proposal

South Korea's Economic Security Policy and New Japan-ROK Economic Cooperation
-Supply Chains and Closer Bilateral Economic Relations-

Satoru Okuda

Introduction

It is well known that South Korea, whose homeland was devastated by the Korean War, achieved rapid economic development, known as the "Miracle on the Han River." A strategy of export-led economic development played a crucial role in its economic recovery, which was made possible by the free trade atmosphere under the postwar GATT regime. South Korea's accession to the OECD in 1996 qualified it as a member of the advanced economies. Afterward, the country survived major economic fluctuations, such as the Asian currency crisis and the Lehman shock, thanks to its exports and the free trade regime under the WTO order.

However, the global free trade atmosphere decreased when the U.S.-China conflict intensified in the late 2010s; Donald Trump took office as U.S. president in 2018, introducing a series of measures incompatible with the free trade regime, including U.S. withdrawal from the TPP and the introduction of retaliatory tariffs against China. Today, the United States appears to be bent on shaping a de facto economic bloc involving its allies, advocating its "economic security."

For South Korea, which has maintained close economic ties with China, the intensification of the U.S.-China confrontation, the emergence of a U.S.-led economic bloc, and a decline in the free trade atmosphere constitute unfavorable circumstances. However, considering its dependence on the United States for security, South Korea, as a member of the U.S. bloc, is manifesting its willingness to contribute to the U.S. security strategy. To this end, South Korea is rushing to strengthen its supply chains and secure its technological superiority.

The same is true with Japan. Recent developments arising from heightened U.S.-China tensions are creating fresh motivations for Japan and South Korea, both belonging to the U.S. bloc, to promote new economic collaboration. The election of Yoon Suk-yeol as president of South Korea in 2022, who is committed to improving relations with Japan, is providing a tailwind for new Japan-ROK economic cooperation.

This paper will review South Korea's economic security policy, examine the significance of Japan-ROK economic cooperation as both countries focus more on economic security, suggest practical examples of possible new bilateral economic cooperation, and discuss future challenges.

1. South Korea's Economic Security Policy Supply Chain Crises and Countermeasures under the Moon Jae-in Administration

South Korea has long pursued export-led economic development, utilizing global supply chains for the efficient production of exported goods. Therefore, supply chain problems often present the country with difficulties. For example, the 2011 Great East Japan Earthquake caused a supply chain crisis, which interrupted the import of intermediate goods from Japan and hampered production in South Korea.

Several supply chain crises took place during the Moon Jae-in administration. The earliest one is due to Japan's tightening of controls on exports of semiconductor components to South Korea in July 2019. This case made South Korea aware of the risk of supply disruptions for non-economic reasons.1 In February 2020, imports of Chinese-made automobile wiring harnesses stopped as a result of the outbreak of COVID-19; the failure of their roundabout procurement resulted in the suspension of production lines of South Korean automakers. This is an example of the overseas transfer of the production of labor-intensive intermediate goods that ended up causing problems. In November 2021, China's restrictions on urea exports tightened the urea water supply in South Korea, which is indispensable for diesel truck operation; truck services became unavailable in some areas (the urea water crisis).

To overcome these supply chain crises, the Moon administration adopted various countermeasures. In response to Japan's strengthening controls on exports of semiconductor components to South Korea, it introduced "Measures to Strengthen Competitiveness of Materials, Parts and Equipment" (MPE2 Measures 1.0) in August 2019. This aimed to replace 100 items of intermediate goods, for whose supply South Korea had depended on with imports from Japan, with domestic products, thereby dealing with a supply chain blockade and to improve the competitiveness of South Korean exports. To address the shortage of Chinese-made wire harnesses, the Moon administration implemented the "MPE Strategy 2.0"3 in July 2020, focusing on the global supply chains, including not only Japan but also China. In May 2021, the South Korean government announced the "K-Semiconductor Strategy," a semiconductor version of the "MPE Strategy 2.0," aiming to create semiconductor manufacturing clusters and an ecosystem and to, in due course, revive semiconductor manufacturing at home. The Moon administration encouraged massive investment (510 trillion won in toral) by semiconductor companies and instituted tax breaks as an incentive. In February 2022, the Japan-ROK agreement under the RCEP (Regional Comprehensive Economic Partnership Agreement) framework came into effect. This is the first free trade framework between Japan and South Korea, paving the way for strengthening mutual procurement capability.

