a defensive strategy of enhancing indigenous technological self-reliance, while simultaneously raising warnings that the US's unilateral export control measures will result in US companies losing access to the vast Chinese market. Furthermore, China is expected to adopt a strategy of signaling its ability to respond aggressively to the US and its allies and partners, leveraging the fact that its companies hold key positions in advanced industrial supply chains.

2. US and China: The Shifting "Small Yard, High Fence" vs. Strengthening "Indigenous Innovation Capacity"

The seeds of this confrontation began to form in 2023. It was a year of intense advanced technology competition between the US and China, during which dialogue channels were restored, and at the global level, forces of de-globalization and re-globalization were in a tense standoff. The Biden administration, while maintaining its stated policy of a "small yard, high fence" in its advanced technology competition, pursued a dynamic strategy of building barriers against China's technological rise and rapidly shifting the target when loopholes were found in export control measures. China, rather than directly confronting US actions, focused on identifying and neutralizing circumvention methods by exploiting loopholes in US export controls, while simultaneously making its best efforts to strengthen its own innovation capabilities. It was akin to a contest between a spear and a shield.

This dynamic was starkly evident in the US's semiconductor export control measures against China. Less than a year after imposing semiconductor export controls on China in October 2022, the Biden administration implemented even stricter measures. The US's swift tightening of controls was driven by the practical necessity of closing loopholes in existing measures. When Yangtze Memory Technologies Corp (YMTC) unveiled its 232-layer NAND flash memory in August 2023, the US government responded by including YMTC on the entity list in October 2022. Subsequently, Apple excluded YMTC from its supplier list. However, by September 2023, following a $7 billion injection of state-backed investment, YMTC was reportedly making breakthroughs in its own development, striving to replace key US components from companies like Lam Research. In September 2023, Huawei successfully developed the Mate 60 Pro, equipped with a 7nm chip developed in collaboration with SMIC.

China's search for workarounds has extended to the AI sector. Chinese AI companies have acquired AI chips, such as NVIDIA's A100, through various means, including intermediaries and smuggling. It is estimated that China has purchased 40,000 to 50,000 AI chips through these channels. This has amplified concerns that China's circumvention of US sanctions is moving beyond possibility to reality. In October 2023, US actions included strengthening regulations on AI chips and restrictions on semiconductor manufacturing equipment, and adding 13 Chinese companies to the entity list, to close loopholes in existing measures.

The US government's determination to maintain its lead in advanced technology competition by raising barriers to prevent China's catch-up was clearly articulated in Commerce Secretary Gina Raimondo's speech in December 2023. Raimondo emphasized, "We will block their access to the latest technologies," and "Protecting national security is more important than short-term profits." Specifically, she stated that if NVIDIA were to redesign AI chips to circumvent regulations, the government would introduce new regulations the very next day. This was a warning against NVIDIA's evasion of US regulations by developing A800 and H800 chips with reduced performance compared to the A100, and selling them to China.

The clash between the US's determination to maintain or expand its lead in advanced technology competition and China's desperate efforts to accumulate its own innovation capabilities by circumventing these measures is expected to continue in 2024. The dynamic of the US's spear, sharply probing China's weaknesses in the advanced technology ecosystem, and China's shield, defending against and neutralizing US advances, is also likely to persist. The US will erect higher and denser barriers as soon as loopholes are found in its containment measures against China. Through this, the US will aim to delay China's catch-up by fundamentally blocking its access to core advanced technologies. Conversely, China will respond with a strategy of increasing its technological self-sufficiency through the development of indigenous advanced technologies.

3. Advanced Industries: De-risking and the Pursuit of Commercial Interests

2024 will mark the first year that the US moves from a declarative level to concrete implementation of its de-risking strategy. Both domestic and international factors have contributed to the formalization of the de-risking strategy by the US. It serves as a response to European Commission President Ursula von der Leyen's designation of China as a 'partner, economic competitor, and systemic rival' in March 2023, thereby advocating de-risking as a new paradigm for China policy. It can be seen as an expression of the US and the European Union's (EU) strengthened intent to coordinate policies toward China.

