1. How has globalization retreated, and why is this especially concerning for South Korea?


So, I would not argue that deglobalization is occurring,
but rather that the earlier period of hyperglobalization,
where cross-border transactions of all kinds grew even faster than world output,
than world GDP, that earlier period of hyperglobalization is over.
And I think we are still observing global trade and global cross-border financial flows expanding along with the world economy. 
So, globalization remains a fact, although it is being reconfigured.
So, hyperglobalization ended with, in my view, the global financial crisis of 2008, 2009.

That was a reminder that an integrated world economy, especially a financially integrated world economy, is a fragile thing. 
In the advanced countries, there was the feeling that Wall Street was rescued, but Main Street was not.
And that reinforced the view that certain sectors and factors of production,
financial markets, capital benefit from globalization more than does labor. 
Inequality became more prominent in the wake of the global financial crisis.
And that then encouraged something of a populist backlash.

We had it in the United States in the form of Donald Trump.
They had it in Europe in the form of various right-wing politicians and parties. 
They had it in the U.K. in Brexit. And you had it in South Korea as well. 
So, those were the events, I think, that really marked the transition. 
Now, we have, in addition, heightened tensions between the U.S. and China.  
And that poses a challenge for globalization because those are the two big economies.

and I should say something about the second part of your question.
Why is this particularly a challenge for South Korea?
South Korea has been an export-oriented economy from the start, if you will,
from the start of the high-growth period in the 1960s, deeply integrated into and dependent on export markets.
As the country developed and grew and became a high-income country, it became dependent on foreign direct investment as well. 
So when there's a wrench in the works of global trade and global foreign investment, 
that's particularly a problem for a country like South Korea, which is much more open, has a higher ratio of exports to national income
and foreign investment to national income, than does a country like the United States.


2. What lessons did Korea learn from the 1997 Asian Financial Crisis, and how did those lessons help it manage later crises?

Korea came into the Asian financial crisis at the end of 1997, 
thinking of itself as a strong and stable economy, because it had had a good run. 
So the fact that it was hit by this financial turmoil, that banks failed, and important chaebol went bankrupt, that was a shock.
And I think the positive aspect was that Korean officials and politicians took that shock and did something about it. 
So the first lesson was the importance of regulating the banks and financial markets better. 
So there has not been another financial crisis in South Korea since the end of the 1990s.

I think the other lesson to be drawn was the importance of having a spare tire,
if you will, having capital markets, bond markets to supplement the banks.
So if something goes wrong with the banks, there's another part of the financial sector to keep the economy going. 
A third lesson was the importance of having adequate foreign reserves. 
What happened in 1997-98 in South Korea was a dollar crisis, a sudden lack of adequate dollar liquidity. 
So building up reserves of dollars was seen as important,
and finally sound and stable monetary and fiscal policies, including a more flexible exchange rate.
So part of the problem in the 1990s was that the Bank of Korea was shadowing the dollar, keeping the won too fixed, too rigidly stable against the dollar. 
So Korea, the Bank of Korea, has moved to inflation targeting,
which is a more robust monetary regime that combines credibility with flexibility. 

There was a final lesson where I'm not sure I would declare victory yet, which is in corporate governance reform. 
So the last thing people concluded the country needed to do economically
was strengthen corporate governance, strengthen the boards, the outside directors of the chaebol, and so forth. 
And there has been a bit of progress there, but there's room for significantly more progress. 
So the story is not over.


3. Why does Korea lag behind its peers in service sector productivity, and what are the policy options?

Well, in terms of time, Korea completed this shift from agriculture to manufacturing
and now to services more recently than the U.S. or various European countries. 
So it hasn't had the same window of time to address the problem of raising service sector productivity. 
I would probably not talk about the service sector in Korea, but you really have two service sectors. 
You have a very large, low productivity, small-scale, self-employment-based service sector.
And then you have a smaller, high-tech service sector, software and back office services and so forth. 
     The problem is in the very large, in terms of number of workers, small-scale, self-employment-based service sector, 
where there are a lot of people who take honorable retirement, they're in their 50s,
they leave a large corporation, and they open, I don't know, a newsstand or the corner store or whatever.

