Your supply chain is only as strong as its weakest link: extraneous circumstances can quickly plunge even the strongest economies into disarray, as recently proven by COVID-19. Fortunately for the economies of the world, the coronavirus was indiscriminate in its economic impact, leaving the leading economies of the world with mostly the same struggles and as a result not creating significant economic-geopolitical shifts.
South Korea however now finds itself at the frontline of the US-Chinese trade war, where escalation could cause significant supply chain disruptions - an extraneous variable which would leave the South Korean economy in a uniquely difficult situation. The likelihood of a second Trump presidency will only reignite and accelerate the intensity of the US-Chinese trade war, with an increase in tariffs, sanctions and geopolitical escalation meaning South Korea must act swiftly. Should the South Korean government not begin mitigating the risks of US-Chinese dependency, it could undo years of progress for the ROK. In the context of renewed economic and political cooperation between the DPRK, Russia and China. It might even delegitimize and de-incentivise support for South Korea’s claim as the rightful government of Korea This combined with the added context of significant supply issues of defence equipment to Ukraine amid global shortages and stockpiling demonstrates a clear need to re-evaluate and risk mitigation in case a confrontation with North Korea was to occur.
South Korea has been a preeminent global exporting force for the last five decades, enjoying the benefits of a friendly international trade environment whilst being on the cutting edge of innovation and technology. TAs a result, companies such as Samsung, Hyundai and LG have cemented themselves as juggernauts in the global consumer goods market, cultivating the Korean economy into one of the most export-dependent industrialized nations, with exports of goods and services valued at 35.6 percent of GDP in 2021.
This global economic influence has played a significant role in deepening global ties with South Korea, cementing them as the legitimate government of Korea in the eyes of many and further allowing them to fund their domestic defence industry to deter any conflict with the North. The economic influence of their conglomerates abroad has also created significant lobbying power for the South Korean government and increased importance for their manufacturing and technology.
The OEC ranks South Korea at number 4 globally for economic complexity due to its variety of products and the systems and knowledge needed to create them. Whilst this has benefited South Korea in the past few decades, it could also become its Achilles heel if it cannot continue to supply the demands of said economy. South Korea has found itself dependent on foreign raw material imports; whilst this has not been a major problem for South Korea in decades passed, the trade war between the its two largest trade partners, US and China, puts Korea’s, place as an international trade-based economy into jeopardy as it grows increasingly subject to more regulations and sanctions from both sides.
Of prime concern is South Korea’s role as a global market leader in the semiconductor and EV market, where it is caught up in US and Chinese export controls in both sectors. These industries make up a significant amount of South Korea’s export revenue, with semiconductors alone being worth ~20%. China specifically has introduced new export controls for Graphite, Gallium and Germanium - inputs necessary for the production of semiconductors and EV batteries - resulting in increased supply chain risks for manufacturing in the sectors. Beijing’s partial ban on US semiconductor firm Micron also reportedly found Seoul under pressure to not backfill any lost semiconductor supply in China, placing Korea in the center of a key dynamic of the US-China trade war which is only set to escalate, all the while in an area which makes up around a third of Korea’s exports.
South Korea also currently imports the entirety of its Graphite from China as well as the majority of its integrated circuits, both equally important for the business continuity of Korean manufacturing. Integrated circuits alone make up ~18% of South Korean exports, not including other exports which require integrated circuits in their production.
These economic difficulties from China are only exacerbated as Chinese manufacturing becomes increasingly advanced and begins to compete in industries where Korea has traditionally dominated. Beyond the semiconductor industry, Chinese tech firms have intensified competition with South Korean firms in the mobile phone, EVs, and battery sectors. A 2023 report has suggested that the sales of 113 big Korean companies have dropped by 13.1 percent since 2016. Another factor worth noting is that OEC ranked number 1 country for economic complexity, Japan, has increased its number of skilled foreign talent by 4X from 2012-2022, while Korea’s has stayed flat. This in the context of South Korea having the lowest birth rates globally, 0.81 births per woman, a significant threat to its future labour market.
