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China's Record Trade Surplus and the G7's Response to Global Imbalances: South Korea's Strategic Choices
Executive Summary
Executive Summary
With China's trade surplus reaching a record high of $735 billion, the global trade order is at a critical juncture of structural realignment. This is not merely a cyclical phenomenon but the result of decades of overlapping structural factors, including state-led economic models, chronic domestic demand shortfalls, and an undervalued Renminbi. The G7, through the institutional language of 'global imbalances,' 'economic security,' and 'supply chain resilience' at the 2026 Evian Summit, is systematically transforming pressure on China from mere diplomatic rhetoric into medium- to long-term policy tools. The most likely scenario (probability 55-60%) is a 'managed imbalance' where structural tensions between the US and China persist long-term without escalating into full-scale conflict. South Korea's optimal response is not to make a strategic bet on either the US or China, but to adopt a triangular balancing strategy: maintaining strategic selective engagement with China while proactively participating in the US-EU-led supply chain realignment and diversifying exports to the Global South. Particularly in areas directly linked to technological security, such as semiconductors, batteries, and critical raw materials, South Korea should gradually reduce its dependence on China. Simultaneously, it should pragmatically maintain supply chain linkages with China in less sensitive sectors, thereby maximizing economic benefits amidst structural uncertainty through a flexible portfolio strategy.
Step 1: Issue Situation Analysis
China's Record Trade Surplus and the G7's Discussion on Global Imbalances
Issue Situation Analysis
1. Background and Course of the Issue
China's trade surplus is not a short-term phenomenon but a product of structural imbalances accumulated over decades. Since its reform and opening-up, China adopted an export-led growth model centered on manufacturing, emerging as a key hub in global supply chains. The US and Europe once actively supported China's accession to the WTO, urging market liberalization, tariff reductions, increased foreign investment, and stronger intellectual property protection. However, as Chinese companies rapidly improved their competitiveness and industrial upgrading progressed, Western countries found themselves facing new threats of deindustrialization, supply chain vulnerability, and technological dependence [2].
Following the 2008 global financial crisis, China implemented massive stimulus packages that rapidly expanded its manufacturing capacity, leading to structural overcapacity issues. This was particularly evident in green industries such as solar panels, electric vehicles, and batteries, where China's production capacity expanded to levels far exceeding global demand. In response, Huang Yiping, Director of the Institute of National Development at Peking University and an advisor to the People's Bank of China, argued that "the fundamental reason for the deepening trade imbalance is that countries around the world have failed to adapt to the changes in the global economic structure," suggesting that China's overcapacity could actually play a positive role in supporting the global energy transition [1].
The G7's strategic perception of China began to shift around 2017. Initially focused on single issues like human rights in Hong Kong, discussions on China within the G7 gradually expanded to the broader concept of a 'systemic challenge,' and the issue of peace and stability in the Taiwan Strait was officially incorporated into the Indo-Pacific security framework [3]. This shift was not merely rhetorical but reflected a policy change recognizing China as a systemic threat to the economic security and technological order of industrial democracies.
2. Current Situation (Latest Trends)
As of 2026, China's trade surplus has reached a record high of $735 billion, also hitting a historical peak as a percentage of global GDP. The International Monetary Fund (IMF) has warned that these external imbalances and their ripple effects are creating negative externalities for trading partners [11]. The EU-China trade deficit has widened to over $1 billion euros (approximately $1.13 billion) per day, prompting discussions among EU member states about implementing stricter regulations on Chinese companies [9].
The G7 Summit held in Evian, France, in June 2026 addressed these imbalance issues as a core agenda item. French President Macron raised the issue of 'global imbalances' as a key G7 agenda item, and German Chancellor Merz unusually and strongly criticized China for 'flooding' overseas markets with state subsidies and utilizing an artificially undervalued Renminbi [11]. Christine Lagarde, President of the European Central Bank (ECB), identified the undervalued Renminbi as a key factor in global imbalances at an event in Brussels, emphasizing the need for G7-level discussions [5].
However, China was not directly mentioned in the summit's final communiqué. This was not because the G7 ignored the issue but rather a result of coordinating the agenda through institutional language such as 'global imbalances,' 'supply chain resilience,' 'critical minerals,' and 'economic security,' allowing for consensus among member states [7]. Indeed, the G7 Trade Ministers' Joint Statement, released in May 2026, explicitly criticized non-market policies and practices, persistent market distortions, global structural overcapacity, and economic coercion, defining China's economic model as a systemic challenge to industrial democracies [3][16].
Trade tensions between the US and China persist. The Trump administration imposed high tariffs averaging 75% on China through the so-called 'Liberation Day' tariffs in April 2025, although negotiations resumed thereafter [16]. Beijing, while imposing new sanctions on US companies, has also expressed a dual stance of pursuing tariff reductions and 'win-win' cooperation [12]. The US trade deficit in goods reached its highest level in over a year at $105.8 billion as of May 2025, indicating that structural imbalances remain unresolved [8].
3. Key Actors and Their Positions and Interests
Chinamaintains that its trade surplus is a legitimate outcome of its competitiveness, driven by corporate efficiency and innovation. The Chinese government argues that efficient, innovative, and globally competitive companies should not be labeled as perpetrators of unfair trade [2]. Concurrently, while denying allegations of currency manipulation, Beijing continues its strategic moves to reduce dollar dependence, such as the People's Bank of China Governor announcing a new blueprint for Renminbi internationalization [13]. However, China's de-dollarization strategy faces structural limitations due to the gap between financial infrastructure development and actual demand creation [13]. Externally, China employs a strategy of parallel cooperation and confrontation, using a dual approach of offering a $300 billion proposal to the US while maintaining sanctions on American companies [12].
United Statesunder the Trump administration, is pursuing a strategy of pressure on China by combining high tariffs with industrial policy. According to analyses by the Peterson Institute for International Economics (PIIE), the US's reciprocal trade agreement structure is designed to accelerate decoupling from China. However, the US itself faces structural issues with its widening trade deficit [8], which limits its moral leadership in resolving global imbalances. Furthermore, President Trump's unpredictable actions weaken cooperation within the G7 [4].
European Union (EU)is shifting towards a tougher stance in response to the deepening trade imbalance with China, but faces structural limitations in establishing a unified China policy due to differing interests among member states [7]. The EU is caught in a dilemma, unwilling to engage in a trade war with China yet unable to ignore its eroding competitiveness. Some have proposed a Renminbi appreciation negotiation similar to the 1985 Plaza Accord, but skepticism about its feasibility is widespread [4]. ECB President Lagarde is attempting to elevate currency issues to the core of the trade imbalance discussion by formally proposing the undervalued Renminbi as a G7 agenda item [5].
G7 as a wholeis adopting a strategy of avoiding overt confrontation targeting China directly, while gradually refining critical language regarding China's economic model at working-level meetings, such as trade ministers' conferences [3][16]. This represents a pragmatic approach to finding the greatest common denominator amidst a lack of full consensus on China policy among G7 members.
