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Sweeping deregulation, not symbolic gesture, needed to facilitate reshoring of Korean firms

President Moon Jae-in last week attended a ceremony to kick off the construction of an electric vehicle parts plant in a provincial city.

In a speech during the event, he praised the company building the plant, Hyundai Mobis, for having put the brakes on overseas investments and making a U-turn to invest in South Korea.

Moon said that promising firms’ U-turns would give hope to the Korean economy, noting the country should do its best to defend its economy at a time when “free and fair trade systems are shaken and politically-motivated trade retaliation occurs.”

While he did not mention Japan by name, he was apparently referring to its export curbs on Korea amid a prolonged dispute over issues related to the unfortunate history shared by the two countries. Tokyo’s measure to drop Seoul from its whitelist of preferred trading partners took effect on the same day that Moon attended the groundbreaking ceremony of the EV parts plant.

The escalating trade spat with Japan, which is threatening to further weaken the Korean economy already exposed to other external risks, has renewed attention to the need to get Korean manufacturers operating abroad to move production back home.

Moon described the construction of the Hyundai Mobis plant as a “fruit” of the government’s efforts to encourage the reshoring of Korean firms by offering tax incentives and other benefits under a related law introduced in 2013.

But there can be no complacency regarding the initiative.

Only 52 Korean firms have transferred production back home over the past five years, according to data from the Ministry of Trade, Industry and Energy.

The anti-business policies pursued by the Moon administration since it assumed office in 2017 have accelerated the exodus of local firms, especially manufacturing exporters, rather than having brought their overseas operations home.

Korean companies’ overseas direct investment increased 44.9 percent from a year earlier to $14.1 billion in the three months to March of the year, according to data from the Ministry of Economy and Finance. The figure is the highest for any first quarter since 1981, when the government began compiling related data.

By contrast, facility investments by Korean firms at home recorded a 17.4 percent on-year decrease in the January-March period, the steepest decline in a decade, according to separate figures from the Bank of Korea.

Certainly, local companies have become more active in securing large-scale mergers and acquisitions and expanding overseas production in a bid to boost sales abroad. But, as many experts note, the contrast between their soaring investments abroad and sagging investments at home can be attributed mainly to the Moon administration’s misguided policies that have made it harder to invest here.

To propel its income-led growth drive, the country’s minimum wage rose at double digits in 2017 and 2018. A rigid implementation of a shorter workweek has added to increasing personnel costs.

The Moon government has made little progress in regulatory and labor reforms. Furthermore, it has raised corporate tax rates, while other major advanced economies have competitively cut them.

Particularly worrisome is a rapid hollowing out of the local manufacturing sector, which has shored up Korea’s relatively small open economy. Korean manufacturers’ ODI climbed a whopping 140 percent on-year to a record high of $5.79 billion, or more than 40 percent of the total, in the January-March period of the year.

Without successful efforts to encourage a U-turn in investments, the government’s goal to turn Korea into one of the world’s top four manufacturing powerhouses would be out of reach.

In last week’s speech, Moon said his government would not spare efforts to encourage companies to invest more at home. He needs to back the pledge with substantial measures, particularly sweeping deregulation, to forge a corporate-friendly environment.

Lifting or easing safety and environmental regulations are also urgently needed to help facilitate the local production of hi-tech materials that Japan has placed under tighter export restrictions. The government has dragged its feet on loosening such regulations despite a presidential aide’s promise to give a due consideration in July following Tokyo’s measure to tighten control on exports of three key materials to Korea.

Earlier last week, Moon visited a bank in Seoul to make a subscription of 50 million won ($41,340) to a fund to be invested in listed firms here manufacturing materials, components and equipment. He needs to complete regulatory reform and other thorny tasks rather than taking yet another symbolic move.