Reshoring to South Korea Needs to be Boosted

A total of 1,600 American companies returned to their home country from 2010 to 2016. Likewise, 160 European and 724 Japanese companies reshored from 2016 to 2018 and in 2015, respectively. On the other hand, merely 41 South Korean companies did so from 2012 to 2017. Besides, no large South Korean corporation did so during the same period.

The United States launched its reshoring policies in 2010 and the policies have contributed greatly to its current economic boom. The Barack Obama administration cut its corporate tax rate from 38 percent to 28 percent and bore 20 percent of reshoring companies’ facility relocation costs. The Donald Trump administration cut the corporate tax rate to 21 percent while providing various tax incentives. Major manufacturers such as GE and FCA relocated their facilities to the United States, creating more than 170,000 jobs. The unemployment rate of the United States dropped from 9.6 percent in 2010 to 4.1 percent in 2018.

The Japanese government, in the meantime, abolished regulations in special economic zones and cut its corporate tax rate from 30 percent to 23.4 percent. Those returning to large cities such as Tokyo and Osaka could benefit from deregulation and R&D subsidies. Toyota, Honda, Nissan, Canon and many more moved their factories back to Japan. Its unemployment rate was 2.5 percent in March this year, a 20-year low.

Germany is providing smart factory and R&D subsidies so that more companies can reshore. Its corporate tax rate has been lowered from 26.4 percent to 15.8 percent and it is currently abolishing one regulation each time one is added. Adidas returned in 23 years three years ago. Taiwan has lowered its corporate tax rate in stages and Foxconn, the world's largest contract electronics manufacturer, is planning to invest US$80 billion in Taiwan.

Last year, the Korea Economic Research Institute conducted a survey on 150 South Korean companies that have their own places of business abroad and constitute the top 1,000 South Korean manufacturers in terms of sales. 96 percent of the respondents answered that they were not considering returning to South Korea. Only two gave the opposite answer and only four answered they would reshore on certain conditions. In the majority group, 16.7 percent and 4.2 percent complained about high wages in South Korea and its labor market rigidity, respectively. 29.4 percent mentioned labor market flexibility as the foremost condition for reshoring, followed by deregulation for business facilitation (27.8 percent) and cost-related support (14.7 percent).

Experts point out that the ongoing trade war between the United States and China can be an opportunity for more reshoring to South Korea. The United States announced on May 10 that it would raise tariffs to 25 percent on imported Chinese goods worth US$200 billion. At present, products produced in China and exported to the United States face an average tariff of 14.7 percent whereas the average is 0.4 percent for those produced in South Korea and exported to the United States. Chinese electric vehicle manufacturers are already considering supplying their products from South Korea. “The import tariffs on Chinese goods have improved the price competitiveness of South Korean products based on the KORUS FTA,” said the Korea International Trade Association, adding, “The South Korean government needs to provide more support for South Korean companies returning from China.”