4. Summary of Key Issues
The first key issue is the narrative competition surrounding the diagnosis of the causes of trade imbalances. The West points to China's state subsidies, non-market practices, and undervalued Renminbi as primary causes, while China deflects responsibility onto the failure of Western economies to adapt to structural changes in the global economy [1][2]. This narrative competition is not merely an academic debate but a political struggle determining who secures moral legitimacy in the future restructuring of international trade norms.
The second issue is the undervaluation of the Renminbi and currency manipulation. Western leaders, including ECB President Lagarde, argue that the undervalued Renminbi artificially boosts the price competitiveness of Chinese exports, a claim China denies [5]. This issue is linked to the possibility of a recurrence of the Plaza Accord, but the consensus is that such a multilateral agreement is highly unlikely in the current geopolitical environment [4].
The third issue is the lack of unity in the G7's strategy towards China. While the G7 shares common concerns about China's economic practices, it struggles to formulate a consistent response strategy due to differing levels of economic dependence on China and geopolitical interests among member states [7]. In particular, the Trump administration's unilateral actions serve as a key factor weakening G7 cooperation [4].
The fourth issue is the choice between a decoupling strategy versus an engagement strategy. The US is pursuing accelerated decoupling through tariffs and export controls, while the EU seeks structural rebalancing through a 'grand bargain' without triggering a trade war [10]. This strategic divergence will be a key determinant of the direction and pace of future global supply chain restructuring.
The fifth issue is the opacity of China's asset holdings. As pointed out by the Council on Foreign Relations (CFR), the lack of transparency regarding the actual scale and management of China's external assets accumulated through its massive trade surplus poses a significant risk to global financial stability. This issue extends beyond mere trade imbalances and is directly linked to vulnerabilities in global financial governance [6].
Step 2: In-depth Issue Analysis
China's Record Trade Surplus and the G7's Discussion on Global Imbalances
In-depth Issue Analysis: Analysis of Root Causes, Structural Context, and Historical Precedents
1. Analysis of Root Causes
China's record trade surplus is the result of complex structural factors overlapping over decades, not a single cause. At its core lies China's unique state-led economic model. The Chinese government has systematically enhanced the price competitiveness of its manufacturing sector through large-scale subsidies for strategic industries, policy financing via state-owned banks at low-interest rates, and artificial suppression of costs related to land, energy, and environment. These non-market policy tools have enabled Chinese companies to supply products at below-cost prices in global markets, thereby causing structural distortions that erode the industrial base of trading partners [7].
A second root cause is the chronic shortfall in domestic demand and low consumption structure within China. The Chinese economy has maintained a skewed structure with a significantly lower household consumption ratio to GDP compared to advanced economies, while the investment ratio remains excessively high. This mechanism causes produced goods to be insufficiently absorbed domestically and instead channeled into exports. The massive stimulus packages implemented by China after the 2008 global financial crisis exacerbated this problem. The enormous fiscal input led to a rapid expansion of manufacturing capacity, and with domestic demand unable to absorb this, structural overcapacity became entrenched across strategic industries such as solar panels, electric vehicles, batteries, and steel [1].
A third factor is the issue of the Renminbi's exchange rate. As pointed out by ECB President Lagarde, the undervaluation of the Renminbi acts as a key variable artificially enhancing the price competitiveness of Chinese exports [5]. While Chinese authorities officially deny currency manipulation, the mechanism of managing the Renminbi's value through capital account controls and foreign exchange market interventions effectively contributes to maintaining export competitiveness, according to the consensus analysis of Western economists. German Chancellor Merz's unusually strong criticism of the undervalued Renminbi at the G7 Summit reflects this perception [11].
Conversely, China's perspective fundamentally differs. Professor Huang Yiping of Peking University counters that attributing the trade imbalance solely to China is unfair, arguing that the core issue lies in the failure of countries worldwide to adapt to changes in the global economic structure [1]. From this viewpoint, the deindustrialization of the US and Europe is presented not as a result of China's unfair competition but as a consequence of their own domestic restructuring failures and over-reliance on the service sector. Thus, the interpretation of the causes of trade imbalances itself has emerged as a core issue between the US and China, and between China and the G7, complicating the path to solutions [2].
2. Structural Context
Political Structure
The G7's strategy towards China has undergone a qualitative shift over the past decade, moving from 'value declarations' to 'policy tools.' Prior to 2017, G7 discussions on China focused on individual issues such as human rights in Hong Kong and the South China Sea. Subsequently, a comprehensive framework emerged, defining China as a 'systemic challenge' [3]. A notable aspect of the 2026 Evian G7 Summit is that while China appears to have 'disappeared' from official documents, the G7 is actually advancing its agenda more broadly through institutional language such as 'global imbalances,' 'supply chain resilience,' 'critical minerals,' and 'economic security' [7]. This represents a strategic choice to manage differing levels of policy intensity towards China within the G7 while building a practical response foundation.
However, clear divisions also exist within the G7. The unpredictable actions of US President Trump and his America First trade policies are hindering the formation of a united G7 front against China [4]. European countries, while sharing concerns about China, are cautious about aligning with the US's unilateral tariff policies. Consequently, the G7 is opting for an indirect pressure strategy through institutional language rather than direct confrontation with China, which imposes fundamental limitations on the effectiveness of a unified G7 response [7].
Economic Structure
From an economic perspective, the structural complexity of this issue stems from China's dual position as a key trading partner and a competitor to G7 nations. Even as the EU's trade deficit with China exceeds one billion euros per day [9], European companies remain deeply reliant on access to the Chinese market and the supply of intermediate goods from China. This interdependence raises the cost of assertive economic policies toward China, thereby constraining policymakers' room for maneuver. In the U.S. case, the trade deficit in goods reached $105.8 billion as of May 2026, its highest level in over a year [8], further intensifying protectionist pressures within the country.
China's pursuit of de-dollarization is also a significant driver of structural economic change. The People's Bank of China has unveiled a new blueprint for internationalizing the renminbi, promoting offshore renminbi trading pilot programs and expanding currency swap lines between central banks [13]. However, this strategy faces structural limitations. Creating financial instruments is one thing; generating global demand for them is another. China's capital account controls and a lack of confidence in its rule of law fundamentally impede the renminbi's rise as a global reserve currency to rival the dollar [13].
Security Structure
From a security standpoint, trade imbalances are inextricably linked to the competition for technological supremacy and supply chain security. The G7 trade ministers' communiqué explicitly criticized non-market policies and practices, persistent market distortions, global structural overcapacity, economic coercion, and risks associated with critical minerals [7], reflecting a trend of 'securitizing the economy' by redefining economic issues in security terms. The official inclusion of the stability of the Taiwan Strait as a core element of the Indo-Pacific security framework in the G7 communiqué is a significant signal that discussions on economic imbalances are being integrated with geopolitical security competition [3][16].
The weakening of the U.S. industrial base is also a key variable in the security structure. Decades of offshoring manufacturing have severely eroded the U.S. industrial production capacity, making it strategically vulnerable in scenarios like a Taiwan contingency [15]. This implies that U.S. reshoring policies and pressure on allies to realign supply chains are not merely economic protectionism but part of a broader security strategy.
