The Global Trade War and Korea’s FDI Strategy

Dr. Hwy-Chang Moon's picture

Concerns about the possible negative impact on Korea’s economy from the global trade war, sparked by the escalation of American trade protectionism, are serious and real. However, aside from what news reports discuss as a potential threat to world trade, the most critical area that deserves our attention is foreign direct investment (FDI).

Initially, United States (US) trade policy, as embodied in US President Donald Trump’s “Buy American, Hire American” policy, aimed to push firms to shift from exporting to investing in the US. Unfortunately, Trump’s aggressive protectionist policies spurred Europe and China to retaliate by increasing their trade barriers against the US, which has driven multinational corporations (MNCs) to seek refuge not just in the US, but also in Europe and China. What appeared, at first glance, as a global trade war has, in fact, extended into a competition for FDI. This implies that Korea, along with other economies, needs to respond more effectively to the changing global situation. To attract more FDI, policymakers first need to understand the following three FDI motivations for companies. First of all, MNCs consider locational advantages which complement their business activities. Second, MNCs examine whether there are significant burdensome regulations. If there are any, they start to look elsewhere. Finally, MNCs will give special consideration to a host country that offers extra incentives. This is to say, if a country’s investment environment is attractive and there is a minimal level of regulation, MNCs will come even without any special incentives from the government. In contrast, if the investment environment is poor and there are serious regulations or obstructions, then incentives will have little potency. The current competition for FDI may seem fierce. However, this difficult time can be a good opportunity for Korea, or other countries, to reconstruct their strategies for attracting FDI.