However, there are barriers to entry into the service sector,
which allow those low-productivity, small-scale enterprises to survive. 
And I think the limited amount of research and development devoted to the service sector. 
Korea is traditionally a manufacturing-based powerhouse, so the R&D goes toward manufacturing activities, not to services, 
means that South Korea now has a challenge in adapting artificial intelligence to the service sector.

AI is Robots are going to revolutionize manufacturing to an extent, 
but where you will really see AI have an effect is in elder care, health care, legal services, education, things like that. 
And Korea needs to up research and development in that area. 
People in the service sector work long hours. They keep the store open for a long time,
rather than figuring out how their digital assistant can increase the productivity of their work.

So part of the solution is for the big companies, be they software companies or manufacturing companies,
to keep these productive workers on beyond their 50s when they still are productive. 
And given that there are now a more limited number of young people coming into the job market, 
keeping those older workers on in the big companies is not denying advancement to the young folks. 
So I think that's part of the solution as well.


4. Caught between the US and China, what strategies should Korea pursue going forward?

So this is a dilemma without a solution, so far as I can tell. Well, it's a very delicate issue. 
South Korea is a minnow navigating between two whales.
It is sometimes said 20% of the country's exports go to China, 20% of the country's exports go to the United States. 
I think we have seen South Korea drawing a bit closer to the U.S. And distancing itself a little bit from China. 

But China is too large and too close by not to be an important economic partner.
South Korea has done a good job on balance in managing its relationship with Donald Trump. 
We will see whether the large amounts of foreign direct investment
that South Korean companies are now undertaking in the United States
have a payoff in terms of restoring a stable economic relationship between the U.S. and South Korea.

But I think South Korean officials, policymakers can only do the best they can do is keep doing what they've been doing, 
which is to try to maintain their calm, not to be provoked by strong statements from either side, 
because both sides threaten to punish third countries that don't clearly align
with their side in this geopolitical dispute between the two gorillas.

And beyond that, try to maintain its economic relations with both, because there really is no alternative to doing so. 
Having to choose one or the other would be economically disastrous, given the extent of the links between Korea and the two big economies. 
Ultimately, I think the fact that South Korea relies on the United States for defense means that
the country will probably continue to be close to the U.S., assuming that the U.S., for its part, respects and maintains that alliance.
I hope that will be the case.


 

Core Industries in a Red Ocean: Is There a Way Out of the Crisis?

Three sturdy pillars have long upheld the Korean economy
petrochemicals, steel, and shipbuilding. These pillars are shaking.
From China’s indiscriminate flood of exports, to the formidable barrier of carbon neutrality,
to the rapidly shifting geopolitical landscape...

The time has come to fundamentally reassess the very framework of Korean industry.


The Structural Crisis of Korean Industry

Many view the current difficulties as a temporary economic downturn.
But the numbers tell a different story.
Korea’s manufacturing value-added ratio stands at 27.6%, stubbornly below the 30% figure in other major OECD economies.
We may have succeeded in producing things in large quantities, but we have much work to do in capturing commensurate value.
China rules the commodities market, and Korea is now feeling the squeeze.


The State of Korea’s Three Core Industries – Petrochemicals

In the past, the boom-and-bust cycle that dominates the petrochemicals sector was predictable.
But something has broken the cycle, and the industry has been trudging through a downturn for far too long.
The petrochemical sector’s key profitability indicator is known as the ethylene naphtha spread.
This number reached a nadir in the second half of 2022, almost four years ago, but has yet to recover.

The reason for this can be summed up in one word: China. 
By 2022, China was already the world’s largest ethylene producer,
and is now on the verge of becoming entirely self sufficient in every stage of the ethylene value chain.
What was once Korea’s biggest customer has transformed into its most formidable competitor,
flooding markets with low-cost output.

Chinese ascendancy has had direct and deleterious effects on local Korean communities. 
Local tax revenues from the Yeosu Industrial Complex (located near the southern coast of the country) are just half of what they once were.
This has set off a vicious cycle, with devastating effects on nearby commercial districts.


