Nota Bene Podcast Ep. 163
South Korea Update: Recent International Policy and Law Developments with Paul Kim and Scott Maberry
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Listen to the original podcast released May 10, 2023 here:
https://www.sheppardmullin.com/notabene-483
In this episode, Paul Kim, a partner in Sheppard Mullin’s Corporate and Securities Practice Group, joins host Scott Maberry to discuss recent developments in international policy and law impacting the U.S.-South Korea relationship, including the business significance of President Yoon Suk Yeol's state visit, the North Korean nuclear threat, and efforts to contain China.
Guests:
About Paul Kim
A partner in Sheppard Mullin's Corporate and Securities Practice Group, Paul Kim also serves as Office Managing Partner and representative, foreign legal consultant for the firm's Seoul office.
Paul's practice focuses on cross-border mergers and acquisitions (M&A), private equity, venture capital and securities transactions, restructurings and multi-jurisdictional disputes. He has more than 25 years of experience representing a diverse range of clients operating in numerous industries and in many countries, practicing in New York for over 20 years before relocating to Seoul. His clients include private equity funds and investment managers, industrial and manufacturing companies, pharmaceutical and biotech companies, and commercial banks and other financial institutions.
Paul has particularly broad experience representing Korean, European and U.S. clients in complex multi-jurisdictional transactions, restructurings and other matters, and has been recognized on multiple occasions by Chambers Global, Chambers Asia Pacific and Asian Legal Business.
About Scott Maberry
As an international trade partner in Governmental Practice, J. Scott Maberry counsels clients on global risk, international trade, and regulation. He is also a past co-chair of the Diversity and Inclusion Working Group for the Washington D.C. office, serves on the firm's pro bono committee, and is a founding member of the Sheppard Mullin Organizational Integrity Group.
Scott's practice includes representing clients before the U.S. government agencies and international U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry & Security (BIS), the Department of Commerce Import Administration, the Department of Homeland Security (DHS), the Department of State Directorate of Defense Trade Controls (DDTC), the U.S. Department of Justice (DOJ), the International Trade Commission (ITC), and the Committee on Foreign Investment in the U.S. (CFIUS). He also represents clients in federal court and grand jury proceedings, as well as those pursuing negotiations and dispute resolution under the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA) and other multilateral and bilateral agreements.
A member of the World Economic Forum Expert Network, Scott also advises the WEF community in the areas of global risk, international trade, artificial intelligence and values.
Transcript:
Scott Maberry:
Welcome to the Nota Bene podcast. I'm your host, Scott Maberry. My guest today is Paul Kim of the law firm of Sheppard Mullin. We are talking about international law and policy developments affecting business in Korea. Before I introduce him, I'd like to thank our listeners in over 100 countries worldwide. We are so glad you're tuning in, and please do keep the feedback coming, it definitely influences our programming. You can email me directly with your comments and suggestions. My email address is in the program description.
My guest, Paul Kim, is well positioned to give us insights into international law and policy developments in Asia. Paul's a graduate of the University of Chicago with highest honors and obtained his Juris Doctor degree from Harvard University. Paul is the managing partner of Sheppard Mullin's Korea office. He advises clients on cross-border mergers and acquisitions, private equity, venture capital, securities transactions, restructurings and multi-jurisdictional disputes. Paul, welcome back to Nota Bene.
Paul Kim:
Nice to be back and nice to have a new host to speak with. Nice seeing you, Scott, and speaking with you.
Scott Maberry:
Great to have you. Thanks very much for your time. So South Korean President Yoon Suk Yeol is making a state visit to the United States in the last week of April. The visit will commemorate the 70th anniversary of the Mutual Defense Treaty signed after the Korean War ceasefire, and on this Thursday, April 27th, Yoon will address the joint century session of Congress, and he's the first South Korean president to do so in over a decade, I think. But that's not the only reason he's here, right? Tell us about the business aspect of the visit. Who is he bringing with him to Washington?