3. Historical Precedents and Comparative Cases
The Plaza Accord of 1985
The most frequently cited historical precedent in current discussions of global trade imbalances is the Plaza Accord of 1985. At that time, the finance ministers of the G5 nations (the United States, Japan, West Germany, France, and the United Kingdom) agreed at the Plaza Hotel in New York to artificially devalue the U.S. dollar, which served as a key tool to address the U.S. trade deficit with Japan. Some European leaders advocate for a similar 'new Plaza Accord' targeting China today [4]. However, this comparison overlooks several fundamental differences. In 1985, Japan, as an ally under the U.S. nuclear umbrella, had a political incentive to accept U.S. pressure, whereas China, as a major power in strategic competition with the U.S., is highly unlikely to yield to similar pressure. Furthermore, Japan's subsequent 'lost three decades' historically demonstrated that currency appreciation is not a panacea for trade imbalances. In this context, the notion of a new Plaza Accord targeting China is widely considered unrealistic [4].
The Smoot-Hawley Tariff Act of the 1930s and the Protectionism Paradox
The U.S. reciprocal tariff policy evokes parallels with the Smoot-Hawley Tariff Act of 1930. At that time, the U.S. imposed broad import tariffs ostensibly to protect domestic industries, which triggered retaliatory tariffs from trading partners, leading to a sharp contraction in global trade and exacerbating the Great Depression. The current U.S. tariff policy toward China, particularly the imposition of tariffs on 'Liberation Day' in April 2025 and China's retaliatory measures, carries the risk of a similar vicious cycle [16]. However, the current situation differs from the 1930s in that the supply chain interdependence between the two countries is much deeper, and the financial system is more interconnected, making the cost of full decoupling prohibitively high for both sides.
U.S.-Japan Trade Friction in the 1970s-1980s
The history of U.S.-Japan trade friction also provides important reference points for understanding current U.S.-China tensions. At that time, the U.S. criticized Japanese exports of automobiles, semiconductors, and steel for encroaching on American industries, employing various measures such as voluntary export restraints (VERs), anti-dumping duties, and pressure for market opening. Despite the geopolitical constraints of Japan being an ally, this conflict persisted for decades without a complete resolution. The current U.S.-China conflict, unfolding within a strategic competitive relationship rather than an alliance, has a much narrower scope for negotiation, making it structurally more difficult to resolve [2].
China's WTO Accession and the 'China Shock'
China's accession to the WTO in 2001 sent unprecedented shockwaves through the global trade order. So-called 'China Shock' studies have empirically demonstrated that the surge in imports from China led to massive job losses in U.S. manufacturing regions, leaving long-term scars on local economies. While Western countries expected China's integration into the WTO to incorporate it into the rules-based trading system [2], it actually resulted in China maintaining its state-led economic model while exploiting loopholes in WTO rules. This experience now forms the backdrop for the G7's designation of China as an 'institutional challenge' and its search for a new normative framework [3][7].
4. Key Variables in Issue Development
The key variables that will determine the future trajectory of this issue can be identified across four main dimensions.
First, the progress of U.S.-China negotiations. China expresses its willingness to continue tariff reduction negotiations with the U.S. while simultaneously employing a dual strategy of imposing new sanctions on U.S. companies [12]. In this 'complex game' structure where cooperation and confrontation proceed simultaneously, the key variable is whether substantive progress will be made in negotiations or if a stalemate, termed 'strategic stability,' will persist [17]. The analysis suggesting that U.S. reciprocal tariff policies are structurally accelerating decoupling from China indicates a potential for prolonged managed competition rather than a fundamental resolution through negotiation.
Second, the G7's capacity for coordinated response toward China. Whether the G7 can take effective joint action against China's non-market practices depends on coordinating the interests among member states [4][7]. The U.S.'s tendency toward unilateralism, the varying degrees of economic dependence on China among European nations, and the unpredictability of the Trump administration weaken the cohesion of a united G7 front. The crucial question is whether the G7 can translate the institutional language of 'global imbalances' into tangible policy instruments.
Third, China's will and capacity for domestic demand transition. Whether China can genuinely pursue a structural shift from an export-led growth model to a domestic demand-centric model is the fundamental key to resolving trade imbalances. However, this is widely considered difficult to achieve in the short term due to complex internal barriers such as resistance from vested industrial interests, pressure on local governments to achieve GDP growth, and deficiencies in the social safety net. Just as China's pursuit of de-dollarization faces structural limitations [13], a fundamental shift in its economic model also presents a significant gap between declaration and execution.
Fourth, the Taiwan risk and geopolitical shock variables. Escalating military tensions or an actual conflict in the Taiwan Strait could shift the current discussion on trade imbalances to an entirely different dimension [15][16]. In this scenario, economic decoupling would become a forced reality rather than a voluntary choice, and global supply chain realignment would occur in a rapid and costly manner. This scenario poses the most severe shock to middle-power countries, including South Korea.
Phase 3: Scenario Analysis
China's Record Trade Surplus and the G7's Discussion on Global Imbalances
Scenario Analysis: Analysis of Multiple Scenarios and Their Impact on Industries and Corporations
1. Optimistic Scenario: Gradual Imbalance Adjustment Through Negotiation
Estimated Probability: 15-20%
Scenario Progression
The optimistic scenario envisions a path where the U.S., China, and the G7 reach substantive agreements at the negotiating table, and China gradually alleviates trade imbalances through domestic demand expansion and exchange rate flexibility. While the feasibility of this scenario is currently low, it cannot be ruled out if certain conditions are met. Firstly, China's economy may have an incentive to reduce its export dependence due to prolonged domestic demand weakness and a prolonged real estate slump. If the Chinese authorities undertake structural reforms to boost household consumption, allow gradual appreciation of the renminbi, and genuinely improve market access for foreign companies, a shift toward easing friction with the West becomes possible. The U.S. and China are already in discussions to expand trade in aircraft and agricultural products, and Beijing is maintaining negotiation channels by proposing a cooperation package worth $30 billion [12]. At the G7 level, a multilateral exchange rate adjustment agreement comparable to the 1985 Plaza Accord could be discussed; ECB President Lagarde's call to officially place the issue of renminbi undervaluation on the G7 agenda could serve as a starting point in this direction [5]. The EU and China are also seeking 'grand bargain' negotiations to avoid mutual ruin, and common willingness to avoid a trade war has been confirmed in high-level talks between the two sides [10].
Impact on South Korea
If this scenario materializes, it would create an overall positive environment for South Korea. Easing U.S.-China trade tensions would reduce the pressure on South Korean exporters to realign supply chains, and a recovery in China's domestic market would likely boost exports to China. South Korea's export structure, centered on intermediate goods such as semiconductors, displays, and chemical materials, would directly benefit from the recovery of China's manufacturing sector. However, as long as Chinese companies maintain their competitiveness, competition with South Korean firms in green industries like electric vehicle batteries and solar power will continue.