The State of Korea’s Three Core Industries – Steel

The year 2025 will go down as an especially painful one for Korean steel. 
Domestic demand fell to its lowest level since 2002, 
while surging electricity costs added further pressure, some steel plants run
by POSCO, Hyundai Steel, and Dongkuk Steel were forced to shut down or halt operations.

Cheap Chinese steel dumped onto the Korean market is a root cause of the problem, but weak domestic demand is another culprit.
Since the 2000s, China has rapidly scaled up steel production to the point where it now accounts for over half of global output.
The resulting oversupply has forced international prices into a tailspin, and Korean steelmakers have absorbed enormous losses in the process.

Adding to this, the second Trump administration has imposed steep tariff barriers on Korean steel exports.
The impact of the 50% steel tariff on U.S. imports will soon become fully apparent.
The EU too has signaled that it will cut import quotas significantly;
and there is also the Carbon Border Adjustment Mechanism to contend with.


The State of Korea’s Three Core Industries – Shipbuilding

The shipbuilding industry found itself in a prolonged slump following the 2008 global financial crisis.
Orders dried up and losses on foreign exchange derivatives forced many small and mid-sized shipyards to close.
From 2016 onward, losses on offshore plant projects and a continued order drought compelled even the major builders to undergo large-scale restructuring.

A crisis was readily apparent. But an opportunity for a rebound has emerged.
First, Korean shipbuilders maintained their competitive edge in high-value-added segments such as LNG carriers and eco-friendly vessels.
The global energy transition and shifting trade patterns have driven a surge in LNG demand,
while the maritime industry’s push for carbon neutrality has seen demand grow for green shipping options.

Second, favorable winds are blowing from the United States.
Korea’s proposed Korea–U.S. Shipbuilding Cooperation initiative, known as MASGA (Make American Shipbuilding Great Again),
played a significant role in reciprocal tariff negotiations with the U.S.
With its own shipbuilding capacity in decline, the U.S. urgently needs the expertise of Korea,
which possesses the world’s most advanced shipbuilding technology.
Through this bilateral cooperation, Korea’s shipbuilding industry expects to gain access to the U.S. as a major new market.

Three core industries that together constitute the beating heart of Korea’s export-driven economy are
showing signs of malaise, and the illness could spread throughout the national economy.
Korea once took pride in its global leadership, but many of its flagship industries have now been overtaken by China, or are on the verge of it.


What can Korea do? 

If Korea’s core industries are to survive, they cannot rely on the strategies that led to prior successes.
They must either secure commanding technological leads or undertake bold business restructuring to pivot toward high-margin specialty products.

Leaving market forces to determine winners is no longer a viable option.
Around the world, governments are engaged in active policy competition to protect and advance their domestic industries.
Comprehensive support for upgrading the steel industry, including through the K-Steel Act, is urgently needed.

Japan has designated its shipbuilding industry as a national security asset,
The government is providing 1 trillion yen in support, describing the shipbuilding industry as one
that constructs vessels and warships to transport supplies and defend the nation in times of emergency.
Korea, too, needs to see shipbuilding and other core industries as more than just a line item on a spreadsheet.
These are major employers and exporters that are critical to national security.

To revitalize Korean manufacturing and strengthen industrial competitiveness,
we need to develop new growth paradigms and build collaborative systems aimed at upgrading the entire industrial ecosystem.
The government must play an active role in mitigating the risks of technological transition
and accelerating industrial transformation by calibrating R&D, infrastructure, and regulatory frameworks.

Korean industry – Don‘t just prepare for the future — make it. A crisis is an opportunity. 
 

The First Crisis
Stalled Out: Weakening Industrial Competitiveness

The most obvious symptom of the Korean economy’s deteriorating health is the annual economic growth rate,
which now hovers in the 2% range, making the 5% rates posted just after the turn of the millenium seem mythical by comparison.
The Korean economy has, in other words, gotten real old, real fast.
And not just old, but ossified. How do we know this? Twenty years ago,
Korea’s main exports were semiconductors, cars, and chemicals.
Today, Korea’s main exports are...semiconductors, cars, and chemicals.
The economy lacks dynamism; there‘s no new blood circulating through its veins.
Over the past decade, the percentage of new market entrants has fallen to 6% from 9%;
market exits by incumbent firms also fell from 7% to 5% over the same period.
The patient not only has a weak heart, but a poor metabolism as well.