Paul Kim:
Yeah, so I don't know when the listeners will be listening to this, but this is going on right now as we speak. So he arrived, I believe, two days ago in the US, and he brought a 122 person business delegation. And these are, I believe, are well-known companies even in the United States, Samsung Electronics, SK Group, and the Hyundai Kia Motor Automotive Group chairman, as well as numerous other chairmen and major executives of Korean businesses, as well as the heads of six major business associates, including the Federation of Korean Industries and the Korean Chamber of Commerce and Industry. So he's in the US not just for the political backdrop with the state visit and in North Korea, which is what many people associate or think about when they think about South Korea, but also he's here for business, and Korean business in particular.
Scott Maberry:
That's great. Well, let's talk security issues right off the bat then. So what's the state of the North Korean nuclear threat and the allied response?
Paul Kim:
Well, it's interesting. It's the 70th anniversary of the treaty and the alliance, and that coincides with the end of the Korean War, which is in 1953, this being 2023. And from a large picture perspective, not much has changed in 70 years vis-a-vis North Korea in the sense of we're still in a state of war with them, we're still divided by the border that existed at the end of the war. What has changed, of course, is their increasingly belligerent, well, they've always been belligerent I guess you could say, but in terms of their development of new technologies, especially nuclear technology, and now with an arsenal that includes ICBMs, and quite frankly, very frightening intercontinental ballistic missile capacities which are being tested literally, I wouldn't say it's every day, but there seems to be some form of test every few weeks. And so the US and its allies, including Korea, are obviously conferring all the time about how to deter this nuclear threat coming from North Korea.
Scott Maberry:
Well, it's fascinating and it's definitely gotten a lot of attention here. What's it like inside South Korea?
Paul Kim:
Yeah, I mean this has been 70 years of this. I'm not yet 70, but I can say that as long as I've been visiting Korea now, living in Korea in a sense it's just... Well, I don't want to minimize the threat and the stresses it causes the citizens here. I mean obviously it's always when there is a test or there is an incident, it's the top news item and it's always one of the top news items that are in discussion. But I think people here just kind of so drunk, they move on with their daily lives. It's not something that is a topic of discussion among business people, clients, and like in the sense of what are the biggest threats for our businesses, for our lives. North Korea just is not part of that conversation. It's just a known quantity I guess at this point. I mean, let's hope it remains that way, but it's just something that we've kind of factored in that risk and we're here and we're living, so we know how to deal with that.
Scott Maberry:
I hope it stays that way. And it's a fascinating issue because it's the life and death threat that's just there all the time right across the border. And I've been there many times visiting clients and others not too far from the border, and you can see across the border and you can see into this country that is just a few miles away physically, but decades away and almost a world away in so many other ways.
Paul Kim:
Yeah. Well, they're decades away in terms of their development economically and in many respects, but they're not decades away. In fact, they're more advanced, at least on this side of the border in terms of their nuclear technology and their missile technology. And that's what Washington and Korea will be conferring on the Washington's extended deterrence, which as I understand it means the US mobilizing the full range of its military capabilities, which includes the nuclear to turn capacities or capabilities and its commitment to defending Korea against the North Korean threat. And that is one of the top agenda items as I understand it, that are either currently being discussed or will be discussed between the president's Yoon and Biden.
Scott Maberry:
And it's clearly one of the very, very top security issues on the US agenda also. So other than containing the North Korea threat, what are some of the other key aspects of the comprehensive strategic alliance between the United States and Korea? For example, how are the allies working to contain China in Asia and the Pacific?
Paul Kim:
Yes, of course, Korea lies on the default lines of one of the major global power struggles that exists today, the US, China, I would say competition or global... I don't know how we refer to that now, global posture or conflict. And we lie right on that fault line and try to be balancing that. I mean, China is still by far Korea's largest trade partner. And yeah, that's 28,000 US troops on the ground here in Korea and part of the extended deterrence umbrella that Washington and the US extends to Korea. It's a large topic in the sense of there is constant daily consternation about lying on this fault line, about being kind of put into a position recently with I think the US has focus on economic security in terms of that competition with China in areas such as semiconductors and EV batteries.
So I think there's always this consternation here, and I think with a lot of other allies in the US, you see that with Europe, even with Macron's visit to China, but China is just such a large and important economic and trade partner for many countries that it's difficult to be in one camp and to the exclusion of the other camp, right? To look at them as two camps. So that's been top of mind.