Domestic political considerations also influenced the adoption of de-risking. De-risking is based on the realistic recognition that economic decoupling between the US and China, which together account for about 40% of the global economy, is practically impossible. De-risking is a threat-based strategy that manages the risks arising from the reality of interdependence between the US and China and the structural vulnerabilities each country has toward the other. De-risking also reflects the dissatisfaction of US tech companies with the side effects of controlling advanced technologies. Containment measures in the advanced technology sector inevitably lead to losses for US tech companies, such as reduced sales in China.

US tech companies' concerns and dissatisfaction were continuously expressed in 2023. A prime example is the Semiconductor Industry Association (SIA) urging both the US and China to de-escalate tensions and seek solutions through dialogue rather than further conflict in July 2023. Immediately after the Biden administration announced its enhanced export control measures, the SIA issued an even stronger statement in November 2023, expressing concern that unilateral export controls not only fail to enhance US national security but also increase the risks of undermining the US semiconductor ecosystem.

The US government also faced dissatisfaction from its allies and partners. Concerns that export control measures against China could lead to losses for US semiconductor companies quickly transformed into the need for policy alignment with other countries. The SIA worried that if the US did not block channels for China to divert imports of US advanced technology products to other countries, the US government would inadvertently create an uneven playing field for its own companies. To alleviate the concerns of its own companies, the Biden administration urged allies and partners to increase their level of policy alignment with the US.

2024 will be a year where attention will be focused on how effectively the US government responds to the anticipated domestic and international challenges, in proportion to its strong policy intent to curb China's technological advancement. This is also an inherent dilemma between advanced technology competition and the pursuit of commercial interests in advanced industries. Prioritizing advanced technology competition can harm commercial interests, while excessively pursuing commercial interests can disrupt the US strategy to maintain and expand its technological lead. 2024 will be the year the US formulates and executes its de-risking strategy as a means to resolve this dilemma.

4. The Drifting Global Economic Order: Uncertainty in the Interaction Between Domestic Politics and Foreign Policy

The uncertainty in the global economic order is likely to persist in 2024. Geopolitical risks, such as the prolonged Russia-Ukraine war and the outbreak of the Israel-Hamas conflict, in addition to US-China strategic competition, cast a dark shadow over the global trade environment. The simultaneous occurrence of US-China strategic competition and regional conflicts has normalized economic coercion, including export controls and prohibitions. The problem is that the expansion of economic coercion is increasing the likelihood of global economic bloc formation. Russia, facing extensive Western sanctions, is strengthening cooperation with China, India, and others, while China is also attempting to expand its influence into the Global South. It is expected to take considerable time for geopolitical risks and global economic uncertainties to be resolved.

The increase in geopolitical risks leads to a greater temptation for "America First" policies and protectionism. The spread of industrial policies aimed at mitigating structural vulnerabilities in national industries and securing advantages over other countries is likely to continue globally. Furthermore, as major powers increasingly link economics with security, the possibility of the securitization of the economy, or even excessive securitization, cannot be ruled out. Moreover, 2024 is dubbed the 'year of the big election,' with elections scheduled in 76 countries involving over 4 billion people. The waves of change driven by the constant interplay between politics and economics, and between domestic politics and foreign policy, will be more profound than ever before.

5. Supply Chain Realignment and Re-globalization

US-China strategic competition began with trade. Starting with President Trump's imposition of high tariffs on Chinese steel and aluminum in 2018, it escalated through retaliatory tariffs from both sides. As a result, the average tariff rates on each other's products between the US and China have reached 19.3% and 21.1%, respectively. It can be aptly described as a trade war. In the course of this trade war, the US and China made efforts to reduce their vulnerabilities to each other, and the outcomes can be evaluated in a dual manner.

