U.S.-South Korea Policy Coordination on Supply Chain Resiliency

On November 28, 2023, the Council on Foreign Relations’ program on U.S.-Korea Policy held an in-person workshop on U.S.-South Korea policy coordination toward China on supply chain resiliency. This workshop was made possible by a generous grant from the Smith Richardson Foundation.

Introduction

Over the past three years, the Joe Biden administration has placed an increased emphasis on supply chain resiliency, which has in turn heightened and securitized the competition in advanced technology between the United States and China. In April 2023, the U.S. Treasury Department released its 2023 De-risking Strategy, and National Security Advisor Jake Sullivan stated the Biden administration’s intention of “de-risking and diversifying, not decoupling” economically from China. At the same time, the Biden administration has focused on “friendshoring” to restructure supply chain networks in a manner that prioritizes U.S. allies and partners with shared values and norms.

This policy approach has challenged South Korean assumptions that economic and security cooperation can be approached separately, upending the long-standing South Korean approach that prioritizes China for its economy and the United States for security. However, the opportunity for South Korean firms to cooperate in strengthening supply chain resiliency has also allowed for deeper South Korean integration into the U.S. supply chain in critical sectors such as semiconductors and electric vehicles. In addition, the Yoon Suk Yeol administration has similarly pursued a policy of supply chain diversification. South Korea’s Ministry of Trade, Industry, and Energy announced the 3050 Strategy in December 2023, which identified 185 critical materials requiring stabilization in the supply chain as part of its initiative to decrease dependence on particular countries—notably China—to less than 50 percent by 2030. By pursuing this policy and others, South Korea aims to reduce its overreliance on China in certain sectors while avoiding backlash as it enhances economic and technological cooperation with the United States.

As the United States and South Korea work to diversify and expand global supply chains for critical materials, the risks and challenges of shifting away from China require stepped-up coordination from a wide array of actors to ensure strategic alignment between the respective governments and corporate benefits for both countries.

Strategy of De-Risking

Many countries around the world are pursuing a strategy of de-risking to restructure the global supply chain. The U.S. Department of State defines de-risking as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” By reducing the probability of being exposed to risk in the global supply chain, de-risking is crucial to counter the potential weaponization of interdependence. Workshop participants agreed that the rise in de-risking is likely due to major countries’ high interdependence with China. However, as noted by the Group of Seven (G7) in its Hiroshima Leaders’ Communiquéfrom May 2023, policies of de-risking and diversifying the global supply chain are not designed to harm China or impede its economic development, nor are they aimed at “decoupling or turning inwards.” Rather, de-risking involves ensuring economic resilience and economic security to protect against coercive economic measures amid heightened geoeconomic uncertainties. The strategy of de-risking not decoupling acknowledges the challenges of complete decoupling from China and the importance of outmaneuvering economic practices that exploit vulnerabilities and dependencies.

However, some workshop participants highlighted the potential for concentrated risk when pursuing reshoring or friendshoring policies. For instance, the baby formula shortage in the United States that began in early 2022 showed the risks of consolidating the baby formula industry in a limited number of U.S. companies. The domestic concentration of the baby formula market and strict regulations on imports by foreign manufacturers led to a nationwide shortage of baby formula. The lack of access to the global supply network enhanced and concentrated the associated risks within the domestic supply chain. As the United States prioritizes partnering with like-minded allies, it could simultaneously increase the likelihood of cross-cutting risks if one or more countries within the supply chain network were to experience unintended manufacturing or production disruptions.

Recommendations

• The United States and South Korea should prioritize redundancy in regional and global supply chains, particularly for critical strategic materials. While risks from restructuring supply chains could be unavoidable, redundancy ensures resiliency against potential disruptions and reinforces the production capabilities of both countries. The two governments should also communicate the importance of redundancy to domestic companies that could view such actions as unnecessarily costly.
• The U.S. government should maintain clear and transparent communication regarding the objectives and risks associated with its economic security policies. As South Korea pursues de-risking measures and assumes heightened risks of Chinese retaliation, the South Korean government will need to prevent domestic backlash if U.S. policies are perceived as detrimental to South Korean interests.   
• The United States and South Korea should enhance coordination of export controls as related to de-risking measures. The two countries should maintain clear communication channels, especially related to South Korean corporations with factories in China that are directly impacted by U.S. controls on Chinese exports.

Regulation of Supply Chains

In recent years, paralysis within the World Trade Organization (WTO) has heightened the role of governments in economic security. Countries had long shaped their trade, investment, and corporate decisions based on efficiency and relative cost advantage, rather than the security of supply chains. More recently, governments have worked to reshape the global economic order through the creation and pursuit of domestic industrial policies. However, some workshop participants questioned the additional costs that such policies entail. The 2023 World Trade Report by the WTO highlighted the emergence of global fragmentation and reorientation of trade along geopolitical lines as a result of governments “viewing interdependence as a vice rather than a virtue” and “placing greater emphasis on economic independence.”