The Second Crisis
Cracks in the Facade: Declining Innovation Capacity

The patient looks weak. And the internals are in even worse shape.
The economy is plagued by numerous marginal enterprises,
or zombie firms, whose profits aren’t enough to pay the interest on their debts,
let alone the principal. Since the COVID pandemic, the number of marginal enterprises has skyrocketed.
The risk of widespread corporate insolvency is real and growing.
Having so much capital tied up in zombie firms hinders innovation.
Korea is considered an AI powerhouse,
but AI adoption rates in the country’s enormously important manufacturing sector sit at just 3.9%.


The Third Crisis
Storms Abroad: Upheaval in the Global Environment

To make matters worse, the playing upon which Korea achieved so much success — the global free trade regime — has been ripped out.
The Inflation Reduction Act (IRA) and the CHIPS and Science Act were the tools through
which the US did the deed. Both laws provide massive subsidies to firms that invest in the US.
This is why Samsung builds new factories in Texas and Hyundai puts up new production lines in Georgia instead of Korea.

And it would be a mistake to think of the current global trade environment has one of mere ’disputes.’ In 2023,
71% of all trade-distorting policies were promulgated by advanced countries that directly compete with Korea.
What we’re seeing is a fundamental transformation of the global industrial environment.
Korea was one of the first fast-followers and one of that model’s greatest success stories.
But it no longer represents a viable survival strategy.

Another issue: The green transition is coming and Korea is not ready for it.
The European Union (EU) Carbon Border Adjustment Mechanism (CBAM) is imminent,
but Korea’s energy mix remains dominated by fossil fuels, with renewables account for just 9.5% of power generation.
This lags far below global leaders like Germany (57.3%) and even China (32.6%).


Four Strategies for Tackling Korea’s Industrial Crisis
Strategy 1: AI and the Green Economy

We propose four strategies for tackling Korea’s multifaceted industrial crisis.
The first: embrace the AI-powered future.
It will not be enough to merely adopt new technology: Korean firms need to address real world-problems using AI solutions.
For example: wearable robotics embedded with AI tech for use in the construction sector and other industries
that are now suffering from a major shortage of skilled workers.

The same goes for green technologies. For POSCO, Hyundai, or any other major steelmaker to spend billions to convert
their pollution-intensive blast furnaces to more eco-friendly solutions (hydrogen-reduction, for example),
the government would have to implement Carbon Contracts for Difference (CCfDs)
or some other mechanism in order to offset risk and get companies moving down the path of decarbonization.


Strategy 2: Policy Reform

Among other things, Korea’s industrial innovation system is in need of a major overhaul,
and this has to start with a change in the industrial R&D ecosystem.
Rather than being misled by the ostensible 90% success rate,
industrial R&D should be assessed on the basis of their real market outcomes.
Industrial innovation is what happens when technologies achieve success in the market.

Korea also needs to completely reconsider its approach to attracting investment.
Successfully attracting investment requires a mix of tax incentives, financial subsidies, and human resources support.
Currently, these functions fall under the purview of different ministries.
This dispersed and opaque system makes attracting large-scale investment from global firms extremely difficult.

The country also needs to shift refocus its investment attraction efforts from firms to projects.
Korea should make every effort to participate in projects led by global leaders;
this will help build out entire industrial ecosystems in Korea, rather than just individual firms.

Another thing to consider: Korean firms make a lot of money overseas,
but currently have little incentive to repatriate this money and reinvest profits in Korea.
The government needs to see capital repatriation as a kind of capital “reshoring,”
and offer benefits commensurate with those extended to foreign firms investing in Korea.

As for the country’s zombie firms, the solution is not to simply let them close their doors forever.
The government needs to let firms capable of growing realize their potential by allowing them to divest unprofitable
or low-value-added lines of business and shift to newer or more promising ones.
Policies that enable this can create new engines of economic growth,
but will require proactive and attentive policy support.

