South Korea is facing significant economic and trade challenges as it navigates complex relationships with global powers like the United States and China. The country has historically been seen as heavily reliant on its largest trading partner, with reports indicating over 23.7% of its exports going to China and Hong Kong as of 2023. This perspective often paints South Korea as caught between its long-time ally, the U.S., and its largest trade partner, China. Yet, this conventional wisdom may not fully capture the current economic reality.
Rather than being solely dependent on China, South Korea's economic ties are more accurately characterized by asymmetric interdependence. While South Korea does rely on China for trade, Beijing also depends on South Korean technology, particularly semiconductors and advanced manufacturing. According to Ramon Pacheco Pardo, who writes extensively on international relations, "the economic relationship between South Korea and China is becoming more balanced, and Seoul cannot simply be described as dependent on its neighbor."
This nuanced relationship has evolved over recent years as both trade dynamics and investment patterns shifted significantly. Back in 2015, South Korea signed up for closer economic cooperation with China, highlighted by a free trade agreement. At its peak, exports to China and Hong Kong accounted for nearly 34.4% of South Korea’s total exports by 2018. Yet, since then, South Korea has been actively diversifying its economic relationships.
A marked change began after the COVID-19 pandemic and China's zero-COVID policy, which prompted many multinational corporations to rethink their supply chains. Companies like GoPro and Apple have shifted production out of China, and South Korean firms are no exception. Many are considering Vietnam as part of their "China plus one" strategy, aiming to reduce over-reliance on the Chinese market.
Investment patterns reflect this shift. The year 2023 saw the U.S. becoming South Korea’s top foreign investment destination, drawing 43.7% of its overseas investments, primarily due to the favorable policies set forth by the U.S. Inflation Reduction Act and other legislation focused on bolstering onshore manufacturing. Chinese tourists now account for less than 30% of visitors to South Korea, illustrating the broader changes occurring.
The semiconductor industry is particularly telling of South Korea's unique position within the global economy. South Korea has evolved from merely assembling chips for foreign companies to becoming one of the leading global players, with Samsung and SK Hynix at the forefront. Even as reports indicate over 51% of South Korea's semiconductor exports go to China and Hong Kong, those purchases are driven by necessity; Chinese firms need these advanced technologies to remain competitive. This dynamic creates tension for China too, which has found itself relying increasingly on South Korean innovations.
South Korea’s strategic pivot is underscored by its response to political tensions. For example, the deployment of the THAAD missile system to counter North Korea led to informal economic sanctions from China. Despite these attempts to use economic leverage, South Korea remained resolute, signaling its willingness to pursue its policies and alliances without fear of economic repercussions. More recently, South Korea has taken bold steps, joining international calls for investigations by organizations like the World Health Organization and asserting its stance on issues involving Taiwan—actions indicative of its diminishing dependence on China.
Looking forward, it is evident South Korea is at yet another crossroads, especially as trade relations with the United States evolve. With the advent of potential new tariffs and policy shifts under former President Donald Trump’s second term, South Korea faces fresh challenges. Trump has urged foreign businesses to relocate to the U.S., declaring, "My message to every business in the world is very simple: Come make your product in America, and we will give you among the lowest taxes of any nation on earth." This may put additional pressure on South Korean companies to increase their visibility and investments within the U.S. market.
Despite these uncertainties, South Korean policymakers understand the importance of pursuing a de-risking strategy rather than complete decoupling. This approach, which entails strengthening economic partnerships with diverse nations, particularly the U.S. and Southeast Asian countries, could provide resilience against potential economic shocks stemming from global shifts.
South Korea's actions can serve as a blueprint for other middle powers facing similar pressures. Just as countries like Australia, Germany, and Japan are recalibring their relationships with Beijing, South Korea will need to leverage its economic strengths. It will be necessary for the nation to navigate this changing dynamic skillfully to capitalize on opportunities and mitigate risks. The country’s ability to adapt and assert itself on the world stage will likely define its economic future amid rising global competition and challenges.