And so what's one of the other areas of discussion in during the state visit I understand is to bolster cooperation on the economic security and competition vis-a-vis China in those areas like semiconductors and EV batteries, which are two battlegrounds and current and future battlegrounds for economic supply. I wouldn't say dominance, but sort of two very important economic, at least in the manufacturing and IT space going forward, the new fuels of the 21st century and so on.
Scott Maberry:
Absolutely, and we'll talk about some of that economic security and economic cooperation in a minute, and I've kind of artificially divided this discussion up into security, and economic, and commercial, but as you're rightly pointing out, the two are really much, much more intertwined than they used to be in US policy, and I would say in global security generally. So it's a little bit artificial.
But before we go into EV batteries and other areas of economic cooperation slash competition, I'm interested to explore a couple more of the security issues. And I know that there's been some consternation not just with the specific US, Korea, China relationships, but what about what's known as the Quadrilateral Dialogue among Australia, India, Japan, and the United States? What does the Quad do and how does that affect Korea?
Paul Kim:
Yeah, that's very interesting. The Quad, as you just described, does not include Korea, but I would say Korea is a member that would be right outside, or at least quad plus one. I don't know if ever really referred to it that way, but certainly the US wants Korea to be as close to the quad as possible because as it is lying right on the fault line with North Korea and also China to the north of North Korea and its major benefactor and supporter that it firmly aligns its policies, its strategic posture and coordinates with the rest of the quad. For Korea the largest, I mean the single most important country of the quad when it comes to security cooperation and alignment is Japan among those countries. It's a neighboring country.
For those who don't know. I mean Korea and Japan share a very difficult history together, especially from the Korean perspective regarding recent modern history. And so there have been many... I would say there's been a lot of encouragement from the US side to reconcile some of the historical issues and animosities between the two neighboring countries, Korea and Japan. And there have been recent developments on that front with President Yoon visiting Japan and meeting with the prime minister of Japan, Kishida.
And there was, at least from the Korean perspective, and obviously it depends on your politics and view of history on this point, there were from the Korean perspective, some initial concessions made regarding historical issues regarding Japan's use of what's called wartime forced labor or slave labor of ethnic Koreans or Koreans in Japan and other places. And Korea and the Korean president tried to resolve that issue by basically creating a compensation fund for the victims of forced slave with that, who had sued Japan and Japanese companies in Korea, he created a fund to try to compensate those victims without initial participation from the Japanese companies involved or Japanese associations or government.
And that led to in the hopes that this relationship, which America, the US desperately wants to be on a firm foundation or a firmer foundation for purposes of I'd say Chinese containment. President Yoon went to Japan, made these so-called concessions, and Korea has now... Just to backtrack, since 2019, both countries had taken each other off of their list of preferred trade partners. And so there were issues with giving the most preferential trade treatment to each other's goods. And that had impacted a lot of the Korean and Japanese business. The Japanese and Korean business communities have wanted a reconciliation as I understand it. And they were quick to kind of fall in line and had many caucuses and meetings between themselves. Recently Korea put Japan back on its whitelist of trusted trading partners three years after their removal in a move to improve the bilateral economic and diplomatic relationship. As I understand, Japan has not yet done so, their bureaucracy or requirements are a little more slow moving, but it is expected that they would do the same.
Scott Maberry:
It's so interesting because it's such a complicated tortured history between the two countries and yet the United States, and I suppose the rest of the quad is kind of pushing Korea and Japan to firm up their relationship as part of the effort to help contain China. So it must put everyone in kind of an awkward position.
Paul Kim:
Yeah. Any way you look at it, I think President Yoon took political risks and used some of the political capital to make this first overture, so to speak. And certainly the opposition party, I don't want to mince words too much, I mean they literally skewed him here. And that was acknowledged by the, I think Rahm Emanuel, the US ambassador of Japan. He acknowledged Yoon's taking political risks and making this first step in overture. Again, this was with US encouragement, which has I think been consistent through many US administrations. There is certainly a desire that Korea and Japan can move past their difficult history and have a future-oriented relationship. Obviously they have a lot of trade links and business links, and there's always the commercial aspect of it, which is different from the strategic and the historical. That only happened in the last month or two, we're getting the exact dates.
