Reshoring is double-edged sword for Korea
Higher labor costs may damage competitiveness
The government should take a more cautious approach in its drive to bring manufacturing back home, known as its reshoring initiative, as it can be a double-edged sword for the Korean economy which relies heavily on exports, experts said, Sunday.
Pushan Dutt, a professor of economics at INSEAD, said “All firms will want to build resilience, sacrificing efficiency for resilience.”
But at the same time he noted, “For export-oriented advanced economies like Korea, reshoring means that the products they export will be more expensive and less competitive.”
For an economy in which exports account for about half of the GDP, reshoring may be a highly costly strategy.
The cautious advice came as President Moon Jae-in said during his address marking three years in office, May 10, that his administration would push to attract Korean businesses to return their production and manufacturing operations here.
The renewed drive comes after manufacturers suffered disruptions in global supply chains due to shutdowns around the world amid the COVID-19 pandemic and as economies around the world seek to more effectively secure key supplies.
“We will push ahead with bold strategies to attract hightech industries and investments from overseas as well as to help Korean companies return from abroad,” Moon said, noting Korea has been recognized as a “safe and transparent production base.”
For Korean businesses seeking to bring their operations here from abroad, the government is offering incentives such as exempting them from corporate tax and subsidizing the costs of setting up smart factories. Support has been increased since March.
Those subject to receiving subsidies are manufacturers and businesses in knowledge services or ICT.
The government has stated reshoring will create new jobs amid growing unemployment caused by the COVID-19 crisis.
However, the associated costs of relocating make this a difficult decision for businesses. Higher labor costs than that of China or other Southeast Asian countries will pose a significant burden for companies.
In a survey conducted by the Korea Economic Research Institute (KERI) in 2018, 16.7 percent of businesses said they have no intention of reshoring due to high wage costs in Korea. This was the second-most-cited reason for not considering relocating, after the need to have a physical presence in overseas markets to grow business there, at 77.1 percent.
Among those surveyed, 5.6 percent said regulations in Korea made operations here unattractive for them.
Regarding increased labor costs, an official of the trade ministry said the government is providing employment subsidies.
“The government provides up to 600,000 won in subsidies per person for up to two years,” she said.
Some experts say the paradigm is shifting for businesses, so that costs are no longer the top priority.
“After experiencing disruptions in supply chains, it has become difficult for businesses to take only a cost-based approach,” said Lee Sang-ho, a senior researcher at KERI.
In the meantime, it is unclear whether the expected effects of job creation will be seen.
A study by KERI stated the reshoring of 5.6 percent of the businesses surveyed earlier would generate 130,000 new jobs here.
The figure accounts for businesses that are likely to reshore if the government eases existing regulations, which they cited as a deterring factor.
However, Dutt noted that automation will limit the creation of jobs.
“The jobs created will be for robots that are not susceptible to infection, not for people. So even if jobs are created they may be fewer than there would be in a world absent of COVID-19.”