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Sunday, April 14, 2024

Strengthening economic alliance meets U.S. protectionism

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Korea and the United States are at a crucial juncture in economic cooperation after the two countries pledged to work together in a wider range of areas, such as supply chain management for key technologies such as semiconductors and electric vehicle (EV) batteries.

The initiatives, which are seen taking the two countries beyond being merely trading partners, will set the tone for the future of the Korea-U.S. alliance, which is entering its 70th year.

While the call for deep economic ties has contributed to substantially increasing trade volumes and investment flows between the allies, it will be put to the test in the face of incentives and regulations favoring domestic companies.

Korean companies like Hyundai Motor, SK On and Samsung SDI announced over 10 trillion won ($7.4 billion) of investment on Tuesday while President Yoon Suk Yeol is in the United States for a state visit.

Other large Korean companies, including Samsung Electronics, committed billions of dollars to the United States last year, dominating the rankings in terms of new manufacturing projects in the country.

The United States is also slated to become Korea’s largest export market this month, beating out China, which held the top spot for 20 years.

The trend is running straight into legislative reality, such as the U.S. Inflation Reduction Act (IRA) and CHIPS and Science Act. The laws either block Korean companies from receiving subsidies or impose strict conditions while backing U.S. car manufacturers and chipmakers.

Korean government officials and Korean company executives are scratching their heads and questioning where the United States is actually committed to maintaining and building on the economic relationship.

At a relationship crossroads
What followed the amicable visit by U.S. President Joe Biden last May was a string of laws that come with certain restrictions against Korean chip producers and automakers in favor of U.S. companies.

The country’s two largest carmakers are not eligible for the incentive at all — at least until 2025 — as only models assembled in North America are eligible.

“The IRA law does not consider the Korean companies’ situation at all, and essentially, it doesn’t have to,” Park Chul-wan, a professor of automotive engineering at Sejong University, said. “It’s just a rule that maximizes the benefits for the United States.”

From left, Hyundai Motor Group Executive Chair Euisun Chung, left, Georgia Gov. Brian Kemp, and Jose Munoz, president at Hyundai Motor, celebrate with a champagne toast during the official groundbreaking for Hyundai's EV plant in Georgia on Oct. 25, 2022. [HYUNDAI MOTOR GROU]
From left, Hyundai Motor Group Executive Chair Euisun Chung, left, Georgia Gov. Brian Kemp, and Jose Munoz, president at Hyundai Motor, celebrate with a champagne toast during the official groundbreaking for Hyundai’s EV plant in Georgia on Oct. 25, 2022. [HYUNDAI MOTOR GROU]

The rule came as Hyundai Motor announced a $5.4 billion electric vehicle plant in Georgia, its first EV-dedicated factory, last year.

The company’s chief Euisun Chung promised another $5 billion investment in the United States through 2025 for innovative mobility technologies at his meeting with Biden during the president’s three-day visit to Seoul last May.

Seo Chang-bae, a professor of Chinese studies at Pukyong National University, said in a forum event on April 18 that the new bills are “attempts to keep Korean companies in check, not just Chinese companies,” given Korean firms’ large market share in the U.S. market.

“The IRA seems to target China, but the essence is that the United States [is targeting] fast-growing foreign companies in the U.S. market.”

To receive subsidies under the CHIPS and Science Act, for instance, chipmakers must disclose sensitive business data, including yield rates.

The yield rate, the amount of a silicon wafer that is successfully made into dies, is considered a key indicator to determine a chip producer’s manufacturing capabilities. It is often confidential.

The U.S. Commerce Department also limits recipients of CHIPS and Science Act funding from investing in the expansion of semiconductor manufacturing in China.

“The U.S. regulations put us in a tough position,” an executive at Samsung Electronics, who spoke on the condition of anonymity, said.

“This adds to the burden of carrying out a manufacturing project in the United States, a country with high labor costs,” the executive said.

Brisk trade
Despite the apparent rift, trade between the two countries is at an unprecedented level.

The United States was Korea’s largest export partner in early April, the first time in two decades. The long-time No.1 had been China.

Exports to the United States jumped 32.1 percent, while those to China plunged 31.9 percent this month through April 10 from a year earlier, according to the Korea Customs Service.

The shifting trend started taking shape last year.

Korea’s exports to the United States reached a record high last year at $109.8 billion, up 14.5 percent compared to the previous year.

Exports to China fell 4.4 percent to $155.8 billion, affected by a prolonged trade tension between Washington and Beijing and weakening demand for chips.

“At this rate, monthly exports to the United States will likely exceed exports to China for the first time in around 20 years,” Chang Sang-sik, head of analysis at the Korea International Trade Association, said.

“China is increasing its independence and trying to make its own products rather than importing from overseas, especially the intermediate goods,” Chang said. “Sluggish semiconductor exports are also a big problem, with the prices getting cheaper and cheaper over the years.”

Chang added that exports to the United States are expected to rise for the next few years following Korean companies’ massive investments in the country.

“With Korean automakers and battery makers building big manufacturing plants in the United States, exports of related materials and equipment will have to increase,” Chang said.

“Also, with the lingering tension between the United States and China, Korea is fulfilling the empty seats.”

Korea’s exports to the United States have been reaching new highs every year over the past seven years, with the volume rising particularly steeper since 2012 when a free trade agreement between the two countries went into effect.

The value of the trade totaled $191.6 billion last year, double from $100.8 billion in 2011. When compared to 1965, when the Korea International Trade Association (KITA) began collecting related data, it is a 638-fold jump.