And so that also, in some ways you can probably look at it as leading up to the state, the United States, you now doesn't have that issue to contend with or discuss. He has in his mind at least made those amends. Yeah.
Scott Maberry:
He's definitely done his part it looks like... Well-
Paul Kim:
From that perspective, yes.
Scott Maberry:
Yeah. Well, a little further afield. What's Korea's position on the Russian invasion of Ukraine? Has it supplied weapons and what are the main issues in Korea for that conflict?
Paul Kim:
Yeah, I wish I had the exact facts there, but from what I understand, Korea is sitting on because of its conflict and defense posture and issues with North Korea. Korea has a substantial stockpile of artillery shells and other military equipment and weaponry. And as I understand now, the Korean law of current policy or regulation or some combination of the above, they do not export to countries in an armed conflict or an armed conflict situation. And so they have been reluctant to actually export this arsenal or artillery shells to Ukraine. And there's been calls for the countries that are supporting Ukraine for created, made those direct exports, and Chris found that to be more difficult under their current posture.
I think if there are civilian issues and casualties, and I think that would be considered or could be done, but I do know that there are calls for Korea to export its substantial arsenal of weaponry and artillery shells in particular because that's been exhausted in many respects by the Ukrainian military. What people don't realize, again, if you look at the two largest standing armies in the world and the top five or 10, it's North Korean and South Korea, and they have the arsenal of military equipment to back that up. So that's also kind of a fascinating kind of side effect of this conflict with North Korea.
Scott Maberry:
Well, Korea's got probably the largest number of artillery and artillery ammunition in the world, and I can see why the Western Alliance would ask that some of that be exported to Ukraine. And I could see a couple of reasons why that's hard for Korea. One would be Korea might need it for itself, and you wouldn't want to give up a whole lot of those just in case.
Paul Kim:
There's also a balancing act to be made vis-a-vis obviously Russia, antagonizing Russia, Russia has made direct comments on whether if Korea does export those arms to Ukraine, that would be viewed as a hostile act and countermeasures would probably flow from that, but also China. So there's those considerations as well. But as I understand it, there actually it is either enshrined in law regulation and/or policy that they don't export those arms in an armed conflict without the further steps needing to be taken.
Scott Maberry:
Well, it remains to be seen. Well, going back to the economic and commercial issues then. The companies that President Yoon is bringing on his state visit, you listed some of them. They included at least a couple of the world's top five semiconductor companies, least three of the top five or six electric vehicle battery makers, largest automaker in the world. Could you comment on what this means for the US-Korea economic and commercial cooperation?
Paul Kim:
Well, at least on that, we're going to talk about semiconductors and EV battery makers, as you or some of our listeners may or you certainly know, Scott, but I think some of our listeners may not be as aware of recent US major economic acts that have been passed in the form of the CHIPS and Science Act and the US Inflation Reduction Act, which provides tax credits, and other benefits and to those companies that nearshore their production and manufacturing in United States or in some cases North America. So we could probably go into the particulars of each of those acts. But as you mentioned, Korea in the semiconductor space, Samsung Electronics and SK Hynix are two of the five largest semiconductor manufacturers in the world by sales. And then we took at EV battery makers between Samsung, SDI, LG Energy Solutions, and SK On, they account for three of the top five or six EV battery makers.
And what's interesting among the top 10, you look at the top 10 EV battery makers, three of them are Korean, one is Japanese, Panasonic, and the rest are Chinese. So these Acts that have been passed in the US, the Nearshoring Act, specifically exclude giving some of those benefits to companies from countries of concern. So at least on the EV battery maker side, if you look at where those benefits are most attainable for those 10 top EV battery makers, there's three Korean and one Japanese.
So I mean, it's a very important topic for them to understand how that Act's supposed to work, how they can avail themselves, and how it should be interpreted. And if that's not something that's palatable, or acceptable, or create difficulties, how there could be changes to those acts if possible. And so I think that's one of the topics that would be discussed during the state visit and related meetings.