As for the regulatory regime, well — reform requires a top-down approach.
We need to analyze and reform laws and policies that act as constraints on entire industrial sectors.

Regulatory reform should be done on a case-by-case basis.
We should seek to make improvements to individual statutes to maximize regulatory consistency
and predictability and drive tangible change at the country’s businesses.


Strategy 3: Recalibrating Korea’s Foreign Policy

Next up: Korea also needs to rethink its global strategy.
For one, it needs to expand and strengthen cooperation with the US in critical strategic industries like biotech and semiconductors.

And when it comes to China, Korea should pursue a bifurcated strategy.
In areas where we still have the advantage, it is crucial that we maintain a super-gap with the Chinese competition.
In other areas, it is best to take a more pragmatic approach, and determine
where Korean firms can leverage the Chinese market and advanced manufacturing supply chains,
seeking out collaborative opportunities in segments where they are competitive.
For example, Korean suppliers could look to sell advanced electrical components to the Chinese EV sector.


Strategy 4: Upgrading Key Industries and Fostering Future Growth

Finally, Korea must address two other major challenges simultaneously.
The country must help its incumbent industries climb up the value-added ladder
while at the same time fostering an ecosystem that can create the next Samsung or Hyundai.

This is a daunting task. It’s like building a new ship while navigating a storm on the old leaky boat.
But we live in extraordinary times, and seeing Korean industry through the storm will require marshaling every resource available.


 

(Intro)
Hello. My name is Kyung-in HWANG, Director of the Office of Public Relations and Media at the Korea Institute for Industrial Economics and Trade (KIET).
As KIET marks its 50th anniversary, we are hosting a series of dialogues with leading international scholars
in which they share their insights on rapidly changing industrial conditions and major policy issues.

Today, we will be speaking with Dr. Guy Lalanne, Acting Head of Division — Productivity, Innovation, 
and Entrepreneurship at OECD Directorate for Science, Technology and Innovation.
Lalanne previously served as Deputy Director of the Macroeconomic Forecasting Division
and the Business Policy, R&D and Innovation Division at the French Ministry of Finance. 


Q1.
We understand the OECD recently built a database called QuiS,dedicated specifically to industrial policy.
Could you explain the background behind this initiative?

Q2.
Many countries are pursuing industrial policy on a significant scale, leading some to declare that we have entered a new era of muscular industrial policy.
However, in your contribution to IER, you note how the number of announced policies far exceeds the number of policies that have been actually implemented.
Are we really in a new era of tough industrial policy?

Q3.
In terms of policy instruments, direct fiscal support has been increasing, while the use of financial instruments (such as the creation of funds) appears to be declining.
What do you think is driving countries to choose this particular mix?

Q4.
Another notable feature is that once industrial policies are introduced,
they tend to persist over long periods without sunset clauses or termination, regardless of their effectiveness.
What do you see as the underlying cause of this tendency?

Q5. Looking at the areas receiving support, there has been a sharp increase in spending on the green transition, SMEs, and rising energy costs.
In your view, which of these areas is most likely to contribute to long-term productivity growth?


(Outro)
So far, I have been talking with Professor Guy Lalanne.
The 50th Anniversary Special Project: Dialogues with International Scholars will continue in the future,
so please show your interest and watch.
Thank you. 

 

(Intro)
Hello. My name is Kyung-in HWANG, Director of the Office of Public Relations and Media at the Korea Institute for Industrial Economics and Trade (KIET).

As KIET marks its 50th anniversary, we are hosting a series of dialogues with leading international scholars
in which they share their insights on rapidly changing industrial conditions and major policy issues.

Today we will be speaking with Shujiro URATA, Professor Emeritus at Waseda University.

Professor Urata is also chairman emeritus at the Research Institute of Economy, Trade, and Industry (RIETI) in Tokyo,
a Specially Appointed Fellow at the Japanese Center for Economic Research (JCER),
a Distinguished Senior Fellow at the Institute of Developing Economies (IDE-JETRO),
and chairman of the East Asian Economic Association (EAEA).


