High-Tech Competition in the Age of Hyper-Uncertainty: The evolution of South Korea’s economic security strategy

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US-China strategic competition and South Korea’s strategic ambiguity

Increasing geopolitical uncertainty has precipitated the return of ‘economic statecraft’, with countries’ economic policy priorities increasingly linked to long-term national security priorities.

However, economic statecraft in the 21st century substantially differs from traditional economic statecraft, in that it attempts to combine the exploitation of power asymmetries, as well as the asymmetry of networks.

South Korea’s pursuit of economic statecraft has been driven by two factors. First, the intensity of US-China strategic competition has led to increasing pressure to choose between the two – particularly in relation to high-tech industry investment – and economic statecraft has been a way of managing this. Second, the shift has been necessitated by various forms of economic coercion from neighbouring powers such as China and Japan, as well as examples of unilateralism exhibited by the US during the Trump administration. 

There is no doubt that the US-ROK alliance has been the backbone of South Korea’s foreign policy, while China has been its largest trading partner since 2003 (link in Korean). To meet the difficult challenge of upgrading its security alliance with the US while maintaining or expanding its economic relationship with China, the South Korean government has delayed making conclusive choices on sensitive issues that would place South Korea in the middle of US-China geopolitical conflict.

The origins of reactive economic security strategy 

The Moon Jae-in government (2017-2022) pursued an economic security strategy based on strategic ambiguity, presuming that it could manage its economic relationship with China separately from its traditional alliance with the United States and react to individual policy dilemmas as they arose. ‘Security with the US, the economy with China’ came to symbolise the Moon administration’s economic security strategy.

The South Korean government’s strategic posture during this period was underpinned by its role as a key player in both the US and China’s regional strategies and alliance architectures. The US recognises the importance of maintaining and deepening its alliance network in the Indo-Pacific region to contain China, and has sought to harmonise policies with allies and partners to counter China’s aggressive diplomacy and economic coercion. On the other hand, China has stepped up its diplomatic offensive against South Korea as a way of undermining the United States’ Indo-Pacific alliance network.

The Moon government’s approach of strategic ambiguity provided South Korea with room for delaying outright decisions on key issues between the US and China. However, the limitations of strategic ambiguity became clear once the government’s economic security strategy raised US and Chinese expectations that South Korea would align itself with their policies. The US has signalled its desire for South Korea to align its policies with those of the US, while China has warned that South Korea will face sanctions if it undermines core Chinese interests. Indeed, in the second half of the 2010s, there were outright measures to this effect: China enforced economic sanctions on South Korea following the decision to deploy Terminal High Altitude Area Defense (THAAD) systems in 2016, while the Trump administration attempted to make unilateral changes to US-ROK bilateral trade arrangements in 2018.

For China, exploiting the asymmetric economic relationship with South Korea has been a crucial diplomatic lever, and there is evidence that such measures have proved effective. A Brookings Institute study points out that South Korea has refrained from signing resolutions opposing Chinese policies or criticising the Chinese government on key issues related to China, including the Hong Kong National Security Ordinance, human rights issues in Xinjiang, restrictions on the introduction of Huawei 5G equipment, the South China Sea and East China Sea disputes, the Belt and Road Initiative agreement, increased screening of Chinese investments, and Taiwan’s accession to the WHO.

South Korean economic losses inflicted by Chinese economic sanctions were estimated to be as much as $19.2 billion, concentrated in tourism, entertainment, and retail. The Bank of Korea estimated that, in the period between July 2016 and April 2019, the number of Chinese tourists and tourism revenue dropped by 65% and 31%, respectively. The lingering effects of these sanctions have resulted in long-term economic losses for South Korea. Notably, the number of Chinese tourists did not recover even after the Chinese government announced in October 2017 that it had reached an agreement with South Korea to ‘quickly normalise exchanges and cooperation in all fields,’ reinforcing the idea that it is far easier for economic ties to break down than it is for them to be rebuilt after a period of diplomatic conflict.

The shift to a proactive economic security strategy

This experience of economic coercion has led South Korea to adopt a more proactive economic security strategy. 

Observing the increasing frequency of China’s economic coercion against regional countries such as Japan, Australia, and the Philippines, as well as European countries such as Italy, Norway, and Lithuania, South Korea took measures to prevent further such economic coercion from China. First, South Korea pursued supply chain diversification to areas like Southeast Asia and India (the ‘China+α strategy’), mitigating vulnerabilities by reducing economic dependence on China. The South Korean government has also leveraged the Biden administration’s reshoring policy to achieve this goal. These changes not only reduced the vulnerability of South Korea’s supply chain, but also strengthened the US-ROK alliance.