2. Baseline Scenario: Managed Persistence of Structural Tensions
Estimated Probability: 55-60%
Scenario Progression
The most realistic baseline scenario posits a state of 'managed imbalance' where trade conflicts between the U.S. and China, and between the G7 and China, do not escalate into full-blown confrontation, yet structural tensions persist. In this scenario, the G7 indirectly maintains pressure on China by using institutional language such as 'global imbalances,' 'supply chain resilience,' and 'economic security,' rather than directly targeting China [7]. As seen in the 2026 Evian G7 Summit communiqué, a dual structure is maintained where the G7 trade ministers' communiqué explicitly criticizes non-market policies and practices, persistent market distortions, global structural overcapacity, and economic coercion, while adopting more moderate language in the leaders' declaration [7][16]. This reflects the reality that G7 member states share common concerns regarding China policy but do not have a fully aligned stance.
U.S.-China relations maintain what both sides call 'constructive strategic stability,' but in practice, a stalemate akin to 'mutually assured disruption' persists [17]. The U.S. accelerates decoupling from China through reciprocal tariffs and industrial policies while refraining from escalating into a full-scale trade war. China maintains its trade surplus, reaching $735 billion, and pursues the internationalization of the renminbi, but faces limitations in posing a substantial challenge to dollar hegemony [13]. The EU, while facing a trade deficit with China exceeding one billion euros per day, pursues regulatory tightening but fails to achieve a unified hardline response due to differing interests among member states [9]. In this scenario, supply chain realignment proceeds gradually, with friend-shoring and near-shoring expanding, but complete decoupling from China is limited to a 'de-risking' level.
Impact on South Korea
In the baseline scenario, South Korea faces complex challenges in managing the structural tensions between the U.S. and China while maintaining its strategic positioning. It faces the dual burden of strengthening investment and cooperation with the U.S. in response to its industrial policies and supply chain realignment pressures, while simultaneously needing to maintain economic relations with China, still its largest trading partner. In the semiconductor sector, intensified U.S. export controls toward China create ongoing uncertainty for South Korean companies' operations in China, and in the electric vehicle battery sector, competition with Chinese companies like CATL intensifies in the global market [9]. Meanwhile, the increasing demand for supply chain diversification provides an incentive for South Korea to accelerate its expansion into alternative production bases in Southeast Asia and India. Overall, South Korean companies will face increased costs for managing uncertainty and will be required to adopt sophisticated dual strategies to maintain relations with both the U.S. and China.
3. Pessimistic Scenario: Global Trade Bloc Formation and Full Decoupling
Estimated Probability: 25-30%
Scenario Progression
The pessimistic scenario envisions a path where U.S.-China strategic competition escalates into full-blown conflict in the economic and technological spheres, leading to the fragmentation of the global trade order into Western-led blocs and a China-centric bloc. Multiple factors could trigger this scenario. Escalating military tensions in the Taiwan Strait, further retaliatory export control measures by China, or a sharp increase in U.S. tariffs on China could materialize this path [15][16]. The imposition of tariffs averaging 75% on China by the Trump administration on 'Liberation Day' in April 2025 serves as a stark reminder that this scenario is not merely hypothetical [16]. With China's trade surplus reaching historic highs relative to global GDP, if structural imbalances are not resolved despite IMF warnings, protectionist responses from the West are likely to intensify [11].
In this scenario, the G7 abandons the indirect language of 'global imbalances' and initiates coordinated economic pressure directly targeting China. The EU erects comprehensive tariff barriers against Chinese goods and institutionalizes decoupling from China through its network of trade agreements with the U.S. As analyzed by the PIIE, the U.S. reciprocal trade agreement structure itself acts as a mechanism accelerating decoupling from China, gradually solidifying trade blocs excluding China. China, in response, accelerates the internationalization of the renminbi and the development of its own supply chains, but still faces limitations in posing a substantial challenge to dollar hegemony [13]. Consequently, the global economy splits into two parallel supply chains and technological ecosystems, leading to a surge in global trade costs and a structural decline in growth. If a crisis in the Taiwan Strait materializes, the shock would be amplified by the exposure of the U.S. industrial base's weakness and supply chain vulnerabilities [15].
Impact on South Korea
The pessimistic scenario would inflict the most severe shock on the South Korean economy. South Korea's structural vulnerability, characterized by high dependence on both U.S. and Chinese exports, would lead to extreme pressure to choose sides amidst global trade bloc formation. In the semiconductor industry, full-scale U.S. export controls on China would fundamentally restrict the operations of Samsung Electronics and SK Hynix's production facilities in China and their sales to China. In the electric vehicle battery sector, while Chinese companies' exclusion from the European market might offer short-term benefits to South Korean firms, the potential for retaliatory Chinese export controls on rare earths and critical minerals could disrupt the supply chains of South Korea's entire manufacturing sector. If a Taiwan Strait crisis materializes, South Korea would be directly exposed to security and economic shocks due to its geographical proximity [15]. In this scenario, South Korea's strategic options would be extremely limited, and proactive investment in supply chain diversification and enhanced technological self-reliance would become conditions for national economic survival.
4. Scenario-Based Impact Analysis on the Global Economy and Industries
Manufacturing and Supply Chains
The optimistic scenario envisions a path where global supply chains, while maintaining their current China-centric structure, gradually diversify. China's green manufacturing capabilities play a positive role in supporting global energy transition [1], and supply chain realignment costs are minimized. In the baseline scenario, friend-shoring and near-shoring expand, gradually increasing supply chain realignment costs, and the importance of alternative production hubs in Southeast Asia, India, and Mexico grows. The pessimistic scenario necessitates a complete restructuring of supply chains, with the associated costs structurally increasing global inflation.
Automotive and Electric Vehicle Industry
In the optimistic scenario, Chinese EV companies compete globally, yet opportunities for cooperation with Western firms remain open. In the baseline scenario, protectionist measures such as EU tariffs on Chinese EVs persist, while Chinese companies employ strategies to circumvent tariff barriers through local production investments within the EU, such as in Hungary [9]. The pessimistic scenario sees the EV market fragmented into regional blocs, accelerating the geopolitical realignment of battery supply chains.
Financial and Monetary Order
The optimistic scenario involves multilateral exchange rate adjustments akin to a new Plaza Accord, stabilizing the global monetary order [4][5]. In the baseline scenario, China's pursuit of renminbi internationalization continues, but with limitations in posing a substantial challenge to dollar hegemony, the global monetary order maintains its dollar-centric structure [13]. The pessimistic scenario sees the global financial system fragmenting into dollar and renminbi blocs, significantly increasing international trade costs and intensifying currency choice pressures on emerging economies.
Technology and Semiconductor Industry
All three scenarios involve continued U.S.-China competition in technology, but with varying intensity and scope. Even in the optimistic scenario, technological competition in semiconductors and artificial intelligence does not subside. In the baseline scenario, 'technological decoupling' gradually progresses, characterized by parallel U.S. export controls and Chinese efforts toward technological self-reliance. The pessimistic scenario witnesses the full fragmentation of technological ecosystems, slowing global innovation and leading to fragmented technological standards. South Korean semiconductor companies, regardless of the scenario, face the persistent pressure of intensified U.S. export controls on China, making a strategic shift toward gradually reducing reliance on the Chinese market and developing alternative markets unavoidable [16].