Q1.
Professor, you spoke about the global resurgence of industrial policy, including in Japan.
My first question is whether you could briefly walk us through how Japan's industrial policy has evolved since the end of World War II.

Q2.
As a leading authority on the Japanese economy, how would you assess Japan's industrial policy over the years?

Q3.
You have argued that the race among major countries to roll out competitive industrial subsidies could have unintended consequences.
What implications do you see this carrying for Japan?

Q4.
The semiconductor industry is arguably the single most important industry for both Korea and Japan.
And so I can’t can’t help but ask you the policies the Japanese government has pursued to foster its semiconductor industry.
Could you give us a brief overview?
What should Korea do to strengthen its own semiconductor industry?

Q5.
Lastly, I’d like to ask about the relationship between Japan and Korea.
These two countries find themselves caught between the United States and China,
occupying a dual role as both competitors and allies.

What does the future hold for this dyad?


(Outro)
So far, I have been talking with Professor Shujiro URATA.
The 50th Anniversary Special Project: Dialogues with International Scholars will continue in the future,
so please show your interest and watch.
Thank you. 
 

(Intro)
Hello. My name is Kyung-in HWANG,
Director of the Office of Public Relations and Media at the Korea Institute for Industrial Economics and Trade (KIET).

As KIET marks its 50th anniversary,
we are hosting a series of dialogues with leading international scholars in
which they share their insights on rapidly changing industrial conditions and major policy issues.

Today we're talking with ITIF President Rob Atkinson.

Rob Atkinson is the founder and president of ITIF,
one of the world’s leading science and technology policy think tanks

He also serves as a nonresident senior fellow at the Brookings Institution,
and as a member of the Science, Technology, and Innovation Council under the Canadian Academy of Sciences.

In the past, he was the first executive director of the Rhode Island Economic Policy Council.


Q1.
In your Industrial Economic Review article, you characterize China as a country pursuing a state-led, winner-takes-all strategy,
and you argue that this strategy could pose an existential threat to the South Korean economy.

Could you explain in greater detail how we got here and led our current moment?

Q2.
You point explicitly to weak productivity in the service sector as one of the culprits behind Korea’s stagnant growth, especially compared to years past.
You also argue that Korea needs to formulate a new, state-led productivity innovation strategy,
noting that could Korea could reference a similar strategy ITIF proposed in the American context.

Could you briefly go over its key features and point to some of the implications for Korea?

Q3.
In your article you briefly touch on how Korea’s zeal for private, after-school cram schools may actually hinder social and economic innovation.
How do you think reforming the current system, which is characterized by a preference for a handful of prestigious, “name-brand” universities,
to create a more flexible and autonomous learning environment could contribute to promoting innovation in Korea?

Q4.
Korean society has long been somewhat averse to taking risks and starting a business. 
Youth entrepreneurship in particular is declining,
and one public opinion survey has identified fear of failure as the biggest obstacle to entrepreneurship.

What policy tools should be considered to help address this issue?


(Outro)
So far, we've been talking with Chairman Rob.
The 50th Anniversary Special Project: Dialogues with International Scholars will continue in the future,
so please show your interest and watch.
Thank you. 
 

(Intro)
Hello. My name is Kyung-in HWANG,
Director of the Office of Public Relations and Media at the Korea Institute for Industrial Economics and Trade (KIET).

As KIET marks its 50th anniversary,
we are hosting a series of dialogues with leading international scholars in
which they share their insights on rapidly changing industrial conditions and major policy issues.

In this inaugural episode, we will be speaking with Professor Gary Gereffi,
one of the world’s foremost experts on global value chains.

Professor GEREFFI currently serves as Director of the Global Value Chains Center at Duke University,
and has previously served as an adviser to the World Economic Forum.

One of pioneers of the global value chain (GVC) analytical framework,
he has provided advisory support to a range of international organizations,
including the United Nations, the World Bank, and the International Labour Organization (ILO).

He is widely recognized as one of the foremost authorities in his field.

