In an op-ed published in the People’s Daily last month, Beijing charged Washington with using the transition to clean energy as a guise to subsidize its key domestic sectors. This assertion caught the attention of South Korean media outlets, given that ongoing U.S.-China trade tensions encompass products like solar panels and rare earth elements vital for battery production.

South Korea hasn’t merely watched from the sidelines in this global contest. The ROK has actively shaped its industrial policies and pursued diplomatic channels to bolster the competitive edge of its energy sector. While some might view Seoul’s maneuvers as an extension of its sustainable development strategy, such an interpretation would be misguided.

Using sustainable development to tackle challenges such as supply chain security might attract political support and funding. However, it will likely divert crucial resources from legitimate efforts to further the ROK’s sustainability goals.

Conflating economic interests with sustainable development objectives risks weakening the latter’s impact. After all, sustainable development aims to benefit a broad range of stakeholders, not just the wealthy corporations entrenched in the energy sector.

President Yoon Suk-yeol meets with President of the European Commission Ursula von der Leyen and President of the European Council Charles Michel, May 22, 2023 | Image: ROK Presidential Office

CONFLATION RISKS

An example of this conflation occurred in May when a meeting took place between Ursula von der Leyen, president of the European Commission; Charles Michel, president of the European Council; and President Yoon Suk-yeol. This gathering birthed the “Green Partnership” between the E.U. and the ROK. A closer look at this agreement reveals that its sustainability goals are closely tied to economic interests.

The partnership prominently features statements emphasizing the significance of multilateral environmental agreements and a broader dedication to sustainability. However, a telling clause was embedded within these diplomatic statements:

“Energy production and use are a key driver of greenhouse gas emissions, thus both sides recognize the pivotal role which clean energy technologies will play in meeting their climate objectives. To this end, both sides share the objective of undistorted and non-discriminatory trade and investment in clean energy goods and services, and agree on the importance of regulatory frameworks conducive to such trade and investment.”

This emphasis on “undistorted and nondiscriminatory trade and investment” stands out. It hints at the use of industrial policies masked as sustainability efforts, mirroring the E.U.’s apprehensions that the U.S. and China, amid their economic competition, are employing state measures that are inconsistent with the World Trade Organization’s (WTO) principles advocating international trade free from undue government influence.

Such inconsistent measures could encompass preferential treatments like subsidies or tax breaks given to producers meeting specific criteria, such as domestic production requirements. These measures might violate the Agreement on Subsidies and Countervailing Measures (SCM Agreement), a cornerstone of international trade law designed to prevent discriminatory treatment of foreign firms or the preferential treatment of domestic ones.

The E.U. and the ROK have expressed concerns over the U.S. Inflation Reduction Act (IRA) potentially conflicting with the SCM Agreement. There is even speculation that Korea is considering legal recourse via the WTO.

Several studies also highlight the potential rise of legal disputes involving Chinese, Japanese and Korean firms operating in strategic technologies excluded from IRA subsidies. In a countermove, the E.U. introduced its Net-Zero Industry Act, which contains a “security of supply” clause. This provision could mirror the IRA’s effects by setting domestic content stipulations.

It is worth noting that nations often find themselves embroiled in international trade disagreements. Allowing economic interests to overshadow sustainable development policies can intertwine the two, often relegating sustainability to the backseat. The U.S. and China’s inability to finalize a climate cooperation agreement amid their increasingly tense trade dynamics serves as a prime illustration of this predicament.

South Korea’s National Assembly, May 20, 2023 | Image: Korea Pro

TWO PATHS AHEAD 

As the ROK enters into agreements like the Green Partnership, which blur the lines between economic and sustainability goals, it risks eroding public trust. When public funds meant for clean energy transition appear to subsidize corporations, taxpayers may grow wary of how the government allocates their money.

The electric vehicle (EV) battery industry is central to this global economic entanglement. South Korean companies command nearly 25% of the worldwide market share in this sector. Given this dominance, the ROK finds itself particularly vulnerable to the capture of sustainable development policies, especially as the U.S. and China vie to lock down their supply chains.

South Korean firms have adeptly maneuvered around the IRA by forming joint ventures with their American counterparts, including Ford, Tesla and GM. It’s probable that they will tackle the Green Partnership’s challenges similarly, especially in light of von der Leyen’s vision of the partnership as a nexus for “strategic, clean energy projects.”

While the ROK continues to support the production of “core technologies,” including green steel and zero-energy buildings, through instruments like the recently amended Act on Restriction on Special Cases concerning Taxation, or the K-Chips Act, it hasn’t yet cast its industrial policy within the framework of sustainable development. For instance, even though the K-Chips Act recognizes EVs and batteries as pivotal to its energy transition policy, they aren’t integrated into the government’s overarching sustainability strategy.

At this juncture, the ROK confronts two paths. One option is to persist in distinguishing between its industrial and sustainability policies, ensuring that public funds earmarked for sustainable development aren’t diverted to bolster manufacturers of competitive products.

The alternative, which seems more probable, is a shift where Korea’s sustainable development policy, influenced by economic partners like the E.U., increasingly merges economic and sustainability objectives.

This path could result in siphoning resources away from Korea’s high-priority sustainable development goals (K-SDGs), such as enhancing employment insurance, balancing the ratio of non-regular to regular workers and bolstering small to medium-sized enterprises.

If the ROK allows transient economic rivalries to sway its industrial policy and then parades it as a green initiative, the strategy may prove counterproductive in both the short and long run, rendering it a zero-sum endeavor.

Edited by John Lee