Beijing has good reason to push Seoul to keep its doors open. The motivations are driven less by a belief in free trade and more about the emerging sectors where China is becoming a global leader, areas of South Korean industry most vulnerable to new competition.
Both sides should “maintain stable and smooth industrial and supply chains” between them and the world, Chinese Premier Li Qiang (李強) said on May 26 ahead of the two nations’ three-way summit that included Japan.
“China is ready to work with South Korea to accelerate the second phase of China-South Korea Free Trade Agreement negotiations,” Xinhua news agency cited Li as saying.
In geopolitics, there is no such thing as free-trade absolutism. Nations pick and choose which counterparts are offered unfettered access and which have tariffs blocking their path. If leaders sense a rival might have a competitive edge, then barriers go up; the US escalation of duties against Chinese electric vehicles (EVs) and solar cells are one example. China has not been innocent either, raising import taxes on US products in response to the trade war started by former US president Donald Trump.
With South Korea, though, China seems happy with the current situation. That is because Beijing is fast catching up in the export sectors dominated by its neighbor. South Korea remains technologically superior, yet its value to Beijing is as a supplier of know-how, not the final goods that come out of the factories. Continued open access to more-advanced providers is crucial for China to get its hands on the people and equipment required to close the gap with rivals, including South Korea and the US.
Memory chips, cars — especially EVs — and shipbuilding are among industries with the greatest potential in the world’s second-largest economy, and categories where it has, or might soon, become a global leader. For decades they have also been South Korea’s biggest industries.
In shipbuilding, South Korea was once the world’s premier supplier and remains a major source of new vessels, driven by the Hyundai, Samsung and Daewoo chaebol. However, China took the top spot five years ago and has kept growing, closing in on 50 percent of worldwide market share.
Samsung Electronics Co and SK Hynix Inc between them make 77 percent of the world’s DRAM chips and 58 percent of all NAND flash memory chips, the two key types of memory semiconductor. However, Chinese firms, unlikely to ever catch up to Taiwanese and US counterparts in the more complicated logic chip market, are gaining ground in this subsector.
Then there are automobiles. EV giant BYD Co has already drawn level with Tesla Inc in vehicle output. Add in dozens more names, including Geely Automobile Holdings and SAIC Motor Corp, and you get an auto industry that rivals a collection of South Korean players like Hyundai Motor Co and KIA Corp, especially in the new realm of electrified models.
The main purpose of tariff barriers is to tilt the playing field in favor of locals, often to protect jobs or profits. There is also an argument to be made that they can help shield young industries from stronger rivals, allowing a domestic ecosystem to sprout. We have seen this with the “Make in India” campaign that spurred a boom in local production of smartphones and computers.
Many Chinese companies do not require this umbrella anymore, and Beijing knows it. Instead, what they need is unfettered access to the machinery, materials and engineering talent that would allow China’s semiconductor, EV and shipbuilding businesses to keep thriving.
It is no wonder that Li wants to encourage South Korean companies to invest and do business in China. Beijing is not worried that Samsung, Hyundai or Daewoo would outcompete with locals on their home turf. However, it knows that their presence would ensure a continued supply of the factors of production: equipment, chemicals and labor. That last item is most crucial.
While China has a history of stealing technology and forcing partners into joint-venture deals, there is also a lot to be gained simply by having foreign development, engineering and manufacturing teams on the ground. Technology transfer does not just happen from hacking computer systems or buying patent portfolios. It occurs through having local and foreign teams working alongside each other.
Seoul needs to ask what it gets in return. Foreign automakers are pulling out of China, Chinese President Xi Jinping (習近平) has made it clear he wants the nation to be semiconductor independent, and there is little chance state-owned enterprises would buy vessels from overseas shipyards. At best, South Korean firms might have the opportunity to temporarily fill gaps left by US suppliers in areas like electronics, industrial goods and equipment in China. However, that is only until a local company gets strong enough to replace the foreign alternative. In today’s fractured world, international cooperation should be encouraged, but no one should be lulled into believing there is anything free in a modern-day free-trade deal.
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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