South Korea in the new geoeconomics: Digital economy

On January 26, 2022, the Center for East Asia Policy Studies at the Brookings Institution convened a group of experts from the United States and South Korea for the second workshop in a series to assess South Korea’s role in the new geoeconomics and its implications for U.S.-South Korea relations and South Korea’s economic diplomacy in Asia. The theme of the second workshop was the digital economy. Both the U.S. and South Korea have signaled the digital economy as an important area to deepen bilateral cooperation, specifically in emerging technologies, 5G networks, semiconductor and EV battery supply chains, as well as tech standards. This commitment was emphasized by the allies at the spring 2021 summit between U.S. President Joe Biden and South Korea President Moon Jae-in.

The workshop opened with framing remarks provided by two experts who offered analysis from the points of view of South Korea and the United States. Chul Chung, senior research fellow at the Korea Institute for International Economic Policy (KIEP), highlighted that the focus on bilateral cooperation in digital economy issues has continued beyond the Moon-Biden summit with statements by South Korean Trade Minister Yeo Han-koo and United States Trade Representative Katherine Tai at the Joint Committee Meeting on the U.S.-Korea Free Trade Agreement (KORUS FTA) in November 2021. Chung singled out semiconductor, battery, and network industries as the key digital industries South Korea should focus upon, all of which have been complicated by U.S.-China competition, pandemic-related global supply chain disruptions, and climate change. Strategic areas of cooperation within these industries could include improving manufacturing capacity, cultivating R&D and facility investment, enhancing private sector cooperation, securing next generation core technologies, and strengthening legislation and institutional support.

Chung explained that as demonstrated by the Digital Economy and Society Index (DESI), which measures individual countries’ digital performance and progress in digital competitiveness, the U.S. is at the front of the pack. Although the U.S. holds the largest share of the global semiconductor market at more than 50%, semiconductors are South Korea’s top export. South Korea therefore maintains an important role as a major producer of memory semiconductors. China, as the top global chip consumer at over 60% market share as of 2019, remains a very influential market player, even though its chips do not reach the cutting-edge technical standard of those produced by U.S. allies. The impressive standing of the United States and South Korea in the digital economy provide opportunities for bilateral cooperation, and point to areas with room for improvement as well. South Korea would benefit from improving productivity levels by implementing policies that better diffuse technology across the economy, and address digital skills gaps present between SMEs and large firms and between generations.

According to Chung, the most prominent challenges for digital economy are the fragmentation of digital rules and standards, and non-interoperability of digital systems. Policymaking to address these concerns will require consistency and transparency in global rules and standards, efficiently building out infrastructure and connectivity, emphasizing public-private partnership, and garnering international cooperation. The Korean New Deal launched by the Moon administration to create jobs, support the transitioning to a digital/green economy, and grow South Korea’s role as a post-pandemic global leader, is a crucial step for South Korea in tackling these challenges.

Next, Clara Gillispie, senior advisor to the National Bureau of Asian Research (NBR), offered her framing remarks. She stressed that South Korea is an important partner for the United States on digital issues more broadly, and in achieving the Biden administration’s agenda for digital development in the Indo-Pacific specifically. Gillispie emphasized that South Korea is betting big on the next wave of digital transformation at home with the Korean New Deal and abroad with its New Southern Policy which enhances its ties to Southeast Asia and India. While Washington and Seoul have not always been on the same page on how to implement digital development in Asia, the joint statement from the 2021 Moon-Biden summit reflected a shared understanding of the importance of digital cooperation in the alliance relationship.