In response to the uncertainty of the global economic order, workshop participants discussed the role of minilateral and multilateral institutions in shaping the rules that govern international economic exchanges. Some participants argued that bilateral cooperation would ultimately serve as the most important tool for coordination given the complexity of supply chains. In this sense, South Korea serves as an ideal partner for the United States to not only establish joint processes such as information-sharing and consultative mechanisms, but also to drive substantive reshaping of the supply chain by segmenting the market and pooling capabilities to reduce the associated costs. Other participants stressed the continued importance of multilateral institutions as necessary foundations for bilateral and minilateral frameworks, while acknowledging the need for updating existing institutions to face new and emerging economic security challenges. The benefits of maintaining the multilateral system included the provision of broad legitimacy, technocratic competence, and a secretariat function for administrative purposes.

As governments increase their role in developing rules that govern domestic and foreign market practices, they will increasingly rely on the private sector to implement industrial and economic measures. The shifting economic order will increasingly demand that companies incorporate geopolitics and geoeconomics within their decision-making. Companies now need to consider standards and targets such as achieving the United Nations’ sustainable development goals; working toward net-zero greenhouse gas emissions; accelerating green- and clean-energy transitions; maintaining corporate adherence to environmental, social, and governance standards; promoting digital innovation and transformation; and minimizing the harms of U.S.-China competition. As such, companies are pressured to find the best cost rather than the lowest cost. Governments should accordingly provide greater guidance to domestic companies and incentivize the pursuit of the best cost.

Recommendations

• The governments of the United States, South Korea, and other like-minded countries should coordinate their respective industrial policies to prevent miscommunication and unintended consequences that harm allies and partners. Clear communication will ensure their policies do not create greater instability in the supply chain due to differing perceptions of economic security risks and measures for mitigating such risks.
• The G7 should consider extending membership to South Korea and Australia, two advanced industrialized democracies that are well-equipped to contribute to its mission. With expanded membership, the G7 could deepen its work on coordinating global efforts on supply chain resiliency.

Prospects for U.S.-South Korea Cooperation

In the case of South Korea, the Yoon administration’s National Security Strategy outlines the country’s approach toward economic security. To mitigate economic uncertainty and enhance strategic partnerships for economic security cooperation, the Yoon administration has pursued the following three approaches: (1) emphasize the importance of public-private partnerships through the establishment of an integrated and multi-layered response system; (2) lead efforts to participate in emerging economic forums and shape norms on the global economic order; and (3) step up its role shaping the agenda in multilateral platforms focused on economic cooperation.

To strengthen the country’s role in supply chain resiliency and economic security, the South Korean government has proposed and passed a variety of legislation. In May 2023, the South Korean National Assembly passed an amendment to the Act on Special Measures for Strengthening the Competitiveness of Key Industrial Materials, Parts, and Equipment and Stabilizing Supply Chains. The amendment expanded the scope of the Special Act, which was originally passed in December 2019 in response to Japan’s export controls against South Korea’s semiconductor industry, to deal with South Korean vulnerabilities to growing supply chain disruptions. Additionally, the National Assembly passed the Framework Act on Supply Chain Stabilization Support for Economic Security in December 2023, which established a supply chain committee under the Ministry of Economy and Finance and created a supply chain stabilization fund to provide financial support for South Korean corporations diversifying export destinations. In January 2024, the National Assembly passed the Special Act on Raw Material Security, which recognized South Korea’s vulnerability to the weaponization of import dependencies. The legislation identified petroleum, natural gas, coal, uranium, hydrogen, critical minerals, and materials and parts for renewable energy infrastructure as key strategic resources, highlighting the need for accelerated efforts to stockpile and produce resources critical for national security.

South Korea’s strategic approach and expanding toolset for addressing supply chain resiliency have aligned U.S. and South Korean interests to reduce overdependence on China and strengthen reliable supply chain networks. However, workshop participants highlighted several areas of divergence between the two countries that could restrict the scope of bilateral cooperation. First, the U.S. approach of protecting U.S. and allied technologies from adversarial exploitation—characterized as “small yard, high fence”—could pose challenges to South Korean semiconductor companies with production plants in China. Second, due to the private sector’s leading role in developing and shaping supply chains, participants highlighted the importance of public-private partnerships and transparency as related to the costs and tradeoffs associated with economic security efforts.

As the United States continues to implement the Inflation Reduction Act and the CHIPS and Science Act to secure a more resilient and trust-based global supply chain network, there will be greater need for the U.S. and South Korean governments, companies, and workers to forge and deepen cooperative partnerships in economic and technological sectors.

Recommendations

• The U.S. and South Korean governments should strengthen joint projects to produce and stockpile critical minerals during peacetime to ensure resiliency against supply chain disruptions.
• The United States and South Korea should consider establishing an intergovernmental fund for companies of both countries to offset the costs associated with supply chain diversification and stabilization efforts. Similar to South Korea’s newly established supply chain stabilization fund, both countries could contribute a certain amount of funds that are evenly or proportionally provided to U.S. and South Korean companies subject to heightened costs in the process of aligning with the government’s policies toward supply chain resiliency.
• The United States, South Korea, and Japan should enhance trilateral cooperation on energy security issues. For example, the U.S. Agency for International Development, the Korea International Cooperation Agency, and the Japan International Cooperation Agency could establish joint ventures in third countries to develop local infrastructure and mine resources for shared use.