However, Chinese interference is only the tip of the iceberg for South Korea’s trade problems. US led sanctions on Russia following the war in Ukraine has meant the end of the import of Russian crude oil. This has resulted in South Korea’s reliance on primarily middle eastern sources of crude oil to meet its domestic energy needs and also its refined petroleum export market, leading to increased costs in the import of oil and gas products. This is critical for a country that imports almost 94.8% of its energy and natural resources consumption. In 2021, it spent USD 135.9 billion on importing energy and resources: equivalent to nearly 22.1% of its total amount of imports. This supply may also be in jeopardy as its new import partners apply to BRICS. The threat of a de-dollarised global oil market looms which could result in further trade difficulties.
American and Chinese understanding of Korea’s dependency on importing raw resources in order to manufacture the products necessary to sustain its economy, and their willingness to use it to leverage Seoul for their own political motivations, leaving South Korea’s supply chain in a more than precarious position. This has been primarily demonstrated by South Korea having a trade deficit for the second straight first time since the late 1990s despite imports decreasing by 12.1%, with continuing high energy costs and trade with China were among the primary factors.
Another consideration for South Korea is the susceptibility of their domestic manufacturing capability should a conflict break out with the North. The war in Ukraine has demonstrated the difficulties in procurement of vital defence equipment to continue the war effort, with 155mm artillery shells increasing in value of up to 10x their pre-war value as a result. Despite South Korea having incredibly strong domestic defence production capabilities, should these facilities succumb to sabotage or surgical strikes, South Korea may be unable to equip its army sufficiently to combat the North. As a result South Korea must look at production abroad to diversify and mitigate the risks should this worst case scenario become a reality.
In order to regain greater economic independence from the US and China and provide South Korea with more bargaining chips, they must look to diversifying their import partners with more stable alternatives which are less affected by global geopolitical circumstances. South Korea can achieve this by leveraging one of its most unique manufacturing industries - Defence.
South Korea is currently the world’s 8th largest weapons exporter, a figure which has increased over the last 5 years. South Korean arms exports have grown from 2-3 billion USD in the late 2010s, to 7.3 billion USD in 2021, 17.3 billion USD in 2022, and 14 billion USD in 2023. This figure highlights not only the increased demand of defence equipment globally in the context of an uptick in global conflict and tension, but also South Korea’s unique ability to supply high quality NATO grade equipment reliably despite a relatively difficult export process due to their defence export regulatory body DAPA. South Korea could leverage its skill in industrialisation and militarisation in order to export and aid developing economies in exchange for favorable trade agreements, providing more economic independence from China and the US.
The most logical partners based on the South Korean import demand are found in South America. South Korea imports significant amounts of crude oil, natural gas, Lithium, iron, copper and zinc. Currently the majority of these resources are imported from nations which are directly impacted by US and Chinese trade policy due to NATO and BRICS. The nations of the Andean Community free trade zone have all these resources in abundance as well as underdeveloped infrastructure for extracting and prospecting, suggesting further untapped supply.
Peru, being the most stable and economically rich nation in the region and an already existing trade partner of South Korea for defence equipment and Zinc, is the best candidate to begin focusing efforts on. Alone Peru’s reserves account for 9.1 percent of the world's copper, as well as sizable shares of silver (17.8 percent), gold (5.6 percent), zinc (8 percent), lead (6.2 percent), all resources crucial to South Korea’s manufacturing industry. The main products that Peru exports to South Korea are Petroleum Gas ($903M), Copper Ore ($529M), and Lead Ore ($251M). Over the past 5 years the exports of Peru to South Korea have increased at an annualized rate of 77.5%, from $122M in 2017 to $2.15B in 2022.
Through economic and political cooperation, South Korea could secure exclusive trade rights as well as contribute to the domestic infrastructure for resource extraction and thus the economic development of Peru, which shares relatively close geographic proximity, separated only by the Pacific Ocean.
However, arguably the most significant piece South Korea could utilize in diversifying their supply chain is their defence industry.