According to Gillispie, enhanced bilateral cooperation in the Indo-Pacific could take several forms, including new joint efforts on improving regional connectivity, supporting regional regulatory and legal capacity building, and strengthening regional data governance norms and values. Connectivity is a longstanding theme of cooperation between the U.S. and South Korea, but there is opportunity for further engagement in this space, especially given that two billion people still lack basic internet access in the region. The allies may seek to help build out not only cutting-edge 5G and 6G networks in the Indo-Pacific, but also provide support for systems built using 4G and other earlier standards, as a number of countries are anticipated to continue to use these standards for years to come. Furthermore, South Korea has not only been a global leader in the roll-out of 5G and other emerging technologies, but it has also demonstrated skill in carefully balancing the use of big data to address emerging societal challenges (such as the COVID-19 pandemic) while ensuring accountability of such tools to democratic governance. South Korea could thus be a key partner to countries in the region that are looking to update their own legal frameworks around digital development, including sharing its own lessons learned in tackling reforms. Promoting privacy rights could be an additional area of cooperation between the allies.

However, Gillispie explained that it will be essential for the allies to also make progress on addressing their own domestic digital innovation challenges if they hope their respective approaches to digital development might be viewed as among regional best practices. South Korea, for example, must resolve the issue of SMEs struggling to achieve the same results in data applications that larger firms have achieved, and the U.S. must address issues with capacity building and competitiveness in certain manufacturing sectors. Trade agreements and non-binding principles are two tracks available to implement cooperative projects. The allies should also take advantage of existing mechanisms already in place such as prominent fora (APEC, G20, East Asia Summit) and look to build digital trade initiatives into the Biden administration’s Indo-Pacific Economic Framework.

A common theme that emerged in the subsequent group discussion was how American and South Korean views align and diverge regarding China’s rise as a digital power, and how U.S.-China rivalry will affect the future of the digital economy and relevant industries. Most participants agreed that Seoul will need to carefully balance its relationships with the United States and China; South Korea will likely follow U.S. strategy and comply with many U.S.-led rules, restrictions, and export controls, but South Korea does not want full-scale decoupling and will make efforts to retain some access to the lucrative Chinese market. Some participants also contended that U.S. tech policies should not necessarily aim to single out certain countries attributing malign intent (China) since such policies are difficult for allies and partners to publicly support. Rather, the U.S. should aim to stamp out undesired practices, and rules should be uniformly applied to all countries and their firms.

South Korea is a critical partner to the Biden administration’s supply chain resilience initiative in semiconductors and EV batteries. Workshop participants stressed the importance of reducing dependency on China for crucial components and a complete end-to-end evaluation of supply chains in these key industries. While South Korean firms are building most of its high-capacity plants in the U.S.  for EV batteries in the coming years, it still sources component materials such as cobalt from China which presents a potential chokepoint in production. For semiconductors, one participant noted that the focus of the U.S. is not on denying China access to the chips themselves, but rather limiting Chinese access to cutting-edge manufacturing equipment that would allow China to build out capacity surpassing that of the United States; Such a distinction is important to South Korean semiconductor firms operating in China.

Another discussion theme was the prospect of a digital economy agreement involving South Korea and the United States. Participants broadly agreed that binding rules will be crucial to any potential agreement. It was noted that Washington appears to have shifted its stance over time in support of soft (i.e. non-legally binding) commitments and dialogue, but Seoul would prefer the clarity and predictability that come with binding rules and enforcement mechanisms. Several participants agreed that a bilateral deal is a more manageable starting point than signing onto a regional deal such as the Regional Comprehensive Economic Partnership (RCEP) or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which could take significant time. Options might include upgrading the e-commerce chapter of the KORUS FTA or initiating negotiations through the Indo-Pacific Economic Framework. The U.S. Congress has indicated that the U.S.-Japan digital agreement could serve as a model for future negotiations. However, the risk of fragmentation in data governance between a closed model (China) and an open model (U.S., South Korea, Japan, and others) was repeated by participants as a concern.

While the 2021 Moon-Biden summit signaled a strong commitment to bilateral cooperation on digital issues, one participant noted that the upcoming (March 9) presidential election in South Korea could be a potential turning point for even deeper cooperation; all candidates have introduced digital-related pledges that demonstrate a growing concern over digital issues in South Korea. Finally, biotech and biodata were repeatedly mentioned by participants as a sector for future cooperation.