Escalating U.S.-China Trade War and Korean Firms’ Survival Strategies

The trade war between the United States and China, triggered under the pretext of reducing the U.S. trade deficit with China, is now in full swing. More than 60% of the U.S. trade deficit is attributable to its deficit with China, and the Trump administration’s hard-line measures aimed at improving this imbalance served as the starting point. Specifically, the United States has imposed large-scale tariffs on Chinese imports. In response, China has retaliated by imposing tariffs on American products. In other words, China is pursuing a “tit for tat” strategy.

The economic war between the world’s hegemonic power and the country challenging it is highly likely to continue for a considerable period of time. Moreover, behind the trade war lies the political incentive structure of the two countries’ top leaders. U.S. President Donald Trump can also use the trade war against China as a means of securing his political support base ahead of the midterm elections this coming November. Likewise, from Xi Jinping’s standpoint, there is also a strong incentive to use the trade war with the United States as an opportunity to quell domestic discontent in China over the country’s return to an era of long-term rule, including the removal of the constitutional provision limiting the president to two terms. These political and economic incentives on both sides make it highly likely that the U.S.-China trade war will be prolonged.

The problem is that if the U.S.-China trade war intensifies, it will cause both direct and indirect damage to our exports to the United States and China, Korea’s major trading partners. As the United States imposes tariffs on Chinese products, Korean firms exporting intermediate goods to China are likely to suffer direct harm through a decline in export volume. Last year, exports to China accounted for 24.8% of Korea’s total exports, and of these, intermediate goods made up about 79%. In addition, the U.S.-China trade war may reduce demand for Korean finished goods exported to both countries as economic contraction in the two economies dampens import demand.

For Korea, which depends heavily on trade, this deterioration in the external environment demands medium- and long-term change and innovation from both the country and its businesses. Since the economic environment created by a trade war is beyond our control, we need to focus our efforts on what we can change through our own actions. That means strengthening corporate competitiveness.

In the World Economic Forum’s 2017 national competitiveness rankings, Korea placed 26th. However, it ranked a low 58th in the institutions category and 73rd in labor market efficiency. In particular, political instability and inefficiency in government organizations are holding back improvements in national competitiveness. Among the specific sub-indicators, the burden of government regulation (95th) and the transparency of government policymaking (98th) are areas that must be substantially improved.

Accordingly, at the national level, it is necessary to create overall conditions, including deregulation, so that economic actors, including businesses, can engage in freer economic activity. From the corporate perspective, firms should not remain complacent with their dominance in the domestic market, but should instead seek more active entry into and expansion in global markets. They should turn the wave of the Fourth Industrial Revolution into an opportunity and, even amid protectionism, pursue product differentiation and new growth businesses based on entrepreneurship. They should also review global value chains to secure cost competitiveness, while at the same time striving to create new markets.

In addition, productivity must be improved through cooperation in labor-management relations (130th). The weakening of price competitiveness caused by protectionist tariffs can be overcome through gains in productivity. To this end, a labor-management culture should be fostered that can ease the adversarial structure of conflicting interests between workers and employers. In other words, there is a need to establish organic institutions that can enhance both employment stability and efficiency. We must share and embrace the understanding that without businesses there are no jobs, and that if workers’ contributions are not properly recognized, businesses cannot develop.

Youngshin Kim / Professor, Department of International Trade, Keimyung University

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Original title: 미중 무역전쟁의 심화와 한국 기업의 생존 전략

Author: Young-shin Kim

Date: 2018-08-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=17&idx=11052