Yoon administration wins many, loses a few in business

President Yoon Suk Yeol’s first year in office was one of success and struggle.

President Yoon Suk Yeol, center, poses for a photo with the heads of major Korean companies at a New Year’s seminar held at Coex in southern Seoul on Jan. 2. It was the first time in seven years for an incumbent president to participate in the business leaders’ event. From left: the Korea Enterprises Federation Chairman Sohn Kyung-shik; the Korea International Trade Association Chairman Koo Ja-yeol; then chairman of the Federation of Korean Industries Huh Chang-soo; the Korea Chamber of Commerce and Industry Chairman Chey Tae-won; President Yoon Suk Yeol; the Korea Federation of SMEs Chairman Kim Ki-moon; Samsung Electronics Executive Chairman Lee Jae-yong; Hyundai Motor Group Executive Chair Euisun Chung; LG Group Chairman Koo Kwang-mo. [JOINT PRESS CORPS]

President Yoon Suk Yeol’s first year in office was one of success and struggle.

He managed to steer bills through the National Assembly for lower corporate taxes and higher tax incentives for investment, although the administration has been all but helpless against the trade deficit, inflation and the rising debts of households and the government itself.

Big corporations like Samsung Electronics and Hyundai Motor's response to the business-friendly moves were big investment announcements.

Samsung Electronics will pour 300 trillion won ($226.4 billion) into a massive chip cluster in Yongin, Gyeonggi. Hyundai Motor, Kia and Hyundai Mobis announced in April plans to spend a combined 24 trillion won into domestic electric vehicle production and development.

In his economic plans announced last year, Yoon, who celebrated his first anniversary in office earlier this week, vowed to “respect the freedom and creativity of the private sector,” and push deregulations to overcome the economic challenges.

But the policies are yet to fully bear fruit, as the endeavors often take a hit from opposition in the National Assembly.

The president continues to push forward his initiatives amid macroeconomic woes facing Korea. The challenges include stubbornly high inflation, weak exports and a fiscal deficit.

The Organization for Economic Cooperation and Development slashed Korea’s growth outlook in April to 1.5 percent for this year, the fourth drop in a row. Pro-business objectives

Samsung Electronics proposed chip complex in Yongin, Gyeonggi [YONHAP]

The hallmark of President Yoon’s campaign was to lower taxes and offer more incentives for companies investing big in key industries, like semiconductors and electric vehicles. In reality, corporate tax rates have been reduced, but not as much as the administration promised due mainly to the National Assembly, where the majority is held by the Democratic Party (DP).

The Yoon administration pushed for slashing a cap on corporate rates to 22 percent from the previous 25 percent. But the actual rate being passed was 24 percent.

“The reform in taxing is in line with the president’s views shared on public discussions advocating tax reduction and benefits to foster a business-friendly environment and bring in investments,” according to a report released by the tax group at Lee & Ko.

Another landmark bill pushed forward under the president is the so-called K-Chips Act, a Korean version of U.S. CHIPS and Science Act. It offers bigger tax incentives to chipmakers and other strategic businesses.

President Yoon distinguished semiconductors from other sectors and services by stating that the chips could "determine the fate of the Korean economy" as the microchips are essential for powering everything from cars, computers and appliances to smartphones.

In the proposed revision to the Act on Restriction of Special Taxation passed in March, the tax credit rate for large semiconductor companies will rise to 15 percent from the current 8 percent, while the rate for small and medium-sized businesses will increase to 25 percent from 16 percent.

Yang Hyang-ja, a former Samsung Electronics executive-turned-lawmaker who is the main author of the two bills, said that the revision could help on-shore manufacturing facilities of Korean chipmakers like Samsung and SK hynix.

“Countries all around the world are extending a wide range of supportive measures to bring chip manufacturing plants to their countries,” Yang, a former DP member now independent, told the Korea JoongAng Daily.

“The passage of the bill will be a small step to advancing Korea’s competitiveness as a tech powerhouse,” she said.

