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Trade war forces Korea to walk US-China tightrope

Trade feud with Tokyo is 'distraction' from real challenge

By Kim Bo-eun

Korea, whose economy is heavily dependent on trade with the world's two largest economies, may be in the trickiest of positions at a time when the international trade order is changing.

It appears the country needs to make a strategic decision in an era defined by two rival blocs led, respectively, by the U.S. and China

Yet currently it is engaged in a trade feud with neighboring Japan, which stems from their historical past.

Michael Witt
Michael Witt
"Fighting with each other even for good reason is not a good idea because it becomes a distraction from what the real challenge of the future is," Michael Witt, professor of strategy and international business at INSEAD, told The Korea Times in an interview last month.

He said the countries need to "sort out" their issue as Korea faces a more daunting task.

The Singapore-based professor was in Seoul for the World Knowledge Forum hosted by Maekyung Media Group.

Deglobalization

Globalization can only be addressed within a discussion of de-globalization and why this takes place.

"Globalization is a technology-driven phenomenon, with transportation and communication making it easier to do international business, but fundamentally, it is a matter of politics," Witt said.

De-globalization is also understood from an international relations point of view.

The rise of China and growing protectionism in major economies has been leading to such an opposite phenomenon.

"We have consistently seen a receding level of interdependence since 2008, in terms of trade, foreign direct investment and financial flows," Witt said.

The professor said this phenomenon is accounted for by two main theories on de-globalization.

The first contends that global order depends on a sole hegemon.

"According to this theory globalization takes place when an overwhelmingly powerful country forces other countries to open their borders and play by the rules the hegemon sets," he said.

"But de-globalization takes place when the hegemon declines."

Witt noted this theory appears to be able to explain the current situation in which the U.S., which was the hegemon of the 20th century, is now declining with the rise of China.

The other theory states de-globalization takes place when countries start opting out of the system.

This also seems to be the case as major economies including the U.S. and the U.K. have begun making decisions to opt out, as seen in the former's withdrawal from the Trans-Pacific Partnership and the latter's drive for Brexit.

Rival blocs

According to the first theory, the rise of China eliminates a global hegemon, but introduces regional ones.

"You have a still strong U.S. which is not a global hegemon but a regional hegemon, and China which is increasingly gaining a lot of power," Witt said.

This results in a U.S. bloc and a China bloc each governed by their own rules, he said.

Witt said much of Europe as well as Japan would likely become part of the former bloc.

Countries such as Korea, for whom the powers are both crucial trading partners and allies, sit in a difficult position.

"Korea is stuck in the middle as in the local expression from history ― a shrimp caught between two whales," the professor said.

He noted possible scenarios of China falling into a middle income trap would have to be taken into account in making the decision.

Witt also said it would be important for the chosen country to have a functioning legal system that would bring fair outcomes when issues arise in transactions.

Implications for businesses

"The question is how companies wind down parts of their international operations in an orderly fashion," Witt said.

"How much more do you want to invest in the other country, and other countries aligned with that country at this point?"

The professor said one option would be for a company to pull out entirely from the opposing sphere, which would be easier and safer but limit its global reach.

The other more complex option would be decentralizing its global operations, loosening ownership and localizing this, to escape being viewed as a company associated with the opposing bloc.

Witt stressed that the latter option comes with greater risks, and that a company would need to be a "master of international business" to pull it off.

But he noted the need to act swiftly.

"Now is probably the time to start doing something about this. If you're swimming down the river to the Niagra Falls, the closer you are to the falls the harder it will be for you to get out."

Trade feud with Tokyo is 'distraction' from real challenge

By Kim Bo-eun

Korea, whose economy is heavily dependent on trade with the world's two largest economies, may be in the trickiest of positions at a time when the international trade order is changing.

It appears the country needs to make a strategic decision in an era defined by two rival blocs led, respectively, by the U.S. and China

Yet currently it is engaged in a trade feud with neighboring Japan, which stems from their historical past.

Michael Witt
Michael Witt
"Fighting with each other even for good reason is not a good idea because it becomes a distraction from what the real challenge of the future is," Michael Witt, professor of strategy and international business at INSEAD, told The Korea Times in an interview last month.

He said the countries need to "sort out" their issue as Korea faces a more daunting task.

The Singapore-based professor was in Seoul for the World Knowledge Forum hosted by Maekyung Media Group.

Deglobalization

Globalization can only be addressed within a discussion of de-globalization and why this takes place.

"Globalization is a technology-driven phenomenon, with transportation and communication making it easier to do international business, but fundamentally, it is a matter of politics," Witt said.

De-globalization is also understood from an international relations point of view.

The rise of China and growing protectionism in major economies has been leading to such an opposite phenomenon.

"We have consistently seen a receding level of interdependence since 2008, in terms of trade, foreign direct investment and financial flows," Witt said.

The professor said this phenomenon is accounted for by two main theories on de-globalization.

The first contends that global order depends on a sole hegemon.

"According to this theory globalization takes place when an overwhelmingly powerful country forces other countries to open their borders and play by the rules the hegemon sets," he said.

"But de-globalization takes place when the hegemon declines."

Witt noted this theory appears to be able to explain the current situation in which the U.S., which was the hegemon of the 20th century, is now declining with the rise of China.

The other theory states de-globalization takes place when countries start opting out of the system.

This also seems to be the case as major economies including the U.S. and the U.K. have begun making decisions to opt out, as seen in the former's withdrawal from the Trans-Pacific Partnership and the latter's drive for Brexit.

Rival blocs

According to the first theory, the rise of China eliminates a global hegemon, but introduces regional ones.

"You have a still strong U.S. which is not a global hegemon but a regional hegemon, and China which is increasingly gaining a lot of power," Witt said.

This results in a U.S. bloc and a China bloc each governed by their own rules, he said.

Witt said much of Europe as well as Japan would likely become part of the former bloc.

Countries such as Korea, for whom the powers are both crucial trading partners and allies, sit in a difficult position.

"Korea is stuck in the middle as in the local expression from history ― a shrimp caught between two whales," the professor said.

He noted possible scenarios of China falling into a middle income trap would have to be taken into account in making the decision.

Witt also said it would be important for the chosen country to have a functioning legal system that would bring fair outcomes when issues arise in transactions.

Implications for businesses

"The question is how companies wind down parts of their international operations in an orderly fashion," Witt said.

"How much more do you want to invest in the other country, and other countries aligned with that country at this point?"

The professor said one option would be for a company to pull out entirely from the opposing sphere, which would be easier and safer but limit its global reach.

The other more complex option would be decentralizing its global operations, loosening ownership and localizing this, to escape being viewed as a company associated with the opposing bloc.

Witt stressed that the latter option comes with greater risks, and that a company would need to be a "master of international business" to pull it off.

But he noted the need to act swiftly.

"Now is probably the time to start doing something about this. If you're swimming down the river to the Niagra Falls, the closer you are to the falls the harder it will be for you to get out."

Kim Bo-eun bkim@koreatimes.co.kr


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