Global Value Chains in an Era of Strategic Uncertainty: Prospects for Us–Rok Cooperation
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GLOBAL VALUE CHAINS IN AN ERA OF STRATEGIC UNCERTAINTY: PROSPECTS FOR US–ROK COOPERATION GLOBAL VALUE CHAINS IN AN ERA OF STRATEGIC UNCERTAINTY: PROSPECTS FOR US-ROK COOPERATION Dr. Miyeon Oh Dr. Robert Dohner Dr. Trey Herr I ATLANTIC COUNCIL Scowcroft Center for Strategy and Security The Scowcroft Center for Strategy and Security works to develop sustainable, nonpartisan strategies to address the most important security challenges facing the United States and the world. The Center honors General Brent Scowcroft’s legacy of service and embodies his ethos of nonpartisan commitment to the cause of security, support for US leadership in cooperation with allies and partners, and dedication to the mentorship of the next generation of leaders. The Scowcroft Center’s Asia Security Initiative promotes forward-looking strategies and constructive solutions for the most pressing issues affecting the Indo-Pacific region, particularly the rise of China, in order to enhance cooperation between the United States and its regional allies and partners. The mission of ASI is help the United States better work with Asian allies and partners in responding to the rise of China. Its mission is also to translate US policy objectives and strategic aims into nuanced messages to Asian stakeholders that incorporate Indo-Pacific voices in order to foster a community of like-minded nations committed to adapting and defending the rules-based international system. In service of these efforts, ASI leverages its mission, method, and talent to provide purposeful programming to address traditional strategic issues in the Indo-Pacific while also developing insight into emerging challenges in non-traditional areas such as global supply chains, changing trade architecture, infrastructure development, energy security, digital connectivity, and advanced technologies that are increasingly impacting the realm of national security. This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations. The Atlantic Council, its partners, and funders do not determine, nor do they necessarily endorse or advocate for, any of this report’s particular conclusions. © 2020 The Atlantic Council of the United States. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Atlantic Council, except in the case of brief quotations in news articles, critical articles, or reviews. Please direct inquiries to: Atlantic Council, 1030 15th Street NW, 12th Floor, Washington, DC 20005 GLOBAL VALUE CHAINS IN AN ERA OF STRATEGIC UNCERTAINTY: PROSPECTS FOR US–ROK COOPERATION Atlantic Council SCOWCROFT CENTER FOR STRATEGY AND SECURITY GLOBAL VALUE CHAINS IN AN ERA OF STRATEGIC UNCERTAINTY: PROSPECTS FOR US-ROK COOPERATION Dr. Miyeon Oh Dr. Robert Dohner Dr. Trey Herr ISBN-13: 978-1-61977-139-0 Cover image: Shutterstock Managing Editor: James Hildebrand, Assistant Director, Asia Security Initiative, Scowcroft Center for Strategy and Security November 2020 III ATLANTIC COUNCIL GLOBAL VALUE CHAINS IN AN ERA OF STRATEGIC UNCERTAINTY: PROSPECTS FOR US–ROK COOPERATION TABLE OF CONTENTS EXECUTIVE SUMMARY: THE CHALLENGES OF A NEW ERA ����������������������������������������������������1 Strategic Uncertainty In Action: Two Case Studies ........................................................................2 The ROK-Japan Trade Dispute and Its Impact On Semiconductor Value Chains ......2 The COVID-19 Pandemic and Global Supply-Chain Disruptions .....................................2 Recommendations For An Uncertain World ......................................................................................2 1� INTRODUCTION �������������������������������������������������������������������������������������������������������������������������������3 2� STRATEGIC UNCERTAINTY AND SHIFTING GVC RISKS �������������������������������������������������������5 Sources of Strategic Uncertainty ..........................................................................................................5 Shifting Risks to Global Value Chains .................................................................................................7 Protectionist Pressures and Aggressive Trade Policy �������������������������������������������������������� 7 Political Risks ...................................................................................................................................8 Supply-Chain Security ..................................................................................................................9 Governmental policy efforts on supply-chain security ................................................ 