First, as evidenced by the US-China merchandise trade volume, which rose from $657.4 billion in June 2018 (when the trade war began) to $690.3 billion in 2022, bilateral trade appeared to be in a 'no-war zone.' However, the situation changes when considering the proportion of each country's trade in the total trade of the other. The share of China in total US imports fell from 21.6% in 2017 to 13.3% in the first half of 2021, reaching its lowest level since 2003. A decline of 8.3 percentage points in just four years is difficult to explain without considering the impact of the trade war. From the US perspective, although the absolute volume of trade may have increased, it can be said that a strategic approach was taken to reduce dependence on China.

Second, in 2023, a change occurred where even the absolute volume of US-China trade decreased. As of October 2023, US-China trade volume stood at $479.5 billion, a decrease of approximately 22% compared to $586.8 billion in the same period of 2022. Although the US and China are not explicitly pursuing decoupling, they have entered a phase of mitigating vulnerabilities to each other. De-risking can be described as a strategy to identify and eliminate the causes of structural vulnerabilities.

Efforts to mitigate vulnerabilities to each other are also evident in supply chain realignment. In several speeches, US Treasury Secretary Janet Yellen affirmed that friendshoring, which means diversifying supply chains with trusted partners and allies, would be the surest path to strengthening the resilience and security of the US economy. Mexico and Canada in North America, and South Korea, Taiwan, and Vietnam in the Indo-Pacific region, are the primary targets for friendshoring.

2024 will be a year to assess the success or failure of friendshoring. As indicated by the changes in the US trade structure, friendshoring has already yielded significant results. As mentioned above, the decline in China's share of total US imports can be attributed to the impact of reshoring and friendshoring. In this process, Mexico emerged as the largest trading partner for the US in July 2023, surpassing China. South Korea also became the largest export market for the US in 2023, the first time in 20 years, which is also a result of friendshoring.

However, friendshoring is not without its limitations. In the Information and Communications Technology (ICT) sector, one of the four priority areas for friendshoring, US dependence on China reached 45% as Chinese ICT companies leveraged US friendshoring efforts. This is a result of Chinese companies, facing high tariffs imposed by the US government, reorganizing their supply chains to friendshoring countries like Mexico, Vietnam, and Malaysia to circumvent these tariffs. China's exports to Mexico surged from $83.5 billion in 2018 to $118.6 billion in 2022. Similar to the advanced technology competition, China's exports to the US via Mexico have increased. High dependence on China also persists in the green energy and critical minerals sectors.

Supply chain realignment, spurred by reshoring and friendshoring, is also having a certain impact on globalization. The global spread of COVID-19 and the increase in geopolitical risks have accelerated supply chain realignment, pursuing the dual objectives of enhancing resilience and prioritizing national interests. Despite their differing objectives, the common denominator is the mitigation of vulnerabilities. This can be described as a revolutionary change: a shift from the efficiency paradigm symbolized by 'Just-in-Time' (JIT) to 'Just-in-Case' (JIC), which prepares for the recurrence of supply chain disruptions. This stems from a self-reflection that existing globalization has limitations as significant as its achievements.

The process of supply chain realignment offers a new direction for globalization beyond 2024. Hyper-globalization, which pursues free trade and deep integration, has led to the 'paradox of globalization.' This has resulted in a movement towards de-globalization, going beyond anti-globalization. However, just as with hyper-globalization, there is no guarantee that anti-globalization and de-globalization will be sustainable. It is time to explore practical measures for re-globalization. For this to happen, two preconditions must be met: globalization must mitigate the problems of hyper-globalization while aiming for connection rather than isolation from the outside world. This requires 'interdependence without overdependence,' as advocated by World Trade Organization (WTO) Director-General Ngozi Okonjo-Iweala.

Interdependence without overdependence can serve as a means of re-globalization that absorbs the geopolitical risks of US-China strategic competition. Not only the US and China, but also the EU, considers responses to structural dependence as the cornerstone of its economic security strategy. Their realignment of supply chains and changes in trade structures are primarily aimed at mitigating and eliminating the sources of vulnerability, rather than for closure and isolation. 2024 will be the starting point for exploring the possibility of re-globalization, which reflects on past hyper-globalization and can manage geopolitical risks.

