Reduce overreliance on China for raw materials

China must clearly explain the reason behind the stalled clearance of urea shipments and prove its sincerity in upholding the free trade principle.

Chinese customs authorities suspended clearance for urea shipments bound for Korea without clear reasons. The move has stoked fear of a repeat of the so-called urea crisis in 2021 that stopped diesel-powered trucks, which need urea for emission exhaust, consequently leading to shipping disruption. The Ministry of Trade, Industry and Energy attributed the suspension to China’s internal supply problem, not to a political motive. But that doesn’t mean we should not ready ourselves against contingency.

The urea reliance on China has not changed much despite the risks. Urea imports from China, which took up 71 percent in 2021, fell to 67 percent last year through diversification efforts. But Chinese products went back up to dominate 91 percent this year. For importers, it is cheaper to bring Chinese products than from Vietnam and Australia due to the low shipping cost. Korean inventory is said to be enough for three months, but it is uncertain how long the restriction will last.

The contest between the United States and China over strategic assets is taking a bigger toll on other countries. According to the guidance on electric vehicles (EV) eligible for a tax credit under the 2022 Inflation Reduction Act (IRA) that Washington has implemented, an entity with a 25 percent share of Chinese capital would fall under the “foreign entity of concern,” which refers to China, Russia, North Korea and Iran that would be excluded from a tax benefit. South Korean battery makers with joint-venture entities in China for easier sourcing of materials and minerals in the country will have to buy back the Chinese share or increase their stake to benefit from the IRA credit.

U.S. Commerce Secretary Gina Raimondo called for tougher global actions in the likes of the Coordinating Committee for Multilateral Export Controls, which was enforced during the Cold War to restrict strategic goods to the communist bloc.

Despite Korea’s heavy reliance on raw materials for manufacturing, efforts to diversify supply chains for more security against the China risk has been slow. Out of 33 strategically important minerals Korea imports, China is a major supplier for 25. Korea is exposed to the China risk in most intermediary inputs for manufacturing. Korean enterprises can’t outright turn away from Chinese products for inputs.

South Korea must expand cooperation with the members of the Indo-Pacific Economic Framework and, at the same time, sustain its partnership with China. Beijing has been stressing the free trade order to scorn trade barriers from America. China must act out on its words. It must clearly explain the reason behind the stalled clearance of urea shipments and prove its sincerity in upholding the free trade principle.