Economic Security Policy under the Yoon Administration

As described above, the Moon Jae-in administration's supply chain measures aimed exclusively to improve the country's competitiveness and to promote domestic production. As a whole, considerations on economic security were limited; only minor suggestions were to be found in the K-Semiconductor Strategy. Those measures did not perform as well as expected because they focused exclusively on domestic production of intermediate goods, which were heavily imported from Japan, and they did not address supply chain risks from, among other countries, China. These measures were ineffective during the Chinese-made wire harness shortage and the urea water crisis.

Meanwhile, the Yoon administration, which took office in May 2022, clearly positioned economic security in its national security strategy; the "National Security Strategy of the Yoon Suk-yeol Administration"4 released in June 2023 called for establishing a global economic security system. As a policy measure to achieve this goal, the Yoon administration articulated its intention to evolve a foreign policy focused on economic security in cooperation with its allies and friendly countries and in regional and international frameworks such as the Indo-Pacific Economic Framework (IPEF). In this context, the administration pointed to two pillars of its economic security policy: the strengthening of supply chains for semiconductors and other goods in demand, and the protection and fostering of key and emerging technologies.

Economic Security Measures of the Yoon Administration―Two Pillars

Many steps have to date been taken to strengthen supply chain resilience5―the first pillar of the Yoon administration's economic security policy.

The October 2022 "Materials, Parts and Equipment Industry Policy Direction of the New Government" stressed the need to reinforce weaknesses in supply chain measures under the Moon Jae-in administration. The document refers to supply chain vulnerabilities associated with countries other than Japan and focuses on securing general-purpose products and crucial mineral resources such as urea. As a consequence, in February 2023, the South Korean government released a "strategy for securing critical minerals," aiming to secure lithium, nickel, and other minerals for crucial advanced industries such as semiconductors and automotive batteries.

In April 2023, South Korea announced a "globalization strategy for materials, parts, and equipment," giving the impression that it will utilize "MPE securing measures" as an advanced technology strategy. In August of the same year, at a trilateral summit in Washington, the leaders of Japan, the United States, and South Korea agreed to create a pilot supply chain early warning system (EWS).

The South Korean government expedited formulating laws and regulations to help promote these supply chain-related strategies. The so-called "three supply chain laws"6 were enacted successively from 2023 to 2024. These laws specify critical commodities and make it mandatory to secure them; they stipulate the establishment of a command post in the event of supply disruptions and government intervention in commodity markets for stabilizing supply.

Efforts to strengthen supply chains are underway in relation to economic security. The IPEF Supply Chain Agreement, to which South Korea is a signatory, entered into force in February 2024. At the 13th "Materials, Parts and Equipment Competitiveness Reinforcement" Committee on April 3, 2024, 200 technologies in ten major fields, including aerospace, the defense industry, and hydrogen, were designated as core strategic technologies.

The second pillar of the Yoon administration's economic security policy focuses on protecting and nurturing key and emerging technologies,7 emphasizing their economic security aspect in addition to their growth potential aspect. Many South Koreans believe they should possess advanced technologies necessary to produce crucial goods considering economic security and produce those goods at home, thereby becoming free from supply chain risks.

In August 2022, the Act on Special Measures for Strengthening and Protecting the Competitiveness of the National High-Tech Strategic Industry came into effect. The law emphasizes the economic security aspect of the high-tech strategic industry, providing the grounds for supporting and protecting the industry by listing "national advanced high-tech strategic technologies" crucial for economic security. The "New Growth 4.0 Strategy" that appeared in December 2022 presented a vision of gaining superiority defying the global technological competition by securing a technological "super-advantage" related to crucial strategic goods. In May 2023, the South Korean government announced the Basic Plan for Fostering and Protecting National High-Tech Strategic Industries. This plan aims to embody the "New Growth 4.0 Strategy" and presents a direction for fostering future industries. The specified areas include future vehicles, robotics, the defense industry, and nuclear power generation.

