## 1. Korea’s Exports

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### Introduction and export structure
- Korea is the world’s 8th largest exporter in 2023, with exports accounting for around 40 percent of GDP.
- Korea has a relatively high GVC participation rate among Asian economies.
- Major export items:
  - Semiconductors: almost 20 percent of Korea’s total exports.
  - Automobiles (including auto parts): 12 percent of Korea’s total exports.
  - Other top items: petrochemical products, vessels and parts, consumer electronics, flat products of iron or steel.
- Top export destinations: the United States and China.
- China is the largest country of origin for Korean imports.
- Korea has 21 Free Trade Agreements (FTAs) in effect with 59 countries as of 2024, covering 85 percent of the global GDP.

### Geoeconomic fragmentation, slowbalization, and world trade policy trends
- Geoeconomic Fragmentation (GEF) and the resurgence of industrial policies (IP) are reshaping global trade.
- Drivers: rising geopolitical tensions, uneven distribution of globalization gains, climate change, demographics, and digital transitions.
- Use of restrictive trade measures surged in 2017–2018 and especially after the onset of the COVID-19 pandemic.
- 2023 saw most IP activity in military-civilian dual use products and advanced technology products, including semiconductors and low-carbon technologies, and upstream inputs such as critical minerals.
- World trade and global FDI trends since the global financial crisis:
  - World trade has stagnated relative to world GDP (slowbalization).
  - Global FDI has declined sharply from its peak.

### Evolving U.S.-China trade relations and Korea’s export implications
- U.S.-China trade tensions since 2018 have reduced direct bilateral trade and reshaped global supply chains.
- Empirical pattern: “bystander” countries increased global exports in products targeted by U.S.-China tariffs relative to untargeted products.
- Korea-specific observations:
  - Korea’s exports of goods targeted by U.S.-China tariffs have seen strong growth relative to non-targeted goods.
  - Overall gain in market share in the U.S. of aggregate Korean exports due to tariffs has been modest.
  - Lovely, Xu, and Zhang (2021) estimate Korea’s share of overall U.S. manufacturing imports rose by 0.9 percent and its share of U.S. manufacturing imports subject to new trade tariffs on China rose by 1 percent by end-2019.
  - Exports to the U.S. as share of total exports of Korea has risen in the 2010s; by 2023 the share of exports to the U.S. reached a record high of 18 percent, almost at par with China.
- Korea’s exports to China:
  - Prior to trade tensions, China accounted for about 25 percent of Korean exports.
  - That share has declined in recent years.
  - About 80 percent of Korean exports to China consist of intermediate goods used by Chinese firms; a significant portion of those Chinese-produced goods are eventually shipped to the U.S.
  - The Bank of Korea (BoK) estimates that the 2018 U.S. tariff hikes on China reduced Korea's exports to China and export-related production by approximately 3 percent.
- Technology export restrictions and semiconductor implications:
  - Restrictions have severely affected operations of Korean chipmakers’ production facilities in China, where over 40 percent of their chips are manufactured.
  - Korean firms cannot upgrade those China facilities to produce more advanced chips; facilities are gradually becoming obsolete and losing competitiveness.
  - Restriction of sales of the most advanced memory chips to China (a small share of total sales) contributed to decline in Korea’s semiconductor exports to China.
  - Export restrictions imposed by China in 2023 on some critical minerals have further disrupted the semiconductor supply chain.
- Electric Vehicle (EV) industry and mineral sourcing:
  - Korean carmakers and battery producers rely on Chinese suppliers for over 80 percent of key materials.
  - Sourcing restrictions have forced firms to search for alternative mineral sources, resulting in higher costs.
  - These restrictions may accelerate investment in mineral processing facilities within the U.S. and countries with an FTA with the U.S., potentially facilitating Korean companies’ diversification of supply chains in the long run.
- Outward FDI shifts:
  - Total FDI to the U.S. has far surpassed pre-trade-tension levels, particularly in manufacturing.
  - FDI flows to China have seen much slower growth over the past five years and experienced a sharp contraction in 2023.
  - Korea’s FDI in ASEAN countries has grown steadily, potentially reflecting relocation of production facilities from China to Southeast Asia.