She mentioned that the president’s support played an integral role in the passage, although political wrangling and a lack of semiconductor experts at the National Assembly slowed progress.

Against the favorable backdrop, Samsung Electronics announced a plan in March to invest 300 trillion won into a massive chip cluster in Yongin, Gyeonggi by 2042, which dovetails with Yoon’s pledge to create a “K-Semiconductor Belt” across Pangyo, Yongin and Pyeongtaek in Gyeonggi.

Samsung’s 7.1-million-square-meter (76.4-million-square-foot) site will host five chip fabrication plants and 150 suppliers of parts and materials for manufacturing a wide range of processors powering computers, cars and appliances.

If the project goes as planned, the Yongin complex will be the world's largest semiconductor manufacturing site in terms of production capacity, according to the government and company.

Besides the tax cut, the administration has either implemented or will introduce policies designed to facilitate the building of the mega-sized factories.

“The Yoon administration plans to provide financial support for the installation of electricity, industrial water and infrastructure at the new semiconductor manufacturing complexes and R&D centers, and has already undertaken initial steps to create the ‘K-Semiconductor Belt’ surrounding Yongin & Pyeongtaek Semiconductor Clusters,” noted a report released by Kim & Chang.

Semiconductors are not alone in receiving a policy boost. The Finance Ministry said it will add the EV and hydrogen categories to the country's list of strategic industries and offer the same tax credits it has been providing to chip, battery and vaccine investments.

Under the so-called K-EV Act, the tax credit on EV investments may be increased from the current 8 percent to 15 percent for big companies. For small and medium-sized enterprises, the maximum tax credit could be raised to 25 percent from 16 percent.

Labor reform

Truck drivers stage a protest over the government's freight rate system on Dec. 6, last year [NEWS1]

Korea is undergoing a major overhaul in labor as the president seeks to shift work hours and take a more hard-line stance against unionized strikes.

The president, who is from the conservative People Power Party, has made it clear that he won’t accept any illicit labor activity, reversing course from the Moon Jae-in government’s labor-friendly policies.

A battle with truck drivers who went on a nationwide strike last year to make a soon-to-expire minimum safe freight rate system permanent was the main showdown so far.

The Yoon government denied the request and issued a back-to-work order first to cement truckers since the unionized move caused a nationwide disruption of logistics.

Yoon won, and the strike was over 16 days after it started, with a majority of union members voting to go back to work.

Kim Hee-Sung, a law professor at Kangwon National University, observed that the response marked Yoon’s commitment to restoring the rule of law in dealing with labor unions.

“The government maintained its rule of law principle when responding to the collective action from the truckers,” Kim said.

“It conveyed the message that the government will exhibit zero tolerance for any activities against the law while recognizing anything legal,” he said.

In revising the maximum work hours, the Yoon administration is trying to hike the legal cap of a maximum work hour from 52 hours per week to 69 hours on the condition that the total work hours in a month do not exceed the limit in the current 52-hour workweek system.

The proposed change, first announced in March by the Ministry of Labor, was met with both criticism and support.

Businesses where 24-hour staffing is required welcomed the move, since the current system has placed a strain on staffing and budget.

“When the Moon government introduced the 52-workweek system, we had to hire a lot more people, which translated into substantial financial burden,” said a CEO of a semiconductor parts supplier that runs a factory in Gyeonggi.

“With the backlash in the manufacturing sector, the former government adjusted the system to allow for extra hours if the company submits consent by employees during peak periods. But at factories where things go around here and there in an unexpected manner, it is almost impossible to notify the government of the plan in advance,” the CEO said.

Others expressed concern that malicious employers can take advantage of the flexibility of the new system, a factor that hampers the proposal from actually going into effect.

“The new system will likely undermine public happiness,” said members of Korean Confederation of Trade Unions in a protest held last month.

“The government should abandon the proposal as it hasn’t been given sufficient thought and consideration,” they said.