2. Moving Toward Economic Security and Closer Japan-ROK Economic Relations: Intensifying U.S.-China Conflict Makes Japan and ROK Economically Closer

Due to the intensifying U.S.-China confrontation, Japan and South Korea's China business is facing potential risks associated with the two countries' relations with the United States. What is emerging as a potential alternative to their China business is "friend-shoring" or concentrating economic relations within the U.S. bloc. This may be where new opportunities can be found to strengthen and promote Japan-ROK economic relations.

The idea of economic security is incompatible with the principle of free trade and is undoubtedly not favorable to Japan and South Korea, which have developed by using trade as leverage. Yet, since Japan and South Korea are today dependent on the United States for their security, it is a practical choice for them to follow U.S. intentions of including its allies in its bloc and making them part of the economic security that it advocates.

Increasing Expectations in the Business Communities for Better Japan-ROK Relations with the Coming of the Yoon Administration

The advent of the Yoon Suk-yeol administration, committed to improving the Japan-ROK relationship, is likely to constitute a factor in activating economic relations between the two countries.

Let us look first at the South Korean side. South Korean firms have traditionally recognized the need for Japan-ROK cooperation and held high expectations for better Japan-ROK relations. According to a November 2021 survey by the Korean Chamber of Commerce and Industry (KCCI), 92.6% of respondent firms said that Japan-ROK economic cooperation is necessary.8 Another KCCI survey conducted in March 2022, just before the inauguration of the Yoon Suk-yeol administration, estimated that better Japan-ROK relations would increase exports to Japan by $2.7 billion.9 In a survey conducted in April of the same year on expectations for Japan-ROK business,10 50% of all respondents said that they would increase trade and investment if Japan-ROK relations improved, while 70% of firms actually doing business with Japan answered the same. The respondent companies pointed out challenges such as resolving frictions over export controls and resuming high-level diplomacy while also mentioning the reorganization of semiconductor supply chains as a promising area of bilateral cooperation.

In March 2023, the Yoon administration proposed a solution involving a government-affiliated foundation in response to the Korean Supreme Court's forced labor ruling, which resulted in a significant improvement in the Japan-ROK relationship. Many of the challenges in Japan-ROK relations that Korean firms pointed out have been resolved, thereby providing the conditions for those companies to embark on increasing bilateral cooperation.

Meanwhile, on the Japanese side, there were calls for improving Japan-ROK relations, chiefly from the business circle. At regular meetings of both countries' business communities, such as Keidanren-FKI (Federation of Korean Industries) business summits and Japan-Korea Business Council meetings, requests have been adopted to facilitate business through improving Japan-ROK relations. Following the Yoon administration's March 2023 announcement of a solution to the forced labor lawsuit, a sense of anticipation for business expansion spread among Japanese companies engaged in business with South Korea.11

From Economic Competition to Coexistence and Co-Prosperity

Many Japanese still think that South Korea is a competitor. Perhaps for this reason, it seems that in the Japanese business circles, voices calling for the normalization of Japan-ROK economic relations are weak. Data at hand confirm that Japan-ROK competition is still present in third countries. Comparing imports from Japan in 2019 and 2022 in 144 countries,12 Japan lost $196.1 billion worth of exports in the countries where the share of imports from Japan declined. Looking at the relationship between Japanese exports and the share of imports from South Korea in those countries, Japan lost $101.4 billion-worth exports in the countries where the share of imports from South Korea increased; $80.2 billion-worth exports in the countries where the share of imports from South Korea decreased; $14.4 billion-worth exports in South Korea. Thus, there is a trend that Japan is losing to South Korea its share of exports in the world.

Yet, there are reasons why not only Japan but also South Korea pursue the promotion of mutual economic cooperation. First, both countries are experiencing a marked slowdown in economic growth rates due to economic maturation and sluggish export growth. As for South Korea, its economic growth rate for 2023 was lower than Japan. Under these circumstances, both countries are seeking room for further economic growth by tapping into each other's markets, which they have not necessarily utilized well.

