Navigating shifting tides: South Korea and Northeast Asian trade integration

Entering the 21st century, two key forces reshaped South Korea’s trade strategy. The first one is the rise of preferential trading agreements, following the stalling of multilateral trade negotiations after the World Trade Organization failed to launch a new round of trade negotiations in Seattle in 1999. Japan’s 2002 agreement with Singapore "for a new age economic partnership" sparked a wave of bilateral free trade agreements (FTAs), including deals between South Korea and Chile (in 2003) and Japan and Mexico (in 2004). Then came a proliferation of "ASEAN + 1" agreements, and South Korea signed an FTA with ASEAN in 2006. Within a decade of its first trans-Pacific FTA with Chile, South Korea had signed 15 FTAs in total. Upon full implementation, these agreements came to govern over 85% of South Korea’s total trade. South Korea’s FTA partners included all of its top five trading partners, except Japan.

For South Korea, as for many other Asian nations, the United States was once a key trading partner. In 1990 the United States accounted for 29.8% of South Korea’s total exports. However, in recent years, the United States’ significance as an export destination has diminished, with its export share dropping to 10.1% in 2011 before rebounding to 18.3% in 2023. By contrast, China’s share of South Korea’s exports surged from 0.9% in 1990 to 26.8% in 2018, before declining to 19.7% in 2023. 

Despite its success in negotiating bilateral FTAs, Seoul lagged in capitalizing on the wave of mega-FTAs that emerged in the 2010s. Policymakers initially believed that a network of bilateral agreements would suffice for securing stable export markets, and they were reluctant to make further trade concessions, particularly in the sensitive agricultural sector. By the time Seoul realized the limitations of bilateral FTAs in expanding export markets, it was too late to be at the forefront of the wave. Although South Korea joined the Regional Comprehensive Economic Partnership (RCEP) as a founding member, the agreement lacks the comprehensiveness needed to fully liberalize trade. South Korea formally declared its application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in December 2021 and has since been negotiating bilaterally with existing members. However, strained relations with Japan have complicated the process, particularly during the administration of Moon Jae-in. Although Japan has not publicly opposed South Korea’s membership, skepticism remains due to ongoing diplomatic tensions. 

The persistent threat from North Korea continues to cast a shadow over South Korea. Although lagging economically and technologically, the North has developed nuclear weapons and advanced missile systems. This complex security environment places South Korea in a unique trade-security dilemma, where its US alliance remains paramount. In navigating this delicate dynamic, South Korea has cautiously deepened its security ties with the United States while sustaining strong economic relations with China – a strategic balancing act often summarized as "the US for security and China for economy". 

However, South Korea’s attempt to separate security from trade faces significant challenges as the trade-security nexus grows stronger amid the escalating US-China rivalry. Economic interdependencies are increasingly weaponized. For the US’ part, the Trump administration has been leveraging US economic heft to pressure trading partners. In China, a shift toward greater self-sufficiency is threatening South Korea’s technological advantage in sectors such as semiconductors and consumer electronics. In response, South Korea has ramped up investments in R&D in areas such as artificial intelligence (AI), 5G, and biotechnology to safeguard its technological leadership. At the same time, its firms are diversifying supply chains and reallocating investment to Southeast Asia and the United States amid China’s growing regulatory constraints and discriminatory trade practices. Nevertheless, Seoul remains ambivalent in its relationship with Beijing, fueled by deep divisions within South Korea's political landscape. 

Biden’s Inflation Reduction Act (IRA) and the CHIPS and Science Act have raised concerns for key US trading partners deeply integrated into global high-tech supply chains. The IRA's tax credits for electric vehicles (EVs) assembled in North America have sparked outcries from South Korean automakers, who see this policy as discriminatory and damaging to their competitiveness in the US market because their vehicles do not qualify for these incentives. In response, Hyundai is investing in a US EV plant, while South Korea engages in diplomatic efforts to secure more favorable treatment. Meanwhile, the CHIPS Act aims to bolster the US semiconductor industry by providing $52.7 billion in subsidies to incentivize the reshoring and nearshoring of chip production. In combination with Washington’s export bans on semiconductor equipment and technology to China, these factors have pushed South Korean semiconductor companies like Samsung and SK Hynix to aggressively establish factories in the United States.  

With Trump’s reelection, South Korea’s semiconductor and battery sectors, which have made substantial investments in the US thanks to subsidies offered by the Biden administration, are facing new uncertainties. Moreover, the South Korean government is increasingly worried about the potential hollowing out of its domestic industries as these companies expand their investments in the United States.  

Further complicating matters, South Korea faced unexpected challenges in its technological interdependence with Japan. South Korea ranks as Japan’s third-largest trading partner, and Japan is South Korea’s fifth-largest trade partner overall and third in terms of imports. Despite their otherwise productive economic relationship, diplomatic tensions between the two have been ongoing since 2018 largely due to historical grievances, including a South Korean Supreme Court ruling on wartime forced labor. In retaliation, in 2019, Japan restricted South Korea's access to its export whitelist, requiring individual approval for shipments of many high-tech items, which strained bilateral ties and led to economic losses for both countries. Although Japan restored South Korea’s status on its export whitelist during a significant diplomatic thaw in June 2023, deep-seated mutual distrust continues to hinder the two countries’ ability to collaborate fully in navigating the complexities of the global economy. 

South Korea stands at a pivotal moment, confronting both challenges and opportunities amid national and global uncertainties. Its ability to continue thriving will depend on a multifaceted strategy – leveraging trade for economic growth, diversifying partnerships to minimize dependencies, and aligning security interests without alienating key economic partners, especially among its Northeast Asian neighbors. As the global economy evolves, South Korea’s experience offers valuable lessons in resilience and adaptation. Future success will hinge on its capacity to navigate these complexities without compromising stability or prosperity.

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