Mounting challenges

Despite some achievements, the Yoon government is stuck with a set of problems, which could limit policy room.

Economic indicators signal Korea’s inflation has peaked, with the April prices growing at the slowest pace in more than a year. The Bank of Korea’s decision to keep the rate unchanged at two consecutive meetings is raising hopes the economy is on its path of recovery.

But the financial authorities and the central banker remain cautious, warning of sticky inflation, a trade balance that remains in the red and growing government debt.

Korea’s inflation slowed to 3.7 percent in April, growing at the slowest pace in 14 months, from 4.2 percent a month earlier.

But core inflation remains stubbornly high at 4.0 percent, remaining unchanged from a month earlier. It is only slightly down from the 4.3 percent peak in November.

“Core inflation is falling at a very slow pace,” said Lee Jung-ick, head of inflation monitoring & forecasting team at the Bank of Korea. “A decline in service inflation in particular is very slow.”

Core inflation is considered more appropriate in monitoring prices because it excludes volatile food and energy prices, which can be easily affected by weather or geopolitical tension, according to Jung Wha-young, research fellow for macro-financial analysis, at Korea Capital Market Institute.

Inflation is forecast to remain elevated for some time.

Declining exports and a trade deficit compounds the matter.

Korea reported a record trade deficit of $47.8 billion last year. The trade deficit in the first quarter – $22.41 billion – is already 46.9 percent of last year’s annual deficit.

The semiconductor downturn caused by lower-than-expected demand is a major contributor. Chips were 16.5 percent of Korea’s exports last year, distantly followed by automobiles, at 11.6 percent.

Exports of chips and other intermediate goods tumbled 19.5 percent in the first quarter, according to the Korea International Trade Association (KITA) in a report on April 25.

“The weak global economy partly contributed to the recent slump in exports, but fundamentally it is the result of the accumulated weakening of our export industries,” it read.

Semiconductor exports annually jumped 10.8 percent on average from 2016 through 2022, while non-semiconductor exports only grew 2.6 percent in the same period.

Analysts project the industry to recover from the second half of the year owing to the production cut.

Samsung Electronics in April said it will cut chip production “to a meaningful degree” following more than a 95 percent decline in operating profit in the first quarter.

“Effects of production cuts will start to materialize in June,” said Ahn Ki-hyun, a senior executive director at the Korea Semiconductor Industry Association. “Samsung’s production cut will materialize from around September.”

China’s reopening of its economy is having little impact on Korea.

“China’s recovery has centered on service spending,” according to the Bank of Korea report in April. “Imports and exports, which have an external influence, are relatively weak.”

China’s retail sales in the first two months of the year were up 3.5 percent on year, while infrastructure spending grew 9.0 percent on government support.

Exports to China are expected to gradually recover, but “the time when we reported large surpluses like in the past is gone,” Finance Minister Choo Kyung-ho told reporters during his trip in the United States in April.

Internally, the government must address its growing debt.

Korea’s national debt broke 1,000 trillion won for the first time in 2022, and the debt is projected to rise further this year as tax revenue declines.

The government reported a 24.6 trillion won deficit in the first two months of 2023. Its income fell 15.2 percent on year and spending was down 5.4 percent in the same period.

The Yoon government has stressed the importance of tightening the fiscal belt to improve soundness, shifting from years of expansionary fiscal policy under the Moon government.

“Indiscriminate scattering of cash and populism need to be sternly rejected,” said Yoon during a cabinet meeting in April.

There are two solutions to resolve the declining tax revenue: issuing state bonds and restructuring public expenditure, which is a reorientation of the government spending.

“Restructuring public expenditure is more desirable because issuing state bonds means issuing debts, which could amplify inflationary pressures,” said Lee Jeong-hwan, an associate professor at the College of Economics and Finance at Hanyang University.

“But political tension could arise from reorganizing expenditure structures ahead of the general election next year,” Lee added.