It is South Korea that is in dire need of economic cooperation with Japan. The Japanese market has long been impregnable to South Korea due to its robust industrial pyramid structure. However, the quality of South Korean products is steadily improving, and Japan's industrial pyramid is showing signs of fraying in certain areas. As described above, South Korean firms are eyeing the Japanese market with keen interest.

For Japan, the annual trade surplus of about $20 billion with South Korea constitutes a valuable source of growth. The ratio of trade surplus with South Korea to Japanese GDP has been stable at just under 0.5% since the beginning of the 2000s, accounting for about 70% of the average annual GDP growth rate of 0.67% during this period. While the competitiveness of Japanese products has declined significantly in many parts of the world, South Korea is a good customer, understanding well the strength of Japanese products, particularly materials/parts/equipment-related intermediate goods. In Japan-ROK trade, especially in Japanese exports to South Korea, Japanese-made consumer goods account for 5.8% (2023, Japanese statistics) of total Japanese exports, the percentage which is quite small compared to other developed countries; this suggests room for further expansion.

As mentioned earlier, the intensification of the U.S.-China confrontation has offered favorable conditions for friend-shoring between Japan and South Korea. It is time for both countries to explore a shift from conflict to coexistence and co-prosperity.

3. Looking to the Future Promising Fields for Japan-ROK Economic Cooperation

As for how and in which areas Japan-ROK economic cooperation should advance, numerous proposals are available; they appeared at meetings of Japan-ROK business circles13 or were presented by experts.14 The following are some promising areas for future Japan-ROK economic cooperation based on the author's review of these proposals.

First, semiconductors and displays are strategic goods that have garnered attention. It has been a long time since Japan lost its edge in those products, and South Korea replaced Japan to enjoy a significant global market share. However, Japan still holds an advantage in materials (silicon wafers, screen glass, LCD materials, etc.), manufacturing equipment, and post-treatment for semiconductors. It is anticipated that there will be increased investment in materials, parts, and equipment toward South Korea. In these areas, the effect of friend-shoring of strategic goods is also expected.

Secondly, DX (Digital Transformation) and GX (Green Transformation). In South Korea, cashless payment and the use of smartphones are standard. Japan, which is lagging in these areas, may learn much from South Korea's experience. The idea of installing a data center in South Korea, where earthquakes are rare, may be worth considering. As for GX, Japan could share with South Korea its related technology with a slight advantage. Other specific cooperation areas may include high-temperature gas reactors (hydrogen and electricity cogeneration) based on nuclear reactor technology; ammonia co-firing at thermal power plants, and other technology cooperation; nuclear-related demonstration tests in South Korea on behalf of Japan where the operation of most of the nuclear reactors is currently suspended.

Third, human resource exchange. The "Future Partnership Fund," declared to be created by the business communities of Japan and South Korea in March 2023, aims to promote the exchange of young people who will lead the future. It is also desirable to promote travel exchanges to enhance mutual, people-to-people understanding between the two countries.

Improvement of a Japan-ROK Economic Integration Framework

In addition to the above-mentioned economic cooperation, it is desirable to continue working on the introduction and improvement of a Japan-ROK economic integration framework.

Among several proposals on Japan-ROK economic integration, the Japan-ROK joint market concept proposed by the Chairman of the SK Group, Chey Tae-won is particularly noteworthy.15 He states, "Korea and Japan are still strong economies, but they cannot on their own weather the storm of geopolitical division and weakening growth engines," expressing the idea that amid the trend toward global blocs, South Korea and Japan should take the lead in creating a large-scale economic cooperation body to compete with the United States, China, and Europe. To realize an economic community comparable to these countries, the hurdles ahead are formidable, such as the harmonization of logistics, tariffs, institutions, and currencies. But such an economic community would constitute an appropriate goal for the future.