6. South Korea's Response Strategies in 2024

1) South Korea's De-risking Strategy

Major global powers are in a strategic implementation phase of pursuing de-risking. South Korea must also seek changes in line with the universal trend of de-risking, but a strategic approach incorporating South Korea's specific characteristics is necessary. South Korea's structural vulnerabilities are incomparably higher than those of the US or the EU, necessitating a strategy that differentiates itself. South Korea's de-risking strategy should begin with a systematic identification and analysis of manageable risks and unmanageable structural risks. For manageable risks, strategies to mitigate vulnerabilities should be established and implementation mechanisms specified. Simultaneously, it is necessary to face the realistic limitation that addressing all risks is nearly impossible. For such risks, efforts to enhance collective response capabilities through cooperation with like-minded countries should be primarily pursued, while continuous efforts to upgrade leverage, such as advanced industrial manufacturing capabilities, to facilitate cooperation are important. Furthermore, it is necessary to supplement the acquisition of leverage that can be used to preemptively respond to attempts to exploit South Korea's vulnerabilities as a tool of economic coercion.

2) Multi-faceted China Strategy

In 2023, South Korea's economic security strategy focused on advancing the ROK-US alliance into an advanced technology alliance, yielding results beyond expectations. Specific achievements include strengthening supply chains in advanced industries such as semiconductors and batteries, building an advanced science and technology alliance in areas like cyber, space, and quantum, attracting $5.9 billion in investment from advanced companies, and expanding personnel exchanges. 2024 is the time to focus on developing a multi-faceted strategy toward China that corresponds to the strategy toward the US. Thus far, the strategy toward China has been somewhat secondary to the strategy toward the US, reflecting the expectation that strengthening the ROK-US alliance would enhance the capacity to respond to China.

2024 is the time to establish a comprehensive strategy toward China that encompasses issues such as changes in the division of labor structure between South Korea and China, the necessity of supply chain cooperation, and responses to economic coercion. Efforts are needed from both the government and the private sector to enhance information sharing with China and improve understanding of government policies, thereby minimizing costs arising from misunderstandings and distrust. To this end, a systematic analysis and response plan for the risks associated with ROK-US cooperation that could affect China must precede these efforts.

3) Combining Cooperation with Like-minded Countries and Like-situated Countries

Re-globalization remains a possibility, and perhaps it is the only alternative. However, as the specific measures for re-globalization are still incomplete, South Korea needs to take the lead in the re-globalization process by leveraging cooperation with like-minded countries. South Korea has utilized cooperation with like-minded countries that share values and norms as the foundation of middle power diplomacy and as a means to broaden the horizons of its foreign policy. In the current environment of expanding rule-based competition, it is time to expand the scope of cooperation with like-minded countries such as Europe, Australia, Canada, and Japan in areas such as economic security strategy coordination, climate change response, supply chain cooperation, and advanced technology collaboration.

What should not be overlooked is the importance of an interest-based strategy that pursues cooperation with like-situated countries facing similar challenges to South Korea. In the process of supply chain realignment, countries like Mexico, Vietnam, and Indonesia are emerging as beneficiaries of diversification. These countries are prime examples of nations benefiting from supply chain diversification under the 'China+1' strategy. At the same time, these countries are on the front lines of the US-China strategic competition, represented by supply chain realignment. The US seeks diversification to these countries to reduce excessive dependence on Chinese supply chains, while China also seeks to maintain access to the US market. These countries are pursuing a strategy of benefiting from the spillover effects of US-China competition, while being mindful not to become mere arenas for US-China competition. South Korea needs to pursue a pragmatic strategy of mitigating the impact of uncertainty by strengthening cooperation with these countries, while also demonstrating the wisdom to integrate its value- and norm-based cooperation strategy with like-minded countries to navigate and lead in an international environment where uncertainty persists. ■

■ Lee Seung-joo_Director of EAI Trade, Technology, and Transformation Center; Professor of Political Science and International Relations, Chung-Ang University.

■ Managed and Edited by: Park Han-soo_EAI Researcher

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