### Industrial policies in major trading partners and implications for Korea’s strategic sectors
- Selected industrial policy initiatives and key quantitative elements:
  - U.S. CHIPS and Science Act (2022):
    - Direct some $278 billion toward scientific R&D and semiconductor production over 10 years.
    - $52.7 billion for American semiconductor research, development, manufacturing, and workforce development.
    - 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.
    - Guardrails: recipients cannot build certain facilities in China and other countries of concern; restrictions on use of taxpayer funds for stock buybacks and dividends.
  - U.S. Inflation Reduction Act (2022):
    - From $739 billion tax revenue raised by tax reform, to invest $369 billion in Energy Security and Climate Change programs, $64 billion in Affordable Care Act subsidy extension, $300+ billion in Deficit Reduction over 10 years.
    - For qualified clean energy vehicle purchases: maximum $7,500 tax credit.
    - $3,750 critical minerals portion of the credit requires vehicle’s battery to contain a threshold percentage (in value) of critical minerals extracted or processed in a country with which the U.S. has an FTA or recycled in North America: threshold percentage is 40% up to 2023, 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026.
    - $3,750 battery components portion of the credit requires percentage of battery’s components manufactured or assembled in North America to meet thresholds: 50% in 2023, 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% after 2029.
  - EU European Chips Act (2023):
    - Invest more than €43 billion in existing programs and actions in research & innovation in semiconductors to increase Europe’s global market share of cutting-edge semiconductors from 10 percent to 20 percent.
  - Japan The Strategy for Semiconductors and the Digital Industry (2021):
    - Invest $25.7 billion between 2022 to 2025 in the semiconductor industry.
    - Establish government-funded chip venture Rapidus.
  - China:
    - Made in China 2025 (2015): increase Chinese-domestic content of core materials to 40 percent by 2020 and 70 percent by 2025.
    - National Integrated Circuit Industry Fund: $21.8 billion in Phase 1 (2014-2019); $29.1 billion in Phase 2 (2019-2024); $47.5 billion in Phase 3 (2024-2039).

### Investment responses by Korean firms and sectoral dynamics
- Korean corporate investment announcements since 2022 (selected figures):
  - Semiconductor:
    - Samsung Electronics expected to invest more than $40 billion in Texas, U.S. and to receive up to $6.4 billion in direct funding under the CHIPS and Science Act. (As of April 2024)
    - SK Hynix expected to invest an estimated $3.87 billion in Indiana, U.S. and to receive up to $450 million in direct funding under the CHIPS and Science Act. (As of August 2024)
  - Electric Vehicle and Battery:
    - Hyundai Motor Group expected to invest more than $10 billion in the U.S. by 2025 including a $5.54 billion new EV & battery manufacturing facilities. (As of May 2022)
    - LG Energy Solution expected to invest $5.5 billion in Arizona, U.S. to step up EV and ESS battery production in North America. (As of March 2023)
    - SK on and Samsung SDI implementing joint ventures with several automobile manufacturers in the U.S.
- Effects of IP-driven investment:
  - Surge in investment and investment-related exports from Korea to the U.S., boosting demand for Korean capital goods (e.g., construction machinery).
  - Deepening cooperation in supply chains, workforce development, and R&D between Korea and the U.S. could help Korean firms maintain competitiveness in advanced technologies.
  - CHIPS Act “guardrails” limit beneficiaries, including Korean companies, from expanding production capacity in China — a major concern for Korean businesses with large China operations.

### Risks and longer-term implications
- Short- to medium-term competitive effects:
  - Technology restrictions have shielded Korean firms from growing competition with Chinese chipmakers in the near term.
- Long-term risks:
  - Restrictions and subsidy-driven capacity expansion in the U.S. and elsewhere may reduce demand for non-U.S. manufactured chips, lowering Korea’s semiconductor exports.
  - Expansion of global semiconductor fabrication capacities, including in China for legacy chips, may put downward pressure on semiconductor prices if demand does not expand at the same pace, decreasing the export value of Korea’s semiconductors.
  - Shift of some production from Korea to the U.S. could boost primary income from rising investments abroad but reduce quality employment opportunities in Korea and worsen income inequality.
- Sectoral vulnerabilities:
  - Semiconductor: over 40 percent of Korean-manufactured chips are produced in China; inability to upgrade those facilities undermines long-term competitiveness.
  - EV batteries and minerals: dependence on China for over 80 percent of key materials creates cost and supply risks, while sourcing restrictions may in time increase supply-chain resilience through diversification.