South Korea has already seen significant cooperation with Peru through the purchasing of significant amounts of military equipment such as warships and trucks from Hyundai, totalling billions in contract value. South Korea’s strong domestic military industrial complex thus becomes a significant bargaining chip and allows South Korea to expand their military industry and become integral parts of the defence sector in South America. As well as geographic proximity, the general stability of the region makes it an ideal place for South Korea to procure a larger portion of its natural resources as well as invest in resource extraction and manufacturing to further solidify relationships and diversify their economy as a regional trade power. The existence of the South Korea–Peru Free Trade Agreement already provides the basis for growing this relationship: Korea is already the fifth biggest trade partner of Peru and its fourth largest export destination.
With the added context of all countries in the region making a move to modernize their militaries, particularly in a time of relative defence equipment shortages and backlogs due to the conflict in Ukraine, Israel and other global theaters, South Korea has a unique opportunity as one of few nations with a holistic military industrial complex to leverage its expertise in exchange for securing its own domestic needs in a true symbiotic relationship between nation states. This investment into the military industry in Peru would also provide South Korean defence manufacturers with alternative supply options should they be necessary during wartime.
Developing ties with Peru also creates a springboard for South Korea to cooperate with the other nations of the Andean Community and South America as a whole for other resources such as oil and gas to decrease reliance on the Middle Eastern Oil market which is at the flashpoint of global turmoil and the whim of OPEC. Something vital for domestic economic needs and also fuel supply during wartime.
In no way would this proposal replace trade with the US and China but instead provide South Korea with greater economic independence and increase its geopolitical influence to mitigate risks from the US-Chinese trade war and any other extraneous geopolitical circumstances, as well as further the South Korean economy and potentially encourage immigration of skilled workers.
The primary obstacles to South Korea leveraging their military industry in Peru are relationship and understanding based. The disconnect between the procurement process in Peru and the strict regulations surrounding monopolization of tenders poses issues for the import of military items to Peru. Domestically in South Korea, DAPA regulations for export of defence equipment can create unnecessary friction and barriers towards signing deals. This can be rectified through close mutual cooperation between those working on the purchasing side in Peru and the defence manufacturers and DAPA in South Korea. This would create an ease of access and dialogue between the two nations, opening doors for further cooperation and larger strategic agreement. Achieving this would require a concerted effort on both sides’ governments with the aid of the private sector to broker and support mutually beneficial trade agreements.
The concept of expanding the South Korean defence industry abroad is not new: it has already expanded into the US, Poland and Indonesia.
Poland is probably the best example of how manufacturers could expand into Peru. Hyundai Rotem has already signed a deal to provide one thousand K2 tanks to Poland, first supplying an emergency quantity built domestically in Korea and later producing the remaining quantity in Poland itself. Similarly, Hanwha systems and the Korean Aerospace Institute have signed contracts to provide K9 Howitzers and FA-50 aircraft respectively, each with plans to create entities in Poland to begin local production and training. Poland is also contributing to the Korean defence industry via the import of the “Warmate” drone to research and utilise to counter increased North Korean drone efficiency.
This willingness of Korean defence manufacturers and the Korean government’s cooperation to establish these deals in Poland reflect an understanding of necessity and opportunity which the Korean defence industry has abroad, particularly in countries which are actively procuring large amounts of equipment, a criteria which Peru certainly meets.
In theory this concept seems logical and mutually beneficial, but there are roadblocks and difficulties to overcome which may be solved through policy. Some recommendations include:
- The signing of a trade agreement directly relating to the export of defence equipment between South Korea and Peru
- Support and/or tax breaks for private sector engaging in Peru
- The establishment of an economic cooperation committee or council
- State visits and declarations highlighting the economic opportunity of cooperation between the two nations
South Korea faces serious economic and geopolitical challenges categorized by domestic and international circumstances that, if left unchecked, could have significant consequences for the integrity and influence of the republic of Korea. By increased cooperation in Peru and South America as a whole, South Korea can mitigate multiple risks it is presented with. Ultimately however this is a risk mitigator rather than a solution to the problems caused by the US-China trade war. South Korea needs to foster partnerships and co-operations globally, leveraging their world renowned manufacturing industry while also strengthening domestic policies surrounding birth rates to ensure a prosperous and stable future.
