Rethinking Risk: Why South Korea’s Conglomerates are Turning Away from China

South Korea’s traditionally family-run conglomerates, the chaebols, play a key role in the development and implementation of national derisking policy. As recent trends showcase, the chaebols often ignore national policies and it is only with the influence of the United States that they have joined onto derisking efforts.
In recent years, South Korea has begun divesting from China after extensively investing in and trading with the country since the early 2000s. This divestment push reflects a derisking strategy in which states and businesses aim to reduce risks in specific supply chains, industries, or bilateral relations. In South Korea’s case, this derisking policy is decisively driven by the chaebols, the country’s traditionally family-run business conglomerates. The chaebols are now seeking to reduce their dependency on China due to increased market volatility in China and emerging commercial opportunities in the United States.
Intensifying China-US geopolitical competition has created a challenging strategic environment for South Korea. While remaining an American treaty ally and a close partner of Washington, South Korea has become deeply embedded in China-linked supply and value chains since the early 2000s. For much of the 2000s and 2010s, South Korean policy elites thus sought to manage this dual dependency on China and the US, leading to an often ambivalent foreign policy that advanced economic cooperation with Beijing while maintaining the security relationship with the US.
In recent years, the vulnerabilities created by the deep economic connection with China have become increasingly obvious. In 2016 and 2017, China sanctioned Korean enterprises following the deployment of the American Terminal High Altitude Area Defense (THAAD) missile system, nominally aimed at deterring North Korea rather than China. By the end of the crisis, the Korean economy had incurred losses worth between US$7.5 billion and $15.6 billion. The THAAD crisis highlighted China’s capacity and willingness to leverage the dependency of South Korean firms on the Chinese consumer market and production in China.
In response, South Korean governments have increasingly sought to derisk the relationship with China. Following the THAAD crisis, many firms affected by the sanctions began leaving China. President Moon Jae-in promoted derisking efforts under the New Southern Policy (NSP), providing subsidies to incentivise firms to relocate production to India and Southeast Asia. These derisking measures have been continued by Moon’s successor, Yoon Suk-yeol, who has also doubled down on economic and security cooperation with the US.
The chaebols play a key role in this de-risking push because of their central role in the South Korean economy. In 2017, the ten largest chaebols accounted for more than 40 percent of the national GDP. Their dominant position now means that the chaebols control large segments of domestic supply and value chains. The state therefore depends on the chaebols for economic growth and the pursuit of policy agendas, for instance regarding decarbonisation and semiconductor development.
In the past, the chaebols’ centrality often meant that derisking policies failed when the conglomerates did not play along. When President Park Geun-hye first sought to incentivise South Korean enterprises to return to Korea under the 2012 “U-turn” law, policy effectiveness was limited, with firms criticising Park for not providing adequate financial incentives. And at the time, total South Korean investment in China actually increased following the THAAD incident. Business representatives complained that policies did not sufficiently offset divestment costs.
The derisking efforts of Park and Moon were ultimately ineffective because they did not align with the commercial interests of the corporate sector, which broadly remained keen to exploit China-related commercial opportunities. Indeed, the limited derisking that did happen following the THAAD crisis appeared driven by profitability considerations (such as greater market volatility and rising labour costs in China) and not government policy.
Derisking policies have become more effective in recent years due to COVID-19 and China’s pandemic response. Since 2022, the number of South Korean firms leaving China has significantly increased. COVID-19 demonstrated the vulnerability of transnationally integrated supply chains and was accompanied by a worsening investment environment in China, linked to Beijing’s botched zero-COVID-19 strategy.
US sanctions against China have also affected corporate risk assessments. The US has imposed various measures that aim to curtail Chinese access to advanced technologies, especially for semiconductors. These policies have created the risk of secondary sanctions for foreign firms operating in China and incentivises them to restructure supply chains in ways that reduce dependencies on the China market. Korean trade patterns have changed as a result: since 2021, trade with China has dropped with corresponding increases occurring with Japan and the US.
Lastly, industrial incentives offered by the Biden administration have shaped the chaebols’ pivot toward the US. Because South Korea and the US have a bilateral free trade agreement, South Korean firms can now access industrial policy subsidies under the Inflation Reduction Act and the CHIPS and Science Act. Chaebols like Samsung and Hyundai have used these subsidies to expand US-based manufacturing, for instance for semiconductors and electric vehicles. As such, American industrial policy has integrated South Korean conglomerates into Washington’s reindustrialisation and derisking efforts.
Although the shift of chaebol operations delivers on national derisking objectives, it indicates that corporate profitability considerations remain decisive in shaping policy outcomes. In practice, the government depends on the private sector for the implementation of its derisking push. When the private sector plays along, derisking can happen, as it has in recent years. Yet, the state’s capacity to compel firms to align with the national security objectives of “their” government is limited.
Ultimately, how derisking has occurred also limits Yoon’s ability to pursue domestic policy goals. Yoon has actively promoted chaebol investments in the US, including by making chaebol heads part of a 2023 presidential delegation to Washington—an unprecedented step. As the chaebols prefer to invest in the US rather than South Korea, however, Yoon’s ability to deliver on his electoral promise of new and better middle-class jobs is constrained. Yoon’s diminished popular appeal was powerfully illustrated during the 2024 parliamentary elections, with his People’s Power Party (PPP) emerging much weaker than before.
Ultimately, South Korea’s current derisking push is primarily driven by the commercial interests of the chaebols rather than government policy. This reflects the conglomerates’ dominant role in the national economy: when the interests of the chaebols gel with that of the state institutions, derisking becomes possible. If this is not the case, derisking is mostly relegated to sloganeering. As I have noted elsewhere, this interest gap is also observable in other instances. For policymakers in Seoul and other capitals, this raises broader questions on how the cooperation of the private sector can be ensured.
Aaron Magunna is a PhD student at the University of Queensland in Australia. His research focuses primarily on how countries in Asia respond to China-US competition by adapting their security, trade, and technology policies. Aaron holds a Master’s degree in International Relations from the University of Groningen in the Netherlands and worked in the think tank sector before re-entering academia.
This article is published under a Creative Commons License and may be republished with attribution.