### Competition and export dynamics
- Intellectual policies (IPs) in major economies are spurring capacity building and incentivizing innovation, intensifying competition along both quality and quantity dimensions.
- China’s subsidies, concentrated in priority sectors including automobiles, semiconductors, and green technology, are found to have promoted Chinese exports and reduced its imports.
- As the gap in export sophistication between Korea and China shrinks, Korean and Chinese industries have become more competitive and less complementary.
- Korean exports to China are likely to continue to decline while exports to much of the rest of the world will face more intense competition.

### Korea’s policy response: K- Chips Act and semiconductor support
- In 2022 and 2023, the Korean government introduced a 15 percent tax credit (25 percent for small and medium enterprises) for investment by domestic and foreign firms to expand facilities in a set of “National Strategic Industries” including semiconductors.
- Since the K-Chips Act, the Korean government has continued to expand public support for the semiconductor sector.
- In May 2024, the government announced another $19 billion incentive package, in addition to a project to form a cluster of semiconductor production in the Gyeonggi province, with around $470 billion in private investment over the next two decades.
- Support to Korea’s semiconductor sector has been increased to maintain its competitiveness in response to policies of major economies and can be viewed as a second-best solution to challenges brought about by the global rise of IPs.

### Policy recommendations (design principles for industrial and innovation policy)
- Industrial policies should remain confined to specific objectives where externalities or market failures prevent effective market solutions.
- When used, industrial policies should:
  - minimize trade and investment distortions;
  - be consistent with international obligations;
  - avoid discriminating between domestic and overseas producers.
- Authorities could focus on horizontal (sector-neutral) policies to maintain competitiveness across the economy to enhance economic efficiency and avoid resource waste.
- Continue engagement with major trading partners to mitigate disruptive effects from IPs.

### Innovation policy priorities and expected impacts
- Promoting innovation to maintain competitiveness in Korea’s key export sectors is crucial given intensifying global competition and rising investments worldwide.
- Korea’s high domestic knowledge spillover increases the importance of innovation policies.
- Recommended mix of instruments and their roles:
  - Public research: scale up to advance fundamental research with strong spillovers to private R&D; Korea’s public research is relatively low compared to some world leaders.
  - R&D tax incentives: cost-effective for established firms and cheaper to administer.
  - Research grants: useful for start-ups.
- Empirical finding: increasing spending on a mix of these policies by 0.5 percentage points of GDP could raise GDP by up to 2 percent.

### Product, labor market, and regulatory reforms
- More flexible product and labor markets and a lower regulatory burden would help Korean firms remain competitive.
- Despite improvement, product market regulation stringency still allows room to:
  - reduce barriers to trade and investment;
  - reduce state involvement in business operations;
  - lower barriers to entry in services.
- Boosting firm productivity via:
  - reducing regulatory burden;
  - accelerating uptake of new technology;
  - increasing participation in international trade.
- Labor market reforms to boost labor productivity:
  - tackle labor market duality;
  - promote performance-based pay;
  - improve job mobility.

### Services, export diversification, and supply chains
- Boosting new export items, including services, will help maintain exports as the main engine of economic growth.
- While global goods trade has slowed, service trade (particularly digital services) has been expanding faster.
- Korea’s service exports account for a much smaller share of GDP compared to advanced economies; ICT, travel, and insurance services account for lower shares of service exports than OECD peers.
- Policy actions to expand services exports:
  - Promote services with growing external demand: cultural content, manufacturing-related services, information and communications.
  - Ease longstanding bottlenecks by lowering legal barriers to entry and startup costs and simplifying complex licensing and permit requirements.
- Identified emerging and rising export items: defense industry, food and beverage (rising with cultural influences).

### Diversification of destinations and supply chains
- Diversifying trading partners and upgrading/signing trade agreements can build a more resilient trade network and reduce risks arising from geoeconomic fragmentation (GEF).
- The Trade Policy Roadmap and authorities’ efforts to expand FTAs, strengthen economic partnerships with regions such as Asia and Africa, and focus supply chain cooperation on strategically important items (such as minerals) through WTO-consistent deep and broad-based FTAs and enhanced multilateral agreements are welcome.

