A warning light has been lit on Korea’s export front. Due to a sluggish global semiconductor industry, Korea’s semiconductor exports were cut in half, and Corporate Korea suffered the largest-ever January trade deficit. In particular, the Korean economy is faced with the troubling fact that the United States and the European Union (EU) have begun to regulate exports under the pretext of expanding their own supply chains and protecting their industries.
A series of global regulations that could negatively affect Korea’s manufacturing exports are set to be implemented. The U.S. Inflation Reduction Act (IRA) is the case in point. Starting in 2023, Hyundai Motor Co. and Kia Corp. which produce electric vehicles in Korea and export them to the United States, are not eligible for a subsidy of up to US$7,500 (about 10 million won) per vehicle.
The IRA offer subsidies such as tax credits only for electric vehicles made in America. Since North America is a major market that accounts for 21 percent of Hyundai Motor Group’s total sales, the Korean automaker may suffer a drop in car exports and sales.
As the European Union (EU) put out export restrictions to counteract the U.S. IRA, Korean manufacturers are caught in the middle. The Net-Zero Industry Act, which is promoted by the European Commission, is intended to inject large funds into the EU industry and drastically reduce regulations to foster eco-friendly industries such as wind power and solar power generation.
This act will be similar to the U.S. IRA, which provides subsidies to electric vehicles produced in North America. As European electric vehicles are discriminated against in the U.S. market due to the IRA, the EU has strongly requested the United States to revise the IRA or apply exceptions to electric vehicles made in Europe. However, as related negotiations are at a snail’s pace, the EU has started to protect its own industries through the Net-Zero Industry Act, analysts say.
As a result, Korean companies are forced to prepare strategies for the European market as well as the U.S. market. If the EU benefits European companies through the Net-Zero Industry Act, it may have a negative impact on Korea’s exports to the EU.
“If Korean companies that produce goods in Korea and export them dial up their production in EU member countries in order to qualify for EU subsidies, it will significantly slash their production activities in Korea and exports from Korea and negatively affect the Korean economy,” said an official of the Korea International Trade Association. “Now, Korean companies need to find a solution to that issue.”
“Korean companies have not produced their goods in the EU region as production cost is high there,” said an analyst. “But from now on, Korean companies have to thoroughly compare benefits and costs when producing goods in Korea and the EU region.”
The EU’s Carbon Border Adjustment Mechanism (CBAM) will impose tariffs on imported industrial products whose manufacturing processes emit large amounts of carbon. Thus, the system is the biggest concern for the Korean steel industry. The CBAM slaps tariffs based products exported to the EU based on the amount of carbon emitted in the process of producing them. The CBAM will apply to steel, aluminum, cement, fertilizers, electric power and hydrogen.
As the steel industry is a major carbon-emitting industry, global carbon regulations directly affect export competitiveness. If the CBAM is applied, tariffs to be paid by importers will increase, which could lead to a sharp drop in Korea’s steel exports. Korea exported US$4.3 billion worth of steel products last year.
Experts say that Korean companies can hardly respond to trade regulations initiated by foreign governments on their own. So the Korean government is urged to devise proper measures for Korean companies.
In addition, the Korean government is required to come up with special measures to help Korean companies secure and boost export competitiveness. Korea’s exports declined for four consecutive months from October 2022 to January 2023, and the nation’s January trade balance posted a record deficit of US$12.69 billion.