China’s economic coercion has been a major factor in South Korea’s deteriorating public perception of China. In a Pew Research Center survey of 19 countries, South Korea, along with Japan and Australia, had one of the highest rates of unfavourable perceptions of China: 80% of South Koreans have an unfavourable view of China, compared to only 19% who have a favourable view. The change in the public perception of China is a domestic political factor that has allowed the South Korean government to move away from strategic ambiguity and pursue a more proactive economic and security strategy.

Second, South Korea has reframed its new economic security strategy in the context of upgrading the US-ROK alliance. The Moon-Biden summit in May 2021 affirmed the importance of high-tech industrial cooperation from an economic security perspective. The two countries agreed to establish the KORUS Global Vaccine Partnership to enhance their joint response to COVID-19. The decision to promote complementary investments in semiconductors and batteries, which are key items in the supply chain restructuring strategy, illustrates the shift in South Korea’s pursuit of an economic security strategy through enhanced cooperation with the US.

This shift has become even more pronounced under the Yoon administration, which took office in May 2022. The fact that the US-ROK Summit took place just 11 days after Yoon’s inauguration, and that President Biden’s first stop during his visit to South Korea was to Samsung Electronics’ Pyeongtaek semiconductor plant, was a strong signal that the two countries would expand and strengthen cooperation in high-tech industries. As President Yoon stated, ‘We hope to develop the relationship into an economic security alliance based on high-tech and supply chain cooperation.’ On this basis, the two countries agreed to elevate the relationship to a global comprehensive strategic alliance. This change marks the alliance as a key pillar in South Korea’s new economic security strategy.

Third, the Japanese government’s decision to remove South Korea from the ‘white list’ – a list of countries which benefit from preferential treatment in trade – in July 2019 was a crucial turning point in the transformation of South Korea’s economic security strategy. South Korea viewed this decision as imposing de facto export controls (although in the last few weeks, South Korea and Japan have both been restored to each other’s ‘white lists’). At the time, Japan’s export restrictions directly targeted key high-tech industries in South Korea, highlighting the importance of a proactive response to economic coercion – reactive approaches would not only disrupt the economy but increase the political risk of being blamed for failing to pre-empt such crises. Again, this reaffirmed the South Korean government’s decision to adopt a proactive economic security strategy that promotes supply chain diversification and technological innovation.

Since 2019, the South Korean government has introduced various measures to secure its economic and technological sovereignty. Given that Japan’s economic coercion was aimed at restricting the export of key materials needed to produce semiconductors, there was growing concern in South Korea that export restrictions on some materials could disrupt production in South Korea’s semiconductor industry. The government selected 100 strategic items in the areas of materials, parts, and equipment and began work to increase domestic self-sufficiency. In addition, they designated 12 national strategic technologies in 2022 and pledged to invest 25 trillion won over the next five years (£15 billion). These national strategic technologies included semiconductors, displays, secondary batteries, advanced means of transportation, next-generation nuclear power, advanced biotechnology, aerospace/marine, hydrogen, cyber security, artificial intelligence, next-generation communications, advanced robotics/manufacturing, and quantum technologies.

In pursuing this new economic security strategy, the South Korean government has taken advantage of high technology as a nexus between economic and security priorities. For South Korea, cultivating manufacturing capabilities in high-tech industries such as semiconductors and batteries has emerged as the best means to pursue proactive economic statecraft. High-tech competitiveness is a means not only to respond to China’s economic coercion, but also to advance cooperation with the United States to improve South Korea’s innovation capabilities. 

The way forward

In shifting to a proactive economic security strategy, South Korea has largely focused on reducing its existing vulnerabilities. It is now time for South Korea to consider the next stage of its economic security strategy. 

First, South Korea must find more effective ways to develop linkages between economic and security policy initiatives. Promoting advanced technologies is an obvious way for South Korea to mobilise the linkages between economic and security policy. 

Second, in the era of hyper-uncertainty, major countries are tempted to compete for economic and technological sovereignty. The greater the uncertainty, the greater the motivation to pursue one’s own interests at the expense of other countries. Looking back at historical cases, however, the exclusive pursuit of economic sovereignty hampered the institutional foundation of the rules-based international order. The erosion of the rules-based order is bound to have serious consequences for South Korea due to the role of global institutions and alliances in maintaining peace there. South Korea’s economic security strategy should therefore prioritise ‘inclusivity’ rather than exclusivity, taking advantage of its high-tech capabilities as a means to boost international cooperation with like-minded countries.

The key to South Korea’s economic security strategy is risk management instead of the maximisation of interests. To this end, South Korea needs to combine a variety of policy tools to pursue diversification effectively while also integrating developments in the commercial sector into its economic security strategy. Achieving this is not easy, and conflicts and inconsistencies between various policies may emerge. But South Korean policymakers must realise the potential reward for resolving these trade-offs, and continuously recall the historical evidence which demonstrates the costs of inaction in economic security strategy. 

The views expressed in this article are those of the authors, and do not necessarily represent the views of The Alan Turing Institute or any other organisation.