Q1. 
Professor, in your work, you have argued that a year-long global economic crisis has eroded the long-standing free trade regime
and has given rise to a new economic order that is fragmented and multipolar.

Could you briefly explain what this new economic order entails, and how it differs from the system that preceded it?

Q2.
Professor, in your article published in Industrial Economic Review (IER) (available at KIET’s homepage),
you emphasized that advancing green industries and building sustainable value chains can provide not only advanced economies
but also emerging economies with opportunities to enhance their economic standing.
At the same time, the Trump administration in the United States has signaled an unfriendly stance toward the broader green policy agenda.

How should countries that are seeking to foster green industries interpret and respond to this direction in US policy?

Q3.
In your earlier research, you have often analyzed cases in which trade policy produced unintended outcomes
that diverged from policymakers’ original intentions.
Recently, major countries have been pursuing trade policy more assertively.
Do you think there is a possibility that these countries’ trade policies could backfire and generate adverse effects?

For a country like Korea, which is highly dependent on trade,
what risks or pitfalls do you think policymakers should be especially careful to guard against when designing and implementing trade policy?

Q4.
Professor, in your IER article you also referenced the concept of “weaponized interdependence.”
Many countries are now working actively to build more resilient domestic supply chains.

In your view, how will these supply-chain policies affect the ability of states to sustain or intensify strategies of weaponization?

Q5.
As strategic competition between the United States and China has recently intensified,
as a relatively open economy dependent on trade with both Korea finds itself in an increasingly difficult position between the two.

Under these circumstances, what realistic options does Korea have when it comes to industrial strategy?

(Outro)

The 50th Anniversary Special Project: Dialogues with International Scholars will continue in the future,
so please show your interest and watch.
Thank you. 

 

Hello. I’m Jae Yoon Lee,

Research Fellow and Director of the Office of Carbon Neutrality and Industrial Transition Research at the Korea Institute for Industrial Economics and Trade.

I’ll be discussing the outlook for South Korea’s 13 flagship industries in 2025.

For 2025, production is set to slow down in many of Korea‘s 13 flagship industries, saving only for a handful of IT-driven sectors,

due to escalating trade risks, a sluggish global economic recovery, and increased outsourcing overseas.

We expect export growth to fall and weak growth in domestic demand.

Overall, robust global demand for IT products should to support healthy production and exports of ICT devices, semiconductors, and displays.

The biotech and shipbuilding are likely to slow down in the second half of the year,

but are nonetheless slated to post positive growth year-over-year (YoY).

The automotive, machinery, steel, oil refining, home appliances, and secondary batteries sectors are expected to remain in recession during the first half of the year due to sluggish domestic and global demand.

We do however anticipate a modest improvement in the petrochemicals industry in the second half of the year, and a full-scale recovery could be in the cards post-2026.

Now, let's take a closer look at the outlook for each of Korea’s 13 flagship industries in the second half of 2025 through detailed graphs.

First, let’s examine each industry’s export outlook for the second half of 2025.

Despite continued export growth in emerging industries such as IT and biotech,

exports of the 13 flagship industries in the second half of 2025 are expected to decline by 2.3% year-on-year

due to prevailing negative factors, such as high US tariffs, intensifying external uncertainties, and increased outsourcing of production abroad.

Due to the reverse base effect and other contributing factors, by the time the first half of 2025 comes to a close,

overall exports are likely to have tumbled by 1.9%, resulting in an annual export decline of 2.1% compared to the previous year.

Among the machinery industries, the shipbuilding sector should expected maintain its growth trajectory in exports (3.4%) in the second half thanks to deliveries of high-value LNG carriers.

However, exports of automobiles (-11.4%) and machinery (-5.8%) are expected to decline further in the second half of the year due to US tariffs and sluggish global demand.

As a result, annual exports in the machinery sector — which grew by 0.6% last year — are expected to fall by 5% in 2025.

In the materials sector, lower oil prices, higher US tariffs,

and weakening global demand are expected to result in weak exports across all subsectors throughout the year.

Overall, sectoral exports look set to plummet by -9.4% in 2025, after falling by -1.2% in the previous year.