Scott Maberry:
I'm sure you're right, the CHIPS Act and the infrastructure bill represent the two largest industrial policy initiatives since World War II in the United States, and they are very central to the Biden administration's view of the next stage in both the United States economic development and really importantly in what you've rightly characterized as the global struggle for economic dominance between the United States and China.
So I think that one of the big issues that we're going to see Yoon and Biden talking about is how much CHIPS act money is the United States willing to let Korean and other allied country companies get access to in order to help keep these really critical technologies in Western hands and not in Chinese hands. And EV batteries was a great example where there are no great US EV battery companies on that top 10 list probably, there are a couple of US companies that are getting into that space and that are doing well, but it's possible that the United States won't be able to go it alone, and it's possible that some of that development money ought to go to companies who can manufacture those materials in the United States, whether they are a US indigenous company or not. And so I'm pretty sure that's an important and probably pretty tricky issue between Yoon and Biden.
Paul Kim:
Yeah, I mean, when you take the EV battery makers, the US Inflation Reduction Act, the IRA is where I think they have the most interest in because that provides a $7,500 tax credit for EVs or electric vehicles that are bought, and on an approved list of car models that can qualify for the full $7,500 tax credit. Just to clarify, that's a $7,500 tax credit available to the taxpayer, which that's not a deduction, that's a tax credit. That's $7,500 off your taxes, which is kind of, depending on your tax bracket, that's like a $30,000, $40,000 deduction in a way. I mean, it's a big competitive advantage for those cars that can qualify for the full tax credit. For the full tax credit though, you've got to have under the IRA, I think $3,750 of that is available if your... as I recall, in each year there's a phase in of a higher threshold, but certain percentage of your battery components had to have been made in or assembled in North America, for example.
And when you look at the minerals in that, and then the other 3,750 is a certain percentage of the minerals used in your EV battery were from essentially countries either North America or countries with which, well, I think basically in United States or countries with which they have a free trade agreement, Korea is one of them. I think Mexico, I believe Japan falls under that category. So you'd have to have both of that. And so it's hard to qualify, but if an EV battery maker who puts that all together in an EV battery, they're the ones who need to now say, "Hey, I can partner with a US automaker or supply them with a battery that satisfies this, then that's a tremendous benefit for the automaker to have in their car a battery that qualifies under both of those standards or requirements."
Scott Maberry:
It's very likely that's the model that you and I are going to go out and buy next time.
Paul Kim:
I want a $7,500 tax credit too. But as I understand it, there's only 16 cars that currently qualify and none of them are Korean. I don't know if there's any non-US companies on that list of models that qualify, but as they say in some sports, that's all to play for going forward. So every year there's a higher threshold requirement. I think now I forget it's 40% or 50% depending on which side of the $3,750 credit goes up to 60, 70, 80, and then a certain year you can't have anything from a source from a country of concern, which basically is China.
China, if you look at their graphs, I mean they have something, I mean, like I said, six of the top 10 EV battery makers, but then their EV sales are just far more extensive than the United States. China has adapted to electric vehicles far faster. I mean much greater amounts in the US has. And so if you look at the sources of these minerals that are part of the mineral composition, they're all from 89% from China. So they have thousand-
Scott Maberry:
They have a virtual monopoly on the processing of almost all the rare earth minerals that you need for a lot of different applications including batteries. Yes. So it's really going to be a struggle for the United States to identify and nurture those sources. And it's also a really interesting political struggle here because the Biden administration has to do two things at once. It has to encourage the development of EVs and also protect itself from the political right by maintaining a strong preference for US-made stuff.
And those two start to compete pretty heavily with each other until and unless we're developing the ability to, let's say, refine cobalt, which is never going to happen in the United States anymore because that's a very dirty process, as are a lot of these rare earth mineral refining capabilities. So yeah, that puts the United States in a tough spot, and it also creates a real incentive for manufacturers from all over the free world to try to get into the United States and set up manufacturing here and get a piece of that money. And in the end, the more of that money that's distributed to whoever can get it is the best because in the end, if you believe in the policy goal of adopting electric vehicles, then the faster we can do that whoever's making them the better.