Auto has been the latest No. 1 export category to the United States since 2012. Before that, apparel and textiles were the biggest export items to the United States.

Korea’s auto exports to the United States came in at an all-time high of $22.2 billion in 2022, around three times the $8.1 billion for semiconductors.

“As of the trade agreement signing, the Korea-U.S. alliance developed from a security alliance to an economic alliance,” Trade Minister Ahn Duck-geun said at a seminar held by the KITA on Monday.

Investment has also risen dramatically. Korea invested a total of $43.9 billion in the United States between 2002 and 2011, while the volume jumped 3.4-fold to $149.5 billion between 2012 and 2021, according to data from the Ministry of Trade, Industry and Energy.

The U.S. investment in Korea also doubled to $48 billion between 2012 and 2021, while it came in at $24.3 billion between 2002 and 2011.

Partners for “resilient” supply chain
The United States made it clear that it will bring more chip and EV-related manufacturing facilities to maintain its position in the industry and counter the influence of China.

In the EV segment, joint ventures are the typical form of cooperation between companies.

A series of joint battery plants announced by Korean battery companies and major U.S. automakers is a reflection of how the countries are leveraging their longstanding military ties into a broader economic partnership.

Korean companies have announced a total of 11 joint battery factories over the past three years in North America.

The most recent project involves SK On and Hyundai Motor building an electric vehicle battery plant in Georgia, a $5 billion commitment announced on Tuesday.

SK On's battery plant in Georgia [SK ON]
SK On’s battery plant in Georgia [SK ON]

Korea has also been the largest contributor to creating jobs in the United States.

Around 350,000 jobs were newly created in the United States through reshoring and foreign direct investment this year, and of them, Korea created more than 35,000, surpassing Vietnam’s 22,500, Japan’s 14,349 and Canada’s 13,671.

General Motors and Ford, the two largest U.S. automakers, have already formed joint ventures with at least two Korean battery makers.

“The United States and Korea have taken steps domestically to reduce their emissions, while making climate change an important part of their efforts to expand the U.S.-Korea alliance beyond traditional security and economic issues,” Troy Stangarone, senior director at the Korean Economic Institute of America, wrote in a recent report.

Ultium Cells' Ohio plant. Ultium Cells is a 50:50 joint venture between LG Energy Solution and General Motors [LG ENERGY SOLUTION]
Ultium Cells’ Ohio plant. Ultium Cells is a 50:50 joint venture between LG Energy Solution and General Motors [LG ENERGY SOLUTION]

LG Energy Solution, Samsung SDI and SK On promised 40-trillion-won of investment in the United States by the end of 2025, with about half of the projects already being announced or in the process of construction.

LG Energy Solution has formed Ultium Cells, a 50:50 joint venture with General Motors, to build three plants, each in Ohio, Tennessee and Michigan. A total of 8.4 trillion won has been committed to the three plants by Ultium.

Ford, the No. 2 automaker in the United States, has established BlueOval SK, a joint venture with SK On, a subsidiary of SK Innovation. BlueOval SK is investing $11.4 billion to build two plants in Kentucky and one in Tennessee.

“To qualify for the IRA incentive, U.S. automakers have no choice but to strengthen partnerships with Korean battery makers in order to produce as many EVs as possible while not using Chinese batteries,” Lee Ho-geun, an automotive engineering professor at Daeduk University, said.

In chips, Korean chipmakers like Samsung Electronics and SK hynix have superior manufacturing capabilities, whereas U.S. companies have a dominant market position in chip equipment technology.

In complementing each other, Samsung Electronics pledged to build more chip fabrication plants in the United States, following its promise of a $17 billion investment in Taylor, Texas.

A new chipmaking factory is scheduled to be completed this year, according to Samsung Electronics CEO Kyung Kye-hyun in January.

U.S. chip equipment and materials suppliers are looking to build their research and manufacturing facilities, although the size is far smaller than those of Samsung Electronics.

Lam Research opened a research center in Yongin, Gyeonggi, in April, while Applied Materials will build its research facility in the province of Gyeonggi.

Promise put to test  
The broader economic cooperation was pronounced during Biden’s visit to Korea last May.

“President Yoon and President Biden recognize that the future of the Alliance will be defined by common efforts to address 21st-century challenges,” the joint statement for the summit meeting read.

“In this vein, the two Presidents pledge to deepen and broaden cooperation on critical and emerging technologies, and cyber security. Both leaders also pledge to develop, use, and advance technologies in line with shared democratic principles and universal values,” it said.

The statement cited semiconductors, EV batteries, artificial intelligence, quantum technology, biotechnology, biomanufacturing and autonomous robotics as areas of cooperation.

The pivot toward supply chain came as the United States is seeking to cut China off from the supply of critical technologies while making the country resilient from a sudden shortage of electronic parts.

“Korea and the United States reaffirmed their commitment to increasing bilateral investment in the private sector and building strategic economic and technology partnership by launching communication channels for jointly managing supply chain,” Kang Gu-sang, an associate research fellow at Korea Institute for International Economic Policy, said.

Heads of four Korean conglomerates are accompanying Yoon on his state visit to the United States, raising the possibility of the negotiations being on the summit agenda.

“There are still some possibilities that we can push the United States to revise the law to make it favorable to Korean companies,” Lee said.

“For example, the U.S. government eased the rule and allowed leased vehicles to get the incentive, which is fortunate for Hyundai and Kia,” Lee said. “We can see the change as the result of the Korean government’s continuous negotiations with the U.S. government, and there is still room for more.”

BY PARK EUN-JEE, SARAH CHEA [park.eunjee@joongang.co.kr]