After a 29.4% surge in 2024, exports for the IT industry and emerging new sectors are expected to continue growing by 4.7% in 2025,

supported by strong global IT demand driven by AI adoption, an increasing share of high-value semiconductors,

and the growth of promising sectors such as biosimilars and energy storage systems (ESS).

However, risks such as tariffs, rapid Chinese growth, and expanded outsourcing are expected to act as constraints on export growth.

Next is the domestic demand outlook for Korea’s 13 flagship industries for the second half of 2025.

The overall decline trend in domestic demand for the 13 flagship industries should soften somewhat in the second half of 2025, aided by improved consumer sentiment.

However, sluggish construction investment and weak domestic and global growth will continue to constrain demand growth.

In the machinery sector, domestic demand for automobiles (2.1%) is expected to increase in the second half of the year as domestic automakers turn their focus to the domestic market.

But domestic demand for general machinery (-1.7%) is expected to decline in the second half of the year due to the slump in the construction and manufacturing sectors.

In the materials sectors, domestic demand for petrochemicals is expected to rebound by 6.3% in the second half.

However, overall annual demand growth is likely to be negative (-0.2%).

And due to weak construction investment, steel demand is also expected to fall (-4.7%). Domestic demand for textiles should remain flat (0.7%).

In the IT industry and emerging new sectors, new product launches and improved electric vehicle (EV) sales are expected to drive a rebound

in domestic demand for ICT devices (5.5%) and secondary batteries (6.8%) in the second half of 2025.

However, domestic demand growth in the biohealth sector is projected to decline by nearly three percentage points in the second half of 2025 due to the base effect,

but overall expanded policy support will allow the sector to see continued annual demand growth of 2.2%.

Next is the production outlook for the Korea’s 13 flagship industries in the second half of 2025.

Production in most sectors should continue to tumble in the second half of 2025,

following downturns observed in the first half of the year as exports stumble and domestic demand recovers only modestly.

In the machinery sectors, annual production is expected to decline for the second consecutive year,

as the decline trend in production of automobiles (-4.4%) and general machinery (-3.5%) worsens in the second half amid sluggish exports and domestic demand.

Although production in the shipbuilding sector is projected to drop by 5.8% in the second half of the year,

the industry should post positive overall annual growth (5.0%) as production is normalized.

In the materials sector, continued export sluggishness and a restrained domestic recovery are expected to result in further production declines

in the steel (-1.3%), refining (-2.2%), and textiles (-1.4%) subsectors during the second half of the year.

However, the petrochemicals (-0.4%) industry could see an uptick in production (3.5%) due to improved product spreads and higher capacity utilization.

Although production growth in the emerging IT industries is expected to slow in the second half of 2025 compared to the first,

increased exports should bolster production in the ICT devices (2.1%), semiconductors (2.3%), and biotech (3.1%) subsectors.

On the other hand, production in the home appliances (-0.5%) and secondary batteries (-2.2%) sectors is expected to fall again in the second half of the year as firms outsource production abroad.

Finally, let’s take a look at outlook for imports in Korea’s 13 flagship industries for the second half of 2025.

Despite rising imports of IT products, total imports in the 13 flagship industries are expected to decline by 0.5% YoY

due to slack domestic demand in the machinery and materials sectors and falling unit prices caused by an increase in low-cost imports.

In the machinery sectors, overall imports of automobiles are expected to tick downward due to increased imports of low-cost EVs,

while imports of general machinery should remain flat amid weak recovery in the manufacturing sectors.

However, shipbuilding imports are projected to increase due to localization of equipment.

In the materials sectors, imports of steel are expected to plunge as domestic demand falters and new restrictions on imports take effect.

Imports of refined oil are also likely to dip as unit prices fall.

However, with improving domestic demand and an increasing influx of low-cost imports, imports of petrochemicals and textiles are expected to grow slightly.

In the emerging IT industries, imports of IT products and home appliances are expected to increase in the second half of the year,

driven by improved consumer sentiment. Imports of semiconductors used in the development of advanced technologies are also projected to continue,

while the decline in secondary battery imports is expected to slow significantly due higher domestic demand for imported batteries.