Africa, Emerging Markets, and the Multipolar Order
In both the baseline and pessimistic scenarios, as the multipolar order intensifies, emerging markets including Africa tend to strengthen their pursuit of strategic autonomy between the United States and China[14]. China will continue to promote Belt and Road Initiative investments and the expansion of RMB settlements to increase its economic influence in these countries, while the US and G7 will counter by offering alternative partnerships through development finance and infrastructure investment. The outcome of this competition will directly impact the geographical restructuring of global supply chains and the race for critical mineral resources, serving as a significant variable for the resource diplomacy and supply chain strategies of middle powers, including South Korea.
> Overall Assessment: Synthesizing the three scenarios, the current structural conditions most strongly support the realization of the baseline scenario. The G7 will maintain a strategy of managing the China issue through institutional language while refraining from full-scale confrontation[7], and the US and China are likely to continue a de facto stalemate under the guise of 'constructive strategic stability'[17]. In an environment where this structural tension persists long-term, South Korea faces complex challenges requiring simultaneous pursuit of supply chain diversification, enhancement of technological self-reliance, and sophisticated management of strategic ambiguity.
Phase 4: Analysis of Response Strategies
China's Record Trade Surplus and the G7's Discussion on Global Imbalances
Analysis of Response Strategies: Evaluation of Strategic Options and Feasibility by Scenario
1. Response Strategies for the Optimistic Scenario: Gradual Adjustment of Imbalances through Negotiation (Probability 15-20%)
Analysis of Response Options and Their Pros and Cons
If the optimistic scenario materializes, the South Korean government and businesses must design response options to strategically leverage the favorable environment of eased US-China tensions. The most prioritized response option in this scenario is the active pursuit of a strategy to re-enter the Chinese domestic market. If China undertakes structural reforms to stimulate household consumption and expand its domestic market, South Korea's intermediate goods industries, such as semiconductors, displays, and fine chemicals, could directly benefit from the recovery of China's manufacturing sector. The advantage of this option is its ability to restore existing supply chain linkages with China and reverse the decline in exports to China, while also offering operational efficiency by utilizing existing capabilities without requiring separate large-scale investments in the short term. However, the disadvantages include significant uncertainty regarding the speed and sustainability of China's domestic recovery, and the structural decline in demand for Korean intermediate goods due to the technological advancement of Chinese companies, which may be difficult to reverse solely through domestic demand recovery.
A second option is to establish a tripartite cooperation framework among South Korea, China, and the US, leveraging the phase of US-China negotiation settlement. Given that the US and China are maintaining negotiation channels, with Beijing proposing a $30 billion cooperation package and discussions on expanding trade and reducing tariffs in sectors like aircraft and agricultural products[12], South Korea can seek a mediating role within this negotiation space. Specifically, this includes strengthening dual-track diplomacy that combines economic cooperation with China while being based on the ROK-US alliance, and restarting negotiations for an upgraded ROK-China FTA. The advantage of this option is its potential to maximize economic benefits while diversifying geopolitical risks. However, a disadvantage is the possibility of South Korea facing pressure for 'tightrope walking' diplomacy between the US and China, unless the US completely abandons its decoupling stance towards China.
A third option is to actively participate in the G7-led discussions on a multilateral exchange rate adjustment agreement. As ECB President Lagarde has urged for the issue of RMB undervaluation to be officially placed on the G7 agenda[5], if multilateral exchange rate discussions comparable to the 1985 Plaza Accord materialize, South Korea must closely monitor the impact on its currency and export competitiveness and establish a preemptive stance. While an appreciation of the RMB could partially improve the relative price competitiveness of Korean exports, the potential for accompanying upward pressure on the Korean Won necessitates a careful evaluation of both effects.
Feasibility and Risk Assessment
Given that the probability of the optimistic scenario itself is low at 15-20%, a strategy that over-bets on this scenario carries significant risk. The strategy of domestic demand recovery in China has relatively high feasibility but considerable uncertainty in its effects, and the tripartite cooperation framework faces implementation constraints as long as the US maintains its hardline stance towards China. Therefore, it is more realistic to position the response to this scenario as a complementary option pursued in parallel with the response to the baseline scenario, rather than an independent strategy.
Priority Response Measures
In the optimistic scenario, the priorities are: first, strengthening the monitoring system for China's domestic demand recovery and preparing for the diversification of export items to China; second, creating the diplomatic foundation for resuming negotiations on an upgraded ROK-China FTA. Third, it is necessary to preemptively establish hedging strategies against exchange rate risks in preparation for multilateral exchange rate adjustment discussions.
2. Response Strategies for the Baseline Scenario: Managed Persistence of Structural Tensions (Probability 55-60%)
Analysis of Response Options and Their Pros and Cons
In the most realistic baseline scenario, the core challenge for South Korea is to implement a balancing strategy that maintains economic ties with both the US and China while avoiding excessive alignment with either, amidst the ongoing structural tensions between them. Within the framework where the G7 indirectly maintains pressure on China by using institutional language such as 'global imbalances,' 'supply chain resilience,' and 'economic security' instead of directly targeting China[7], South Korea must accurately grasp the substantive implications of this institutional language and respond preemptively.
The first core response option is the systematic implementation of a supply chain dualization strategy. This involves diversifying supply chains in critical material, component, and equipment sectors where dependence on China is high, and diversifying procurement sources to regions such as the US, Europe, and Southeast Asia. The advantage of this option aligns with the 'supply chain resilience' emphasized by the G7 and allows for strengthening South Korea's position in the US market by linking with industrial policies like the US Inflation Reduction Act (IRA) and the CHIPS Act. Indeed, as G7 trade communiqués increasingly criticize non-market policies and practices, economic coercion, and critical mineral risks[7][16], structuring South Korean companies' supply chains to comply with this trend is directly linked to maintaining market access in the US and European markets. The disadvantages include the inevitable increase in costs and decrease in efficiency due to supply chain dualization, and the added burden for companies maintaining production bases in China.
A second option is strategic selection and concentration within the Chinese market. A complete decoupling that reduces dependence on China across all sectors is practically impossible and entails significant economic losses. Therefore, a strategy of selection and concentration, where exposure to China is reduced in strategic technology areas such as advanced semiconductors, artificial intelligence, and quantum computing that conflict with US export controls and G7 economic security regulations, while continuing to target the Chinese domestic market in areas with low regulatory risk such as consumer goods, food, healthcare, and cultural content, is effective. The advantage of this option is its ability to maintain revenue streams in the Chinese market while responding to US decoupling pressure. However, a disadvantage is the potential narrowing of strategic space if both the possibility of economic retaliation from Chinese authorities and pressure from the US on its allies are applied simultaneously.
A third option is preemptive integration into the G7 economic security architecture. As the G7 institutionalizes non-market policies and practices, persistent market distortions, and global structural overcapacity, and economic coercion through institutional language[7], South Korea must secure its status as a rule-maker, not just a rule-taker, by actively participating in this rule-making process. Specifically, this includes increasing participation in multilateral economic security cooperation frameworks such as the US-led Indo-Pacific Economic Framework (IPEF), the Chip 4 Alliance, and critical mineral partnerships in a manner that contributes substantively. The advantage of this option is strengthening strategic trust with the US and Europe and securing access to advanced technology cooperation. However, the disadvantage is the risk of provoking China's backlash and economic retaliation.
