Government’s Measures to Diversify Supply Chain and Achieve Self-Sufficiency in Raw Materials

Raw materials for major industries are as important as food, but as concerns over urea count increase, the government has come up with measures to diversify the supply chain and make steady efforts to become self-sufficient.

Sangbong Kim, Professor of Economics at Hansung University

Recently, our country has been in trouble due to issues with urea water and fertilizers. The issue of urea water and fertilizer is not just something that happened yesterday and today, but also caused a stir in our country a few years ago. At the time, it also became a problem as China restricted exports, and China did not even provide a proper explanation. The same problem has been repeated this time, and now the government is coming up with various measures.

Our country is a small, open economy that focused on agriculture and advocated agricultural sovereignty, but then changed to focus on manufacturing and relies on exports and imports. Even as the focus shifted from agriculture to manufacturing, agricultural sovereignty continued to be advocated. The reason is that from an economic perspective, if you depend on imports from other countries because agriculture is cheap, and later on, if the other country uses agriculture as a weapon, you cannot immediately produce new products, so there is no way to respond even if prices rise. Therefore, agriculture corresponds to food, clothing, and shelter, and is recognized as an important industry even though it accounts for a low proportion of our gross domestic product.

The situation is similar for major industries and high-tech industries that are highly dependent on Chinese raw materials. Putting aside the economic elasticity story, this is because the market may be close to a monopoly. In the case of a monopoly, there is no choice but to buy raw materials even if they are not sold or the price is raised.

The global supply chain of Korea, China, and Japan went from the 1960s to 1990s in the early stages of Asia’s export-driven economic system to a turning point with the establishment of the World Trade Organization (WTO) in 1995, and with China’s accession to the WTO in 2002, multinational companies began entering China in earnest. and reached its peak. There was a period of threat as the financial crisis in 2008 and the Great East Japan Earthquake in 2011 disrupted the supply and demand of semiconductor components. Recently, the trade dispute between the United States and China since 2017, COVID-19 in 2020, and the Russia-Ukraine war in 2022 have led to changes in the global supply chain of the three countries. In particular, many problems have arisen in relations with China recently. Representative examples include the issue of minerals such as rare earth elements with Japan and the issue of urea water in Korea. In this rapidly changing global supply chain, our country has been importing raw materials, regardless of quality, as long as they are cheap and producing intermediate or final goods.

In this global supply chain, Korea still relies on China for many raw materials. The reason is simple. Because the price is cheap. It is very bad to continue to rely on one country just because the price is cheap. Now, the era of creating intermediate or final goods by importing cheap and low-quality raw materials from China and creating added value is passing. Nevertheless, there are many parts that depend on China’s key minerals. Some minerals are imported almost 100% of the time, and there are many minerals that account for a fairly high proportion. What should I do?

A common imputation is the diversification of the supply chain. Even if the price is slightly high, we need to start trading the raw materials with other countries instead of relying on one country. Large companies can find suppliers and trade on their own, but the government’s economic role is to find suppliers for small and medium-sized businesses or self-employed people who have difficulty finding supply chains on their own.

Following the diversification of the supply chain, the second step is for the government to intervene where market failures occur. It is produced domestically. Because the price of domestic production is high, companies move overseas or give up domestic production. In response to these market failures, governments can provide subsidies or tax benefits and seek out productive companies.

Lastly, securing raw material inventory, etc. Inventory must be secured through contracts with countries that possess raw materials, even if it incurs costs domestically. Other countries do not have inventory at cost because they do not produce raw materials domestically. Even if it costs money now, the government must be able to supply it at any time in the future if there is a shortage, so the government must keep enough inventory. In addition, we must find ways to cooperate with countries that have raw materials so that our country can secure inventory in those countries.

It is truly fortunate that the government has now announced these supply chain implementation tasks. However, it is important for the government to continue to work with the private sector to ensure that our industry runs naturally through diversification, self-reliance, and securing inventory. It is also important to lead industrial development by integrating new high-tech industries with existing industries. Therefore, it is expected that it will be very important for relevant ministries and the private sector to continuously check supply chain problems and cooperate when problems arise.

Sangbong Kim, Professor of Economics at Hansung University

2023-12-18 14:45:00
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