Why China wants South Korea to stay open

By Tim Culpan

Beijing has good reason to push Seoul to keep its doors open. The motivations are driven less by a belief in free trade and more about the emerging sectors where China is becoming a global leader, areas of South Korean industry most vulnerable to new competition.

Both sides should “maintain stable and smooth industrial and supply chains” between them and the world, Chinese Premier Li Qiang said Sunday ahead of the two nations’ three-way summit this week that included Japan. “China is ready to work with South Korea to accelerate the second phase of China-South Korea Free Trade Agreement negotiations,” the official Xinhua News Agency cited Li as saying.

In geopolitics, there’s no such thing as free-trade absolutism. Countries pick and choose which counterparts are offered unfettered access and which have tariffs blocking their path. If leaders sense a rival may have a competitive edge, then barriers go up; the US escalation of duties against Chinese electric vehicles and solar cells are one example. China hasn’t been innocent either, raising import taxes on US products in response to the trade war started by the Trump administration.

With South Korea, though, China seems happy with the current situation. That's because Beijing is fast catching up in the export sectors dominated by its neighbour. South Korea remains technologically superior, yet its value to Beijing is as a supplier of know-how, not the final goods that come out of the factories. Continued open access to more-advanced providers is crucial for China to get its hands on the people and equipment required to close the gap with rivals including South Korea and the US.

Memory chips, cars — especially EVs — and shipbuilding are among industries with the greatest potential in the world’s second-largest economy, and categories where it has, or may soon, become a global leader. For decades they’ve also been South Korea’s biggest industries.

In shipbuilding, South Korea was once the world's premier supplier and remains a major source of new vessels, driven by the Hyundai, Samsung and Daewoo chaebol. But China took the top spot five years ago and keeps growing, closing in on 50 per cent of worldwide market share.

Samsung Electronics Co. and SK Hynix Inc. between them make 77 per cent of the world’s DRAM chips and 58 per cent of all NAND-flash, the two key types of memory semiconductor. But Chinese firms, unlikely to ever catch up to Taiwanese and US counterparts in the more-complicated logic chip market, are gaining ground in this subsector.

Then there’s automobiles. EV giant BYD Co. has already drawn level with Tesla Inc. in vehicle output. Add in dozens more names, including Geely Automobile Holdings Ltd. and SAIC Motor Corp., and you get a car industry that rivals a collection of South Korean players like Hyundai Motor Co. and KIA Corp., especially in the new realm of electrified models.

The main purpose of tariff barriers is to tilt the playing field in favor of locals, often to protect jobs or profits. There’s also an argument to be made that they can help shield young industries from stronger rivals, allowing a domestic ecosystem to sprout. We’ve seen this with the Make in India campaign that spurred a boom in local production of smartphones and computers.

Many Chinese companies don’t require this umbrella anymore, and Beijing knows it. Instead, what they need is unfettered access to the machinery, materials and engineering talent that will allow China’s semiconductor, EV and shipbuilding businesses to keep thriving.

It’s no wonder that Li wants to encourage South Korean companies to invest and do business in China. Beijing isn’t worried that Samsung, Hyundai or Daewoo will outcompete with locals on their home turf. But it knows that their presence will ensure a continued supply of the factors of production: equipment, chemicals and labour. That last item is most crucial.

While China has a history of stealing technology and forcing partners into joint-venture deals, there’s also a lot to be gained simply by having foreign development, engineering, and manufacturing teams on the ground. Technology transfer doesn’t just happen from hacking computer systems or buying patent portfolios. It occurs through having local and foreign teams working alongside each other.

Seoul needs to ask what it gets in return. Foreign automakers are pulling out of China, President Xi Jinping has made clear he wants the nation to be semiconductor-independent, and there’s little chance state-owned enterprises will buy vessels from overseas shipyards. At best, South Korean firms may have the opportunity to temporarily fill gaps left by US suppliers in areas like electronics, industrial goods and equipment in China. But that’s only until a local company gets strong enough to replace the foreign alternative.

In today’s fractured world, international cooperation should be encouraged. But no one should be lulled into believing there’s anything free in a modern-day free-trade deal.