A fourth option is to establish industry-specific defense mechanisms against the pressure of overcapacity originating from China. As China's overcapacity in strategic industries such as electric vehicles, batteries, solar power, and steel encroaches upon the global market, Korean companies face direct competitive pressure in the same sectors. In line with the trend of the EU introducing stricter regulations on Chinese companies[9] and Germany strongly criticizing the undervaluation of the RMB and state subsidies[11], South Korea needs to systematically develop institutional defense measures such as strengthening anti-dumping investigations, imposing countervailing duties on subsidies, and refining fair competition regulations. While this option offers clear benefits in protecting domestic industries, it entails diplomatic costs such as retaliatory measures from China and deterioration of ROK-China relations.
Feasibility and Risk Assessment
As the baseline scenario has the highest probability of realization, the feasibility of the response options for it is relatively high. Supply chain dualization is already underway to a significant extent, driven by the synergy between government supply chain stabilization policies and companies' voluntary restructuring efforts. However, government support systems must be implemented in parallel to compensate for the increased costs and reduced efficiency during this process. Integration into the G7 economic security architecture is diplomatically sensitive, but South Korea, as a holder of critical technologies such as semiconductors and batteries, possesses negotiation leverage. The greatest risk is the possibility of economic retaliation from China, which has not hesitated to use economic means as a tool for diplomatic pressure, as seen after the THAAD incident. Therefore, a two-track approach that simultaneously manages risks with China and pursues integration into the G7 is essential.
Priority Response Measures
The top priorities in the baseline scenario are the parallel pursuit of supply chain dualization and strategic selection and concentration. This will enable South Korea to balance responses to US decoupling pressure with the maintenance of revenue streams in the Chinese market. The second priority is to proactively participate in the G7 economic security rule-making process to shape a regulatory structure that reflects South Korea's interests. The third is to institutionalize industry-specific defense mechanisms against overcapacity originating from China.
3. Response Strategies for the Pessimistic Scenario: Full Economic Blockade and Supply Chain Fragmentation (Probability 25-30%)
Analysis of Response Options and Their Pros and Cons
The pessimistic scenario posits a path where US-China trade conflicts escalate into full-scale decoupling, and the global economy fragments into US-led and China-led blocs. In this scenario, South Korea will be forced into the most extreme strategic choices. The possibility of this scenario is not negligible, given that US reciprocal tariffs and industrial policies are accelerating decoupling from China, and as PIIE analysis points out, the structure of US reciprocal trade agreements inherently internalizes decoupling from China.
The first response option is clear integration into the US-led economic bloc and a phased reduction of dependence on China. This option involves strengthening supply chain integration with democratic industrial nations such as the US, Europe, and Japan, and gradually reducing exports of advanced technology and investments to China. The advantage is securing stable market access and technological cooperation with the US, and strengthening South Korea's strategic position within the Western-led economic order. However, the disadvantages include unavoidable short-term economic shocks due to a sharp decline in exports to China, and the potential for severe disruptions in the supply chain of critical raw materials such as semiconductor materials and rare earths if China retaliates economically. If a Taiwan crisis materializes, there is also a possibility that South Korea will be required to play a role as part of the core military and defense supply chain, given the weakened state of the US industrial base[15].
A second option is a strategy of export diversification by developing markets in third countries. As US-China bloc formation intensifies, South Korea must actively explore new export markets in non-aligned countries such as Southeast Asia, India, the Middle East, and Africa. Amidst the trend of global order multipolarization[14], these countries are pursuing strategic autonomy, seeking not to be fully incorporated into either the US or Chinese bloc, and South Korea can build new economic cooperation relationships in these spaces based on its technological capabilities and manufacturing prowess. The advantage of this option is its ability to reduce dependence on specific blocs and structurally diversify export markets. However, developing new markets requires considerable time and cost, and it is difficult to immediately compensate for short-term export declines.
A third option is to accelerate self-reliance in core technologies and strengthen the protection of strategic industries. If China weaponizes the supply of rare earths, critical minerals, and intermediate goods in a pessimistic scenario, South Korea must accelerate investment in technological self-reliance to minimize its vulnerability. Key elements of this option include localization of semiconductor materials and equipment, development of recycling technologies for battery critical minerals, and research into alternative materials for rare earths. The advantage is the potential to fundamentally resolve supply chain vulnerabilities in the long term, but the short-term effects are limited due to the need for substantial R&D investment and long-term technological accumulation.
A fourth option is strategic engagement to maintain minimal economic channels with China. Even in a full decoupling scenario, completely severing all economic ties with China is practically impossible and undesirable for South Korea. Just as the EU is seeking a 'grand bargain' to avoid a trade war with China[10], South Korea must also pursue strategic engagement to maintain minimal economic cooperation channels with China while accepting US alliance pressure. The advantage of this option is its ability to buffer economic damage even in the worst-case scenario. However, a disadvantage is the risk of losing trust from both sides amidst US alliance pressure and the threat of Chinese retaliation.
Feasibility and Risk Assessment
The response measures in the pessimistic scenario involve both high feasibility and high risk. Integration into the US-led bloc is a politically clear choice but entails significant economic shocks, and developing third-country markets, while directionally correct, has limited short-term effects. Achieving technological self-reliance is the most fundamental long-term solution but requires immense investment and time. The greatest risk is economic retaliation and weaponization of supply chains by China; failure to adequately prepare for this could result in severe shocks to the entire South Korean economy. Furthermore, as the limitations of China's de-dollarization efforts suggest[13], the structural vulnerabilities of the Chinese economy itself may act as a moderating factor on the pace of the pessimistic scenario's unfolding.
Priority Response Measures
In the pessimistic scenario, the top priorities are achieving technological self-reliance and establishing defense mechanisms against the weaponization of supply chains. The second priority is the fundamental diversification of the export structure by developing third-country markets. The third is expanding market access through strategic integration into the US-led economic security architecture. Simultaneously, by pursuing strategic engagement to maintain minimal economic channels with China, a safety net should be secured to buffer economic damage even in the worst-case scenario.
4. Integrated Strategy Framework: Cross-Scenario Core Response Principles
Establishing common response principles that cut across the three scenarios is essential for ensuring strategic consistency. The core response principles that remain valid regardless of which scenario materializes can be summarized as follows:
First, managed maintenance of strategic ambiguity. South Korea must pursue a balancing strategy that maintains economic ties with both the US and China without fully aligning with either. Similar to how the G7 indirectly addresses the China issue through institutional language[7], South Korea needs diplomatic skills to secure substantive benefits while avoiding direct confrontation. However, as US-China tensions escalate, the sustainability of this strategy diminishes, necessitating the prior development of phased transition plans based on scenario developments.
Second, preemptive strengthening of supply chain resilience. Diversification of supply chains and achieving technological self-reliance are valid responses in any scenario. Particularly amidst the trend of China's overcapacity encroaching upon global markets[1][11], Korean companies must move beyond simple price competition and maintain competitive advantage through technological differentiation and value-added enhancement.