Paul Kim:
Yeah, I mean, so just to give you an example, I mean Hyundai and SK On, SK On is one of the EV battery makers. Hyundai, I was always surprised by this. They're the third largest, by some measures, the third-largest automobile manufacturer in the World, Hyundai Kia Group. They've just announced the 6.5 trillion Korean won, that's about 5 billion US EV battery plant to be made to be built in the United States recently.
Scott Maberry:
It's so amazing.
Paul Kim:
So I think that's in Georgia. But there are other projects that... for example, LG Energy Solutions has also announced with US car manufacturers for other plants. So this is going on... I mean, the business necessity was already driving that, but now with the IRA and other inducements that are available now, that's only going to accelerate. I mean, getting back to the CHIPS Act, Samsung, they initially announced a semi manufacturing plant to be built in Taylor, Texas. And I've read that due to inflation itself, that's now a $25 billion plant to be built in Taylor, Texas, Samsung electronics. So this is big, big money. That's why these 122 business sectors are also accompanying Yoon on state visit and participating in a number of meetings with these types of topics in mind.
Scott Maberry:
Yep. And then to tie it back to the security issues, this is all not only just US industrial policy, but US industrial security policy, economic security policy in the global competition between the United States and China. We're trying to attract that development and we're spending a heck of a lot of taxpayer money to do it. So one hopes that those are good investments and one hopes that the desired policy outcomes are achieved, but there's going to be a lot of struggle between here and there to get the development right so that whoever's doing that development can get the funding that's being offered to them. So that's kind of the struggle that's ahead of us.
Paul Kim:
Yeah, I mean, just to give you a little bit of the Korean perspective on matters, as I understand it, I mean, while there's opportunity available for investment in US and tax credits, there is also, we haven't even talked about these manufacturing credits, I think it's 25% of your qualified investment gives you a tax credit. So there are incentives involved, big, big incentives to building in the United States, but there's also a part of the CHIPS Act that says there's a clawback provision where you have to give back some of these funds you might receive under the CHIPS Act if you made what they call a material expansion of semiconductor manufacturing capacity in a foreign country of concern.
We lawyers, we love that language of... but what does that mean, right? Well, a country of concern is essentially China. And so a material expansion, I think that's what's being kind of interpreted now, but as I understand it's some of the Korean... So just to give you background on this, Korea not just has these major semiconductor manufacturing facilities in the US and Korea, in China is where they have maybe 30-40% of their sales might be in China, and they have the facilities to back that up.
And so I think as I understand it, the problem with of the potential concern with the US CHIPS Act of the CHIPS Act is that a material expansion could be even modest transactions extending their manufacturing capacity in China. So they do something in China, which... So I think the standard is only $100,000 spend or more. They might lose billions of dollars of credits that they receive from building under the CHIPS Act. So I think there's some positive developments regarding interpretations of that. But no, I think that's sort of one of the issues that are of great concern for Korean semiconductor manufacturers.
Scott Maberry:
I'm feeling a lot of companies you've described are thinking about that and talking about that in the United States this week. And I also know that there are companies in the United States, for example, who are concerned about that, and many US companies have some manufacturer in China including semiconductor companies.
And so you'd have the same question for them. If I go out and grab some of this CHIPS Act money and I qualify for the incentives, but then five years from now China is where the real demand growth is, which is not a crazy prediction, then I have to be careful what I build there so as not to have a clawback come and try to get that money back from me. And same with a lot of European companies, we've got clients in some of these areas thinking about some of these same provisions of the CHIPS Act or of the Inflation Production Act, making sure that once they get the money, they're not triggering some clause that somehow limits their ability to collect or worse triggers one of those clawback concerns.
Paul Kim:
Yeah. I mean, as we started the podcast out, we're talking about security concerns, but really Korea lies really on the fault lines of the security competition as well as the economic competition in these key industries. And so in an outsized way, these companies and industries account for a large part of the Korean economy, especially semiconductors and exports. And so obviously it's a big issue for many companies in many countries, but for Korea, it's very pronounced when you talk about the BG sector's, driving economy here, semiconductors and EVs, and EV batteries are really top of that list. So there's a security issue and the posture, but it really is linked to the economic security issue.
