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Some Korean companies have found themselves caught in the middle of the intensifying trade war between the U.S. and China. The U.S. has applied sanctions on Huawei, China’s biggest provider of telecommunications equipment. China, of course, has not sat idly by, threatening retaliation. The escalating trade feud between the world’s two largest economies is putting South Korean firms in an increasingly difficult situation. With more, here’s Cho Yong-chan, director of the America China Economic Research Institute. 

The U.S. and China are in a fierce battle for fifth-generation or 5G leadership. Washington’s ultimate goal in this high-tech war is to drive Huawei out of the 5G network. For that purpose, the U.S. is likely to blacklist companies that refuse to join its anti-Huawei campaign. 

During a security forum in Seoul on June 7th, U.S. Ambassador to South Korea Harry Harris said that the U.S. is naturally concerned about the security implications of how the 5G network will be instantiated across Korea but that he is confident the U.S. and South Korea, as allies and friends, will work through these issues together. Clearly, the U.S. was pressuring Korea to take its side and stop doing business with Huawei. 

The U.S.-China trade conflict is not about a mere trade imbalance but more about gaining supremacy in the economy, technology and national security overall. What started as a trade war is expanding into a hegemonic battle between the world’s two major economies. Drawn into their clash, South Korean firms are being asked to choose which side they would like to be part of. 

On May 15th, U.S. President Donald Trump signed an executive order that effectively prohibits American firms from doing business with foreign telecom companies believed to pose risks to national security. The following day, the U.S. Department of Commerce placed Huawei and nearly 70 affiliates on an entity list restricting their access to U.S. suppliers. The U.S. has been urging its allies, including the European Union, Canada and Australia, to abandon Huawei’s equipment for 5G network services. South Korea is also under mounting pressure from the U.S. to join its Huawei boycott. 

If Korean chipmakers such as Samsung Electronics and SK Hynix join the U.S.-led campaign against Huawei, they will be hit hard by uncomfortable relations with China. Huawei is one of Samsung Electronics’ five largest customers. Samsung supplies semiconductors and displays to Huawei, although it competes with the Chinese company in the smartphone market. For SK Hynix, nearly half of its total sales are from China. 

Other Korean manufacturers that have invested in China will also take a significant hit. Industry sources say that as many as 30 to 40 affiliates of Korea’s four largest business groups operate production bases in China. 

Samsung Electronics produces NAND flash chips in Xian, while SK Hynix operates a DRAM plant in Wuxi. The two firms each provide Huawei with chips worth about 4.5 billion US dollars annually. Another Korean tech firm, LG Electronics, is operating production lines in eight Chinese regions, including Nanjing. LG Display also plans to start mass production of organic light emitting diode or OLED panels in Guangzhou in the second half of this year. 

But if Korea joins the U.S. sanctions on Huawei, Korean factories in China could face sanctions from Beijing. 

Amid the U.S.-China trade dispute, Korean companies are most concerned about the possibility that Beijing may slap sanctions on their plants in China. It is highly likely that the Chinese Commerce Ministry will blacklist Korean firms if they join the U.S.-led boycott of Huawei and stop providing their parts to the Chinese tech company. 

If the past is any guide, Korean companies had to bear the brunt of China’s economic retaliation a couple of years ago when South Korea deployed the U.S.-led Terminal High Altitude Area Defense or THAAD anti-missile system. For example, the Beijing government sanctioned Korean retail chain Lotte Mart in China, citing fire and hygiene regulations. In March 2017, 87 out of 99 Lotte Mart grocery stores across China faced business suspensions. Lotte Mart had to pull out of the country last year. Also in 2017, Lotte Shanghai Food Corporation’s chocolate factory was ordered to stop operation. The corporation was a joint venture between Lotte Confectionery and American chocolate maker Hershey’s. 

If the Chinese authorities impose sanctions on Korean semiconductor plants, taking issue with hygiene and environmental problems, there is no means of avoiding them. 

According to the New York Times, the Chinese government has recently summoned global IT companies and warned of dire consequences if they join the Trump administration’s trade restrictions against China and Huawei. 

There are concerns that South Korea might get caught in the crossfire amidst an intense tug-of-war between the two superpowers, as evidenced in China’s retaliation against South Korea over the THAAD dispute. If that happens, Korea’s export-dependent economy will face a serious setback. China and the U.S. were Korea’s two largest trading partners last year, accounting for nearly 40 percent of its total exports. Last month, China took up about 78 percent of Korea’s semiconductor exports. 

But some analysts note that the anti-Huawei campaign may not be entirely bad news for Samsung. 

In terms of the global 5G network equipment market share last year, Huawei came in first, followed by Ericsson, Nokia and Samsung. But in the first quarter of this year, Samsung Electronics ranked first in the 5G equipment market and the smartphone market as well. Apparently, Huawei is being replaced by Samsung, which, in some way, seems to be benefiting from the U.S. campaign against Huawei. 

The U.S.-China trade tension could also positively influence Korea’s exports to the U.S. In the first quarter of the year, imports of Chinese goods fell 24.7 percent on-year in U.S. markets with Chinese products subject to import restrictions, while imports of Korean products rose 20.5 percent. The U.S. has imposed maximum 25 percent tariffs on Chinese imports on three different occasions since July of last year, helping some countries like South Korea, Taiwan and Vietnam increase their exports to the U.S. In those U.S. markets, the market share of Korean products was 3.4 percent last year but rose to 4.1 percent this year. 

Huawei is competing with Samsung Electronics in the global market for 5G mobile telecom equipment and smartphones. Therefore, sanctions on the Chinese firm might be an opportunity for the Korean company. Samsung aims to achieve a 20 percent market share in the global 5G communication equipment market by 2020 and hopes to increase its global smartphone sales. Huawei’s smartphone sales last year amounted to some 205 million units, but other phone makers could expand their market share if the Chinese firm struggles with the U.S. sanctions. 

However, protracted sanctions on Huawei will negatively affect the industry overall. Shrinking demand for IT devices will lead to a decline in chip prices and the exclusion of 5G equipment from Huawei may slow the process of building the 5G network. 

The best-case scenario would see the U.S. and China settle their trade dispute at the G20 summit at the end of this month. If they fail to reach a compromise, however, Korea will have to brace for various contingencies.

Some say that Korea needs to choose between the U.S. and China, but I think it’s important for Korea not to make an enemy for the sake of its own national interests. To get closer to the U.S. and maintain friendly relations with China at the same time, Korea needs to promote communication among the government, industries and the academia, and enlist their cooperation. The corporate sector should work on Plan B to prepare for the worst. 

According to Bloomberg Economics’ estimates, an all-out trade war between the U.S. and China could cost the global economy 600 billion US dollars. The fallout may deal an even greater blow to the Korean economy, which depends heavily on the two major economies. Amid their hegemonic rivalry, I think Korea needs to strike a balance carefully and strategically. 

The government will have to carry out its diplomatic policy in a balanced way to prevent another crisis similar to THAAD from occurring.