The prolonged trade conflict between the United States and China is leading to a restructuring of Korea's supply chain, with connections to the US and China increasingly routed through third countries like Vietnam. While direct economic ties between the US and China have weakened, supply chain links have remained intact. However, experts warn that if the US intensifies regulations such as origin rules or circumvention export investigations, the trade pressures faced by third countries could spill over to Korean companies.
The Bank of Korea released a report on September 13 titled "How Global Economic Connections Are Restructured Amid Geopolitical Fragmentation."
The report from the Bank of Korea's research division indicates that as direct economic ties between the US and China weaken, third countries are playing a crucial role as "connector countries" that maintain global economic connections. These connector countries, including Vietnam, India, and Mexico, link both the US final market and the China-centered production network.
Korea's supply chain has also significantly strengthened its connections through connector countries like Vietnam. The share of value added from Korea's exports to Vietnam that ultimately connects to US final demand (consumption and investment) rose from 11.1% in 2016 to 18.5% in 2022. Similarly, the share leading to Chinese final demand increased from 7.3% to 13.9% during the same period.
This trend is particularly evident in Korea's key industries, such as semiconductors and electronics. The share of value added from exports to Vietnam that connects to US final demand surged from 12.8% to 21.0%, while the share leading to China rose from 11.2% to 19.4%.
In indirect routes where Korean intermediate goods pass through third countries to reach the US, the share via China decreased from 10.7% in 2016 to 6.8% in 2022, while the share via the five ASEAN countries expanded significantly from 4.9% to 8.3%. In the semiconductor and electronics sector, the share via ASEAN soared to 18.6%, surpassing the share via China, which stood at 17.0%.
However, the increasing reliance on ASEAN production networks raises the scope of trade and supply chain risks that Korean companies must bear. Jeong Seon-young, head of the Bank of Korea's Asia-Pacific Economic Team, noted in a background briefing, "While connections through third countries serve as a buffer channel that solidifies economic ties, the potential risks we must bear have also increased." He added, "In addition to the direct tariff pressures from the US on Korea, the risks from third countries, such as circumvention export investigations or strengthened origin regulations affecting connector countries like Vietnam, have re-emerged, indicating that the scope and degree of risks we need to manage in the supply chain are much larger than in the past."
Furthermore, there are concerns that the lengthening of production routes could lead to inflationary pressures and increased risks of supply chain disruptions. Jeong stated, "As production nodes increase, such as through ASEAN, and new investments are made, costs have risen compared to the past. Given the extended production bases, if bottlenecks occur in the middle, the risk of the entire supply chain coming to a halt is likely to be greater, similar to what we experienced during the COVID-19 pandemic."
The Bank of Korea emphasized the need to utilize the buffering function of ASEAN while thoroughly managing the potential for shocks from policy changes in major countries or third-country production networks to spill over domestically. It advised that Korea should pursue strategic diversification of its supply chains to reduce dependence on specific production bases or routes.
* This article has been translated by AI.
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