Scott Maberry:
Absolutely. Well, in some ways it's a great problem to have because we've got two really strong countries in Korea and the United States who have really strong industries who are really strong allies. And so we have our differences, and we're in slightly different positions than maybe you would even say dramatically different positions vis-a-vis trade with China. But we do have a strong alliance, and we do have a lot in common, and we do have really powerful economies. And so when Yoon and Biden are talking, they're talking about ways of finding areas of cooperation and moving ahead together for the benefit of both countries for sure.
Paul Kim:
Yeah. So as I understand it's... I know surprised, but I read somewhere that this is only the second state visit during Biden's tenure. The first was I think Macron from France, and then Yoon, so I don't know if that's right. I read that somewhere. Just seems like that's a very few number of state visits, maybe they're not in vogue anymore.
Scott Maberry:
That's interesting. I have a feeling if that's true, that it has more to do with the very highly consciously developed domestic policy agenda. So we're probably not hosting very many state visits and the ones that we are hosting, this one's going to be emblematic of future state visits where we're looking at ways to expand economic cooperation for purposes of commerce and security.
Paul Kim:
Yeah. Interesting. I found that to be an interesting fact to-
Scott Maberry:
Great and great fact. Yeah.
Paul Kim:
I hope that's true, but that I read that, that surprised me.
Scott Maberry:
What about doing business in Korea right now? What's the current business climate there?
Paul Kim:
Well, I mean I think in some respects it's no different than what is the case in the lot of other major economies, including the United States. I mean, there are interest rate fluctuations and uncertainties, rising interest rate environment, supply chain bottlenecks and disruptions creating issues for certain sectors. Especially here, the project finance construction sector is under duress because on the one hand, they had to borrow money for completing their projects, and those interest rates are only going up. And on the other hand, the construction materials prices have gone up, whereas the economic uncertainties, sales of residential units and other sales even on the commercial side have gone down. And so that's created a real gridlock and stoppages in a lot of construction projects.
I think I've read some figures that's probably depending on how you add it all up. So a $100 billion of exposure for certain players in Korea. So that's a domestic issue, but it's been impacted by other trends that we see in other major economies. We talked about semiconductor, semiconductor, which is a very notoriously volatile industry where there's big cycles and upturns and downturns. It's going through a downturn now, as a result with it accounting for a large portion of Korea's exports, Korea's exports are down. Korea's been running a trade deficit for several months, and because the energy imports are getting more expensive, the exports are done because the semiconductors and the like, it's actually running a trade deficit because of what's going on globally. And inflation persists here it's gone up. I don't think, to the same extent as US, but certainly inflation has gone up from recent historical levels. And so all of that's conspiring to make for the same uncertain business climate that exists, I think, in US and other major economies.
Scott Maberry:
Yep. That sounds a lot like what we're facing here. I would add into that some very strange and contradictory signals in the bond and equity markets here. And so nobody really knows what's up, and what's down, and what the future holds. So we're in a really strange economic period here in the United States given some of the similar issues to what you just talked about. So it sounds kind of familiar.
Paul Kim:
We haven't had any of the bank runs that we saw with Silicon Valley Bank, and I think it's the Silver Gate and First Republic, but for various reasons. But still people here, the Ministry of Finances is on high alert for looking for any of these types of uncertainties. So we haven't experienced that yet. I think, as I said, there's some pressures that exist in the project finance market here, but hopefully that will subside and see a better business environment going forward.
Scott Maberry:
Excellent. Well, given all of that, what are the current hottest issues for your global clients regarding doing business in Korea and in Asia more generally?
Paul Kim:
Well, Korea's economy, you look at maybe 40%, 50% of Korea's economy is accounted for by exports. So when you look at Korea, many economists look at Korea's economy and its exports as a bellwether for the global economy. And so exports are down, there's probably some weakness somewhere. But all those things we just talked, all the issues we... or topics we talked about, I mean, in terms of an outbound posture, Korean clients are very interested in what they need to do to nearshore their operations to account for the supply chain reorganization that's taken place globally.