On the other hand, we need to keep working on improving the current economic integration frameworks. The RCEP Agreement entered into force in South Korea in February 2022; however, the Japan-ROK agreement under the RCEP has achieved only a low level of tariff concessions, with only 83% of tariffs eliminated in the Korean market while 92% in the Japanese market. Further liberalization efforts will be required in bilateral talks on the RCEP. As for the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP), South Korea declared starting accession procedures in December 2021; the agreement has been mentioned repeatedly in subsequent South Korean economic policy documents. However, the South Korean government has thus far failed to apply for accession. The CPTPP advocates a high degree of liberalization; it will take the lead in global trade liberalization in place of the stagnant WTO. South Korea has already undertaken a broad liberalization of its market through the ROK-U.S. FTA and is ready for a higher degree of liberalization required by the CPTPP. Should South Korea join the CPTPP, trade liberalization between Japan and South Korea will advance. Hopefully, Japan will actively support South Korea's accession to the CPTPP.

Lessons from the LINE Yahoo Incident

The Japan-ROK relationship has been repaired to a considerable extent after the Yoon administration proposed a solution to the forced labor issue in response to the Korean Supreme Court's ruling. Yet, other problems are appearing between Japan and South Korea.

As the most immediate example, we would like to discuss the LINE Yahoo incident (personal data leakage case) that is making mass media headlines in Japan and South Korea.

In October 2023, LY Corporation disclosed that a maximum of 520,000 items of personal data of LINE users had leaked out. The Japanese Ministry of Internal Affairs and Communications (MIC), aware of the seriousness of the case, issued administrative guidance twice to LY Corporation in March and April 2024. The MIC demanded that necessary steps be taken to improve the company's management system, including a review of capital relationships with its parent company, South Korean IT giant Naver.

The Japanese government's response was unusual: it issued administrative guidance twice during a short period and commented on a private company's capital ties. On top of LY Corporation's repeated blunders, the probable reason for the Japanese government's reaction is the fact that it regards LINE, a social networking service used by a great number of people, as a key infrastructure from the perspective of economic security.

However, public opinion in South Korea considered the MIC's guidance an attempt to "rob LINE," and opposition intensified. Under the pressure of public opinion, on May 10, 2024, the Science Ministry's Second Vice Science Minister expressed regret over the Japanese government's pressure on Naver to relinquish ownership stakes in the messaging application LINE.

The LINE Yahoo incident seems to reveal important points of discussion when considering future Japan-ROK economic cooperation and investment: the absence of a clear line on how far the government's interference is allowed with foreign-invested enterprises from the perspective of personal data protection and economic security; the Korean public's ignorance of the increasing emphasis placed in Japan on personal data protection and economic security, misunderstanding the Japanese reaction as overkill; that Japanese authorities are not accustomed to dealing with economic security issues and sometimes overreact; and the Japanese government's lack of imagination on how its measures might be accepted by the Korean side. The shortage of dialogue and mutual understanding, coupled with the absence of a relationship of trust necessary to fix bilateral biases, has contributed to aggrandizing those problems.

Conclusion

As the U.S.-China confrontation intensifies, the concept of economic security has come to the fore in many countries. Japan and South Korea are rapidly introducing economic security measures. Meanwhile, the global economy is witnessing the effective revival of economic blocs. Japan and South Korea have chosen to join the U.S. bloc. Both countries had long been in an economic rivalry. Yet, their entry into the U.S. bloc will give rise to the benefits of friend-shoring between the two countries and provide a new incentive to strengthen bilateral cooperation. For Japan, South Korea is a good customer. Its exports to South Korea are a valuable source of growth. South Korea considers the Japanese market to be its final frontier.

Japan-ROK economic cooperation will evolve in association with industrial cooperation related to semiconductors and GX, the upgrading of the RCEP, and support for South Korea's accession to the CPTPP. Although the Japan-Korea joint market concept may be fraught with many issues to overcome, it is worth continuing efforts as a long-term joint goal.

The Japan-ROK relationship is changing for the better owing to the Suk-yeol administration's response to the forced labor ruling. However, the issues of historical perceptions are always shadowing bilateral relations, and the recent LINE Yahoo incident has shown that the lack of dialogue and the absence of trust will increase antagonism between the two countries. The Japan-ROK relationship will not be exempt from various problems, large and small. However, as Japan and South Korea must keep up with global trends, they cannot stop improving bilateral relations whenever some problem arises. It is of primary importance to build channels for properly addressing various questions that will continue to arise.

(Professor, Asia University)

(Translation by Tsutomu Inuzuka)

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