Korean Companies Facing Growing U.S. Pressure to Move Production Bases to U.S.
Keith Krach, undersecretary of state for economic growth, energy, and the environment of the United States
South Korean companies are in deep worry as the U.S. government is pressuring the South Korean government to participate in an economic bloc aimed at isolating China.
Keith Krach, undersecretary of state for economic growth, energy, and the environment said on Wednesday that he and South Korean officials discussed the Economic Prosperity Network (EPN) initiative during the allies’ Senior Economic Dialogue (SED) in Seoul in November.
Krach talked about the EPN during a teleconference organized by the Asia-Pacific Media Hub of the U.S. State Department. He said that the EPN consists of like-minded countries, companies and civil societies that will operate under the same set of “democratic values.”
The South Korean Foreign Ministry said the initiative remains conceptual with no official request coming from Washington for Seoul’s participation.
Yet if Washington steps up pressure on Seoul for participating in the initiative, it will put an enormous burden on the South Korean government and business community.
South Korean companies operating in China have been concentrating their attention on the escalating disputes between the U.S. and China.
South Korean companies’ exports to China in the first four months of 2020 stood at US$39.36 billion, more than the US$24.30 billion exports to the United States during the same period, according to the Korea International Trade Association (KITA). South Korea chalked up a surplus of US$16.8 billion in trade with China while enjoying a surplus of only US$2.9 billion in trade with the United States.
This trend has continued since 2003 when exports to China eclipsed those to the United States. In 2019, Korea’s exports to mainland China and Hong Kong combined accounted for 34.4 percent of its total exports. During the same period, Korea’s exports to the United States took up 12.0 percent of the total.
South Korean companies have been making massive investments in China for the past 28 years, as they cannot ignore a neighbor with the largest population in the world. LG Electronics, for instance, has operated 10 production bases since the establishment of a production subsidiary in Huizhou, China in the following year after the normalization of Korea-China diplomatic ties. On the other hand, it has only three factories in the United States. Samsung Electronics entered China in the year when the two countries established diplomatic relations and established four semiconductor and home appliances factories in China. It has only two factories in the United States.
Hyundai Motor and Kia Motors are in a similar situation. In 2002, Hyundai Motor and Kia Motors established Beijing Hyundai and Dongfeng Yueda Kia, respectively, jointly with a local partner. Beijing Hyundai has five plants in China whose total production capacity amounts to 1.65 million units. Dongfeng Yueda Kia has a factory with an annual production capacity of 750,000 units in Yancheng. On the other hand, Hyundai and Kia roll out only 700,000 units a year in the United States where the two carmakers have two plants in Alabama and Georgia.
“The Chinese auto market is the largest in the world, and the South Korean auto industry has made huge investments in China,” said Kim Pil-soo, a professor of automotive engineering at Daelim University. “Their investments have been so huge that they cannot withdraw from China.”
The South Korean business community called the remark by Keith Krach “a highly political act” aimed at making Korea an axis of the envisioned EPN. “The EPN initiative is a U.S. political gesture designed to isolate China,” said Lee Won-seok, head of the Korea International Trade Association’s Trade Support Center. “The relocation of a corporate production base is not like a family’s move to a new house. As South Korean companies entered China to penetrate a market of 1.4 billion people, their immediate exodus from China is practically impossible.”
Therefore, South Korean companies are likely to decide on their future investment plans based on thorough commercial calculations. South Korean companies that have already entered China but cannot give up the U.S. market may respond to the Trump administration’s pressure with additional facility investments and job creation in the U.S. Extreme cases may emerge like that of Taiwanese semiconductor company TSMC that stopped receiving new orders from Huawei and promised to invest in the United States.