Third, active participation in the G7 economic security rule-making process. In the process where the G7 institutionalizes non-market policies and practices, economic coercion, and critical mineral risks[7][16], South Korea's role as a rule-maker aligns with its long-term national interests in any scenario. To this end, a strategy is needed to actively leverage strategic assets held by South Korea, such as semiconductors, batteries, and critical minerals, as diplomatic negotiation leverage.
Fourth, establishing a precise monitoring system for structural changes in the Chinese economy. China's de-dollarization efforts are facing limitations[13], and structural vulnerabilities in the Chinese economy are deepening amidst the ongoing real estate downturn and sluggish domestic demand. The ability to track the impact of these changes on China's external economic policies and trade practices in real-time and to flexibly adjust response strategies based on this information will be a core competitive advantage in any scenario.
In conclusion, South Korea's best approach is to adopt a flexible, portfolio-based response strategy that can adapt to scenario developments, rather than a rigid strategy that over-bets on a single scenario. Centered on responding to the baseline scenario, establishing a dual safety net that captures opportunities in the optimistic scenario and buffers shocks from the pessimistic scenario represents the most feasible and effective strategic framework at present.
Phase 5: Final Recommended Response Strategies
China's Record Trade Surplus and the G7's Discussion on Global Imbalances
Final Recommended Response Strategies and Implementation Plan
1. Overall Judgment and Recommended Response Strategies
Overall Judgment
The current global trade order is reaching a critical juncture of structural realignment, centered around China's record trade surplus of $735 billion. The G7 is systematically organizing pressure on China through institutional language such as 'global imbalances,' 'economic security,' and 'supply chain resilience,' rather than directly targeting China, and this approach should be interpreted not as short-term diplomatic rhetoric but as a signal of medium- to long-term policy instrumentalization[7][16]. A state of 'strategic stalemate,' where cooperation and confrontation coexist between the US and China, persists, and neither complete victory for one side nor a full compromise is realistically likely[17]. Amidst this structural uncertainty, South Korea's best course of action is to adopt a flexible portfolio strategy that can simultaneously respond to multiple scenarios, rather than making a strategic bet on either the US or China.
Synthesizing the estimated probabilities of the three scenarios analyzed above, the baseline scenario (55-60%), which assumes the managed persistence of structural tensions, converges as the most realistic future. This implies that South Korea's response strategy should be designed with 'selective realignment' as its core, rather than full decoupling or maintaining the status quo. Specifically, the core recommended direction is a tripartite balancing strategy that involves phased diversification of supply chain dependence on China while maintaining strategic linkages with the Chinese market, preemptively participating in the supply chain realignment led by the US and EU, and simultaneously securing diversification pathways with the Global South.
Recommended Response Strategy: Tripartite Balancing Strategy
First, in relations with China, the principle of 'Strategic Selective Engagement' should be applied. China remains South Korea's largest trading partner and a key market for intermediate goods exports such as semiconductors, displays, and fine chemicals. Despite the prolonged slump in China's domestic demand and real estate market, the sophistication of Chinese manufacturing continues to advance, suggesting that demand for South Korea's high-value-added materials, components, and equipment industries is likely to remain. Therefore, rather than completely severing supply chain linkages with China, a differentiated approach is necessary: maintain cooperation in areas with low strategic sensitivity while gradually reducing dependence in fields directly related to technological security, such as semiconductors and advanced materials [6].
Second, a 'Proactive Alignment' strategy should be adopted towards the supply chain restructuring led by the United States and the EU. Amidst the trend of the G7 strengthening institutional responses to non-market policies and structural overcapacity [7][16], it is crucial for South Korea to position itself as an active participant in norm-setting rather than a passive recipient. By aligning with the US framework of reciprocal tariffs and industrial policy, supply chain partnerships in semiconductors, batteries, and critical minerals should be deepened, while simultaneously strengthening technological and trade cooperation with the EU. Notably, with the EU's trade deficit with China exceeding 1 billion euros per day [9], opportunities are expanding for South Korean companies to strategically enter the EU's supply chain diversification process.
Third, securing 'Diversification Pathways' with the Global South should be pursued as a medium- to long-term strategy. Amidst the trend of multipolarization in the global economic order [14], emerging markets such as ASEAN, India, the Middle East, and Africa are emerging as key hubs for South Korea's export diversification and supply chain restructuring. A strategy is required to simultaneously reduce dependence on China and pioneer new markets by establishing third-country production bases that bypass China, while strengthening cooperation in resources and energy with these regions.
2. Short-term/Medium-term/Long-term Action Plan
Short-term Action Plan (0-12 months): Risk Defense and Positioning
In the short term, the most urgent task is to establish a defensive posture against the escalating economic pressure on China by the G7 and the uncertainties of US-China trade negotiations. At the corporate level, it is essential to precisely diagnose vulnerabilities in supply chains with high dependence on China, secure safety stocks for critical raw materials and components, and immediately begin exploring alternative supply sources. In particular, given the trend of China strengthening export controls on rare earths and critical minerals [7], diversifying the procurement of these resources is no longer an option but a necessity.
At the government level, diplomatic responses must be strengthened to protect the interests of South Korean companies during the US's reciprocal tariff negotiations. As the US builds a structure that accelerates decoupling from China through reciprocal trade agreements, South Korea must actively utilize the US-ROK trade cooperation channels to ensure it is not left outside this framework. Concurrently, high-level dialogues should be pursued to strengthen trade cooperation with the EU, laying the foundation for South Korean companies to be recognized as reliable partners in the EU's supply chain diversification policy [9][10].
In terms of financial risk management, hedging strategies against the volatility of the Chinese Yuan exchange rate must be refined. With ECB President Lagarde urging the formal inclusion of the undervalued Yuan issue on the G7 agenda [5], a sharp appreciation of the Yuan cannot be ruled out if G7-level discussions on exchange rate coordination gain momentum. Companies with a high proportion of exports to China must strengthen their exchange rate risk management systems in preparation for this.
Medium-term Action Plan (1-3 years): Supply Chain Restructuring and Market Diversification
In the medium term, supply chain structural restructuring should be fully initiated while accelerating market diversification. The core of supply chain restructuring is the transition from a 'China Plus One' strategy to a 'Multi-Hub' strategy. Production bases should be dispersed across ASEAN and South Asia, including Vietnam, Indonesia, and India, with each hub responsible for specific product categories and markets. In this process, government-level support systems must be strengthened to reduce the financial, human resource, and regulatory barriers faced by South Korean small and medium-sized enterprises when establishing overseas production bases.
Enhancing technological competitiveness is another key pillar of the medium-term strategy. As the G7 defines China's economic model as an 'institutional challenge' and strengthens export controls on advanced technologies to China [16], maintaining and expanding technological superiority in semiconductors, batteries, and advanced materials is a prerequisite for the survival of South Korean companies. In particular, to prepare for the risk of gradually declining demand for Korean intermediate goods as China accelerates its domestic technological self-sufficiency, technological upgrading and demand diversification for product categories with high dependence on the Chinese market must be pursued simultaneously [6].