10 Private Efforts on GVC Security ������������������������������������������������������������������������������������������ 12 Unexpected Shocks and the COVID-19 Pandemic ������������������������������������������������������������ 13 3� CASE STUDIES ������������������������������������������������������������������������������������������������������������������������������� 14 A� ROK-Japan Trade Dispute and its Impact on Semiconductor Supply Chains ...............15 B� Reshoring: The COVID-19 Pandemic and Global Supply-Chain Disruptions .................19 4� POLICY RECOMMENDATIONS �������������������������������������������������������������������������������������������������� 22 5� FURTHER RESEARCH ����������������������������������������������������������������������������������������������������������������� 24 Advisory Members (alphabetical order): .........................................................................................24 ABOUT THE AUTHORS ������������������������������������������������������������������������������������������������������������������� 25 IV ATLANTIC COUNCIL GLOBAL VALUE CHAINS IN AN ERA OF STRATEGIC UNCERTAINTY: PROSPECTS FOR US–ROK COOPERATION EXECUTIVE SUMMARY: THE CHALLENGES OF A NEW ERA he global COVID-19 pandemic brought the heats up, how can the United States and its likeminded allies challenges of disruption to global value chains and partners, including the Republic of Korea (ROK), adapt to (GVC) into sharp focus for the policy community. these new risks and effectively guarantee national security at While the pandemic is not alone in driving growing acceptable economic cost? calls to realign the GVCs of major industries to Tmitigate risk of future disruptions, the virus has brought The answer is to maximize effective cooperation between renewed importance to a set of key questions for firms and these allies and industry in the decades ahead. This report the policy community during an era of strategic uncertainty explores the key drivers of this new era of strategic uncertainty in the global economy. Stakeholder assumptions about what and the evolving landscape of risk it has produced for GVCs. threats GVCs face, and how to manage this risk, are changing The report examines how rising skepticism of globalization dramatically. Industry and government must confront these and trade expansion, convergence of commercial technology challenges and seek innovative solutions. and national security, and intensifying competition and signs of decoupling between the United States and China are driving Strategic uncertainty is placing new pressures on value chains four threats to GVCs, including: protectionist pressures and for industries crucial to both economic competitiveness and aggressive trade policy; political risks; supply-chain security national security. This uncertainty is driven principally by risks; and vulnerability to unexpected shocks. It illustrates new risks of US-China decoupling, trade and supply-chain these threats via two real-world case studies: the ROK-Japan protectionism, and unexpected shocks like COVID-19. Given trade dispute and its impact on semiconductor value chains, this changing risk landscape, how can firms manage short- and the worldwide supply-chain disruption caused by the and long-term risks to balance national security requirements COVID-19 pandemic. Drawing on these cases, the report and commercial interests? What role should government play, offers a roadmap for enhanced public and private sector and to what extent can, or should, governments require firms cooperation, and a description of areas of future research to operate more in line with national security priorities? As the critical for both governments and firms to overcome these race for global leadership on strategic emerging technologies new challenges. FACTORS DRIVING STRATEGIC UNCERTAINTY INCREASING STRESSES AND SHIFTING RISKS Rising skepticism of globalization and trade expansion Protectionist pressures and aggressive trade policy, stemming from a wave of populist anti-globalist sentiment exemplified by the Donald Trump administration’s actions in response to loss of manufacturing jobs and stagnant to raise, or threaten to raise, tariff rates on a variety of US wage growth in the United States, among many other imports from both competitors and allies on grounds of advanced economies, following the post-World War II national security, such as tariffs on steel and aluminum liberalization of trade and reduction of trade barriers imports� worldwide� Political risks, seen in China’s willingness to use economic Convergence of commercial technology and national sanctions to signal displeasure and punish countries that security, which has made