During the Cold War, the United States and China began visible efforts to normalize relations in 1972, with the strategic intent of jointly responding to the common threat posed by the Soviet Union, and finally established diplomatic relations in 1979. In this process, the Taiwan issue was one of the biggest obstacles to normalizing bilateral relations. Nevertheless, the two countries succeeded in establishing diplomatic relations by agreeing on the “One China” principle (policy) and recognition of non-governmental exchanges between the U.S. and Taiwan, and have managed the Taiwan issue based on three joint statements made by the two countries. However, the Taiwan issue has been brought to the forefront again, mainly due to great transformation in the international order and strategic competition between the U.S. and China, created by the rise of China and the response of the U.S. to contain it. Of course, even after the establishment of diplomatic relations between the U.S. and China, friction between the U.S. and China over the Taiwan issue and confrontation between both sides of the Taiwan Straits (i.e. Chinese mainland and Taiwan) have continued. However, the recent U.S.-China strategic competition has further increased the risk and uncertainty of the Taiwan issue. In addition, with the outbreak of the Russia-Ukraine War, the international community's concern about the Taiwan Strait has grown, and the strategic value of Taiwan is rising even more in the era of the Fourth Industrial Revolution, as an important actor in the global semiconductor supply chain. Against this background, this study analyzes the impact of U.S.-China strategic competition on the Taiwan issue and considers the implications for Korea in terms of supply chain stability, industrial competitiveness, and economic statecraft, which are important elements of economic security.

First, the supply chain instability that can result from an emergency in the Taiwan Strait will mainly occur along the maritime transportation route, which accounts for an overwhelming portion of Korea's import and export volume. The maritime transportation routes passing through or near the Taiwan Strait account for 33.27% of Korea's maritime transportation, and if an issue arises along this route, it is calculated that an economic loss of KRW 445.2 billion per day would result even when only accounting for major resources and products. According to a wargame scenario of an emergency situation in the Taiwan Strait, fierce battles are expected to take place between seven days and 70 days, which could cause up to 31 trillion won in economic losses during the period of active engagement alone. In addition, the expected amount of economic damage is expected to increase further when including other resources, products, and air transportation routes in the analysis.

Meanwhile, military skirmishes between South Korea and China or between the two Koreas, that may occur as a result of a military clash between the U.S. and China in the Taiwan Strait, can be expected to destabilize the Korean Peninsula and have a major negative impact on the Korean economy. In other words, the instability of the Taiwan Strait can be added as an element of the so-called “Korea discount.” In addition, if South Korea intervenes in the Taiwan issue in any way, China is expected to use its own economic power to deploy economic statecraft toward sanction measures against South Korea. Judging from various circumstances, China may impose more high-strength economic sanctions in relation to the Taiwan issue than those seen during the THAAD issue. Accordingly, as in the case of the THAAD issue, we can expect suspension of various economic cooperation projects, the promotion of boycotts, restrictions on tourism, strengthening of sanctions against Korean companies in China, and restrictions on imports of Korean products, as well as more systematic and sophisticated forms of economic statecraft implemented in accordance with the Export Control Law of the People’s Republic of China (中华人民共和国出口管制法) and the Law of the People’s Republic of China on Countering Foreign Sanctions (中华人民共和国反外国制裁法), which came into effect in 2021.

In order to prepare for risks and uncertainties caused by U.S.-China strategic competition and cooling cross-strait relations, Taiwan, which has a high economic dependence on China like Korea, is pushing for diversification of its supply chain and imports/exports, stronger competitiveness in key industries such as semiconductors, and closer economic cooperation with allies. Such strategic measures by Taiwan, conducted to ensure its survival, present not only opportunities but also challenges for the Korean economy. In fact, Taiwan's New Southbound Policy (新南向政策), the Moon Jae In government's New Southern Policy (NSP), and the Yoon Suk Yeol government's Strategy for a Free, Peaceful, and Prosperous Indo-Pacific Region all aim at competing over the ASEAN market and fierce competition to gain the upper hand in the semiconductor industry.

As such, in a situation where tensions over the Taiwan issue escalate as U.S.-China strategic competition intensifies, Korea must make thorough preparations to cope with the direct and indirect impacts this will have on Korea's economic security.

From the perspective of Korea’s economic security, the worst case scenario regarding the Taiwan issue is a situation where military conflict breaks out in the Taiwan Strait and Korea is drawn into this conflict. It will be necessary to consider such a situation as Korea carefully assesses the benefits and risks associated with the U.S. Army deploying a Multi-Domain Task Force (MDTF) to the Korean Peninsula, or transition of the mission assigned to the USFK, focusing on national interests.

In addition, more attention and measures are needed at the national level to ensure the safety of major maritime traffic routes, including the Taiwan Strait. This is because strengthening maritime power is essential not only in terms of traditional security, but also in terms of economic security, as examined in this study. 

And, from the perspective of tensions on the Taiwan Strait and economic security, another important factor will be to improve inter-Korean relations. This is because even should a military conflict occur in the Taiwan Strait, efforts to improve inter-Korean relations could minimize the destabilizing effect this has on the security of the Korean Peninsula. If inter-Korean relations are not managed stably and left in a confrontational state, military clashes in the Taiwan Strait could directly escalate into security instability on the Korean Peninsula, for instance in the form of military provocation by North Korea.

Meanwhile, as seen with Taiwan's New Southbound Policy, the Korean government needs to establish a more detailed foreign policy focused on ASEAN and South Asia to promote stability in the supply chain and diversify its import sources and export markets. The Strategy for a Free, Peaceful, and Prosperous Indo-Pacific Region announced by the current government of Korea presents the direction of these efforts, and further steps should be taken to establish detailed policies.

In addition, just as Taiwan is striving to strengthen its competitiveness in the semiconductor industry as a survival strategy amid U.S.-China strategic competition, Korea should implement more active policies to strengthen its competitiveness and improve the conditions for corporate investment in the area of system semiconductors. More active support will be necessary at the national level to maintain or widen the existing technology gap Korea currently enjoys in the memory semiconductor field, and to gain competitiveness in the areas of system semiconductors, materials, and equipment. 

Lastly, the Korean government must carry out active measures and increase its policy focus on trust-building efforts with other stakeholders in the region, another key element of economic security. While it is very important to de-escalate potential threats by building trust with other parties for economic security, as well as to secure a material and institutional basis, interest and efforts in this area appear to be relatively lacking. We should reduce the uncertainty of economic sanctions by building trust with China and actively seek a constructive role as a middle power country to restore trust between the U.S. and China.