Strengthening positioning within the EU market is also a crucial element of the medium-term strategy. With the EU's trade deficit with China exceeding 1 billion euros per day [9], the EU's strengthening of regulations on Chinese products and its pursuit of supply chain diversification present strategic opportunities for South Korean companies to replace Chinese competitors in the EU market. A strategy to accelerate market entry for South Korean companies in sectors where the EU seeks to reduce its dependence on China, such as electric vehicle batteries, solar modules, and steel, is necessary.
Long-term Action Plan (3-5+ years): Structural Transformation and Securing New Growth Engines
In the long term, based on the premise of restructuring the global economic order due to the structurization of US-China strategic competition, a strategic transformation at the level of redesigning South Korea's economic growth model itself is necessary. Currently, the South Korean economy maintains a structure centered on intermediate goods with high export dependence on China, a structure that harbors medium- to long-term vulnerabilities in an environment where China's accelerated technological self-sufficiency and the G7's supply chain pressure on China are occurring simultaneously.
The first direction of the long-term strategy is to establish South Korea's status as a 'Trusted Middle Power' in the global supply chain. The key is to build an independent position that is not strategically subordinate to either the US or China, while maintaining economic cooperative relations with both. This requires securing technological sovereignty in strategic industries such as semiconductors, batteries, biopharmaceuticals, and defense, and leveraging this to enhance negotiation power in the process of global supply chain restructuring [15].
The second direction is to systematize economic cooperation with the Global South as a new growth engine. Amidst the trend of multipolarization in the global economic order [14], ASEAN, India, the Middle East, and Africa can play a multifaceted role as South Korea's export markets, production bases, and resource suppliers. A long-term strategy is required to simultaneously reduce dependence on China and pioneer new markets by expanding the Free Trade Agreement (FTA) network with these regions and strengthening development cooperation in infrastructure, energy, and digital sectors.
The third direction is preparation for the internationalization of the Chinese Yuan and changes in the dollar-centric financial order. Although the People's Bank of China has announced a new blueprint for Yuan internationalization and is promoting pilot programs for offshore Yuan transactions and expansion of central bank swap lines [13], there are structural limitations to a substantial challenge to dollar hegemony. South Korea should maintain the dollar-centric financial order as its basic premise, while simultaneously pursuing a flexible financial strategy that gradually secures options for currency diversification, such as increasing the proportion of Yuan settlements.
3. Monitoring Indicators and Trigger Points
Key Monitoring Indicators
In terms of trade and economic indicators, the monthly trade surplus of China and changes in its composition by item must be continuously tracked. If China's trade surplus continues to reach historical highs as a percentage of GDP [11], the likelihood of the G7 strengthening institutional responses increases, and this should be used as a leading indicator. The US trade deficit in goods is also a key indicator. As the US trade deficit in goods expanded by 27.4% month-on-month to $105.8 billion [8], an increase in the US trade deficit can act as a trigger for the Trump administration's potential imposition of additional tariffs.
As for financial and exchange rate indicators, the volatility of the Chinese Yuan exchange rate (CNY/USD) and the intensity of the People's Bank of China's intervention in the foreign exchange market must be monitored. If G7-level discussions on exchange rate coordination gain momentum or if the US Treasury Department re-designates China as a currency manipulator, there could be pressure for a sharp appreciation of the Yuan, which would directly impact South Korea's export competitiveness to China [5].
In terms of supply chain indicators, the scope and intensity of China's export control measures on critical minerals and rare earths must be tracked. As China increasingly uses export controls as a strategic leverage [7], South Korea's vulnerabilities in the procurement of critical minerals must be regularly assessed, and response systems updated.
Geopolitical indicators should include parallel monitoring of the level of military tension in the Taiwan Strait and the progress of high-level US-China dialogues. If a Taiwan crisis materializes, the issue of weakening the US industrial base may be highlighted [15], leading to a rapid increase in demands for supply chain cooperation from allies. This could be a variable that explosively increases the strategic demand for South Korea's defense and semiconductor industries in the short term.
Trigger Points and Response Transition Criteria
Key trigger points that initiate scenario transitions can be set as follows. First, if the US further increases additional tariffs on China by more than 30 percentage points from the current level, or if the G7 agrees on joint tariff measures on Chinese products, this should be interpreted as a signal to transition to a pessimistic scenario, and the pace of reducing supply chain dependence on China should be significantly accelerated. Second, conversely, if a comprehensive trade agreement is reached between the US and China, or if a currency cooperation mechanism is established between the G7 and China, this should be interpreted as a signal to transition to an optimistic scenario, and strategies for re-entering the Chinese domestic market should be actively pursued. Third, if China's export controls on critical minerals are expanded to a level that directly affects South Korea's key industries, this should be set as a trigger to activate an immediate emergency response system.
4. Summary and Conclusion
China's record-breaking trade surplus of $735 billion and the G7's discussions on global imbalances signal a structural restructuring of the global economic order beyond short-term trade friction. The G7 is systematically applying pressure on China using institutional language rather than directly targeting it [7][16], while strategic stalemate, characterized by parallel cooperation and confrontation, continues between the US and China [17]. In this structure, South Korea's foremost task is to establish a 'Trusted Middle Power' position that is not strategically subordinate to either the US or China, while maintaining economic cooperation with both.
The core strategies to achieve this can be summarized into three points. In relations with China, maintain differentiated selective engagement based on strategic sensitivity; in relations with the US and EU, proactively participate in supply chain restructuring; and secure medium- to long-term diversification pathways through cooperation with the Global South. This triangular balancing strategy is the most realistic and effective response direction for South Korea at this juncture. Given that the interpretation of trade imbalance issues itself has emerged as a key point of contention between the US and China [1][2], and that finding a solution is structurally complex, South Korea must internalize flexibility and strategic agility as core competencies to respond simultaneously to multiple scenarios rather than betting on a single scenario.
References
[2] [South China Morning Post] Anxious West seeks to rewrite global trade rules to counter China
[3] [聯合報 (United Daily News)] G7高峰會提防中國？從外交喊話到警覺威脅
[4] [South China Morning Post] Europe wants a new Plaza Accord for China – seriously?
[6] [Foreign Affairs] China Is Pulling Up the Ladder Behind It
[7] [The Diplomat] The Structural Limits of the EU’s China Policy
[8] [Business Times (SG)] US goods trade deficit widens to biggest in more than a year
[9] [Nikkei Asia] Chinese firms brace for new EU rules as trade deficit tops $1bn a day
[10] [South China Morning Post] EU and China need a grand bargain to avoid a trade war
[11] [Deník N] Obrat v EU: roste odhodlání vzdorovat Číně. Můžeme mířit k obchodní válce
[13] [Foreign Policy] China’s De-Dollarization Drive Has Hit a Wall
[14] [Daily News (TZ)] Africa’s economic future goes multipolar
[15] [The Diplomat] A Taiwan Crisis and America’s Industrial Base
[16] [Foreign Affairs] The Fault Lines in China’s Power
[17] [Foreign Affairs] The False Promise of U.S.-China Stability
*This text is an AI translation of an original written in Korean. Some translations or nuances may be inaccurate.