We talked about the US IRA and the CHIPS Act, but Europe's coming out with their own versions of that. Korea has its own CHIPS Act. And so everyone now has to be mindful of the regulatory environment, I guess to some extent by COVID, but just when they needed something, it wasn't there because of how globalized and interlinked all the economies were. But now that everyone's focused on, well, when I need something in a pinch, I want that to be domestic, right? And so if you're a global manufacturer like many of these Korean conglomerates and businesses are, and you're dependent on at least half your economy is global or even export oriented, then you have to be aware of all of what's going on in the rest of the world so you can continue that business globally. And so that's been top of mind. So even though the business confidence in many sectors is kind of at low levels, they still need to be mindful of what's going on and what they need to do to nearshore and to be in the markets that they're already serving, to continue to be there.
Scott Maberry:
Well, I'm glad you mentioned that because I didn't think to ask it, but it creates, or it highlights a really interesting parallel between Korea and the United States in that we're both looking for ways to address another related but separate issue of economic security, which is that the perfect storm of COVID and economic downturn, and war, and instability, and maybe a ship getting stuck in the canal created a real uncertainty about supply chains. And so everybody is considering ways to shorten their supply chain, not just because we want to cut out countries of concern, although I think the United States strongly does, but also because they want to make sure that they can have access to the supply chains that they had. And there's a real deep concern out there about making sure that manufacturers have the goods that they need when they need them.
And my own view of this is that the days of these super extended supply chains that were really very efficient in their way are kind of over, or at least those days are numbered because what those events showed is that although they're efficient when they work, they're very vulnerable, those supply chains.
Paul Kim:
Yeah. It'd be interested to see what going forward with all these models of sharing knowledge. I mean, you can really localize a lot of things, but then you can't localize or you can't minimize the cost components sometimes, as we know. It's just more expensive to do certain things in certain places than it is elsewhere. And that drives a lot of supply chain diversification, I think, over the years. But as you see what happened in the Panama Canal, and then also the COVID, and supply chains being cut, this is all a very synchronized kind of movement. So one thing goes off and the whole thing just seems to break down, and then you say you don't have what you want or what you need. And I think that's caused a lot of policy makers to try to do something about that.
And I think the security aspects of it are... I guess, the theory is, well, if this manufacturer or this maker is from a country of concern, they could just pull the supply at any time they want for political or noneconomic reasons. My own personal view, I don't know how great that risk is, but... And it seems to be driving some of the policy initiatives in this area.
Scott Maberry:
And the concern that they'll get ahead of us if we let them continue to use us as a destination for their goods.
Paul Kim:
Yeah. That too. And then also the competitive aspects of that. So I mean, I think at least for transactional lawyers and like myself, I mean, we just want the gears to be moving all the time. And some people are just transacting all the time, different types of deals, and transactions, and investments. So it's just another kind of issue that needs to be addressed.
But it can also drive investment as we see. It does drive translational activity, but just in different ways. What's interesting is some of these apps you get at manufacturing tax credit in the tens of hundreds of millions of dollars. I mean, that's a big benefit, right? So you want to grab that.
Scott Maberry:
It's going to be real interesting to see because it's going to drive a lot of investment.
Paul Kim:
Yeah, that's interesting.
Scott Maberry:
Well, before I leave you, I remember when you were on this podcast in February of 2020, you mentioned a strange and lethal new virus circulating in China, and you speculated that it was going to be a pretty big deal. Any new events that you're seeing on the horizon, any predictions you'd like to make about the future? Because now I trust you.
Paul Kim:
Yeah, there are some viruses that they have been talking about, but I don't think we're quite there. That was something that was evident on the street here. I mean, just something-
Scott Maberry:
Amazing.
Paul Kim:
... we were experiencing. Thankfully, I don't see anything like that coming-
Scott Maberry:
Good.
Paul Kim:
... in future at the moment. So I can leave the viewers, I wouldn't say assure, but at least I don't see anything comparable at the moment.
Scott Maberry:
Well, Paul, thank you so much for taking the time to be with us today. This has been a really interesting conversation, and I can't wait to see you again next time we have an update from Asia.
Paul Kim:
Okay, great. Nice to chat with you. Nice to be here. Thanks for inviting me.
Scott Maberry:
Thanks a lot.
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