### Key figures and indices
- Tax credit under K-Chips Act: 15 percent (25 percent for small and medium enterprises).
- May 2024 semiconductor incentive package: $19 billion.
- Projected private investment in Gyeonggi province cluster: around $470 billion over the next two decades.
- Policy spending scenario: increase by 0.5 percentage points of GDP could raise GDP by up to 2 percent.

*Source: IMF Selected Issues Paper — "Korea in a Changing Global Trade Landscape" (January 21, 2025).*

### 1. Korea’s Exports _______________________________________________________________________ 2

### 1. Korea’s Exports

### Introduction and export structure
- Korea is the world’s 8th largest exporter in 2023, with exports accounting for around 40 percent of GDP.
- Korea has a relatively high GVC participation rate among Asian economies.
- Major export items:
  - Semiconductors: almost 20 percent of Korea’s total exports.
  - Automobiles (including auto parts): 12 percent of Korea’s total exports.
  - Other top items: petrochemical products, vessels and parts, consumer electronics, flat products of iron or steel.
- Top export destinations: the United States and China.
- China is the largest country of origin for Korean imports.
- Korea has 21 Free Trade Agreements (FTAs) in effect with 59 countries as of 2024, covering 85 percent of the global GDP.

### Geoeconomic fragmentation, slowbalization, and world trade policy trends
- Geoeconomic Fragmentation (GEF) and the resurgence of industrial policies (IP) are reshaping global trade.
- Drivers include rising geopolitical tensions, uneven distribution of globalization gains, climate change, demographics, and digital transitions.
- Use of restrictive trade measures surged in 2017–2018 and especially after the onset of the COVID-19 pandemic.
- 2023 saw most IP activity in military-civilian dual use products and advanced technology products, including semiconductors and low-carbon technologies, and upstream inputs such as critical minerals.
- World trade and global FDI trends since the global financial crisis:
  - World trade has stagnated relative to world GDP (slowbalization).
  - Global FDI has declined sharply from its peak.

### Evolving U.S.-China trade relations and Korea’s export implications
- U.S.-China trade tensions since 2018 have reduced direct bilateral trade and reshaped global supply chains.
- Empirical pattern: “bystander” countries increased global exports in products targeted by U.S.-China tariffs relative to untargeted products.
- Korea-specific observations:
  - Korea’s exports of goods targeted by U.S.-China tariffs have seen strong growth relative to non-targeted goods (figure-based finding).
  - Overall gain in market share in the U.S. of aggregate Korean exports due to tariffs has been modest.
  - Lovely, Xu, and Zhang (2021) estimate Korea’s share of overall U.S. manufacturing imports rose by 0.9 percent and its share of U.S. manufacturing imports subject to new trade tariffs on China rose by 1 percent by end-2019.
  - Exports to the U.S. as share of total exports of Korea has risen in the 2010s; by 2023 the share of exports to the U.S. reached a record high of 18 percent, almost at par with China.
- Korea’s exports to China:
  - Prior to trade tensions, China accounted for about 25 percent of Korean exports.
  - That share has declined in recent years.
  - About 80 percent of Korean exports to China consist of intermediate goods used by Chinese firms; a significant portion of those Chinese-produced goods are eventually shipped to the U.S.
  - The Bank of Korea (BoK) estimates that the 2018 U.S. tariff hikes on China reduced Korea's exports to China and export-related production by approximately 3 percent.
- Technology export restrictions and semiconductor implications:
  - Restrictions have severely affected operations of Korean chipmakers’ production facilities in China, where over 40 percent of their chips are manufactured.
  - Korean firms cannot upgrade those China facilities to produce more advanced chips; facilities are gradually becoming obsolete and losing competitiveness.
  - Restriction of sales of the most advanced memory chips to China (a small share of total sales) contributed to decline in Korea’s semiconductor exports to China.
  - Export restrictions imposed by China in 2023 on some critical minerals have further disrupted the semiconductor supply chain.
- Electric Vehicle (EV) industry and mineral sourcing:
  - Korean carmakers and battery producers rely on Chinese suppliers for over 80 percent of key materials.
  - Sourcing restrictions have forced firms to search for alternative mineral sources, resulting in higher costs.
  - These restrictions may accelerate investment in mineral processing facilities within the U.S. and countries with an FTA with the U.S., potentially facilitating Korean companies’ diversification of supply chains in the long run.
- Outward FDI shifts:
  - Total FDI to the U.S. has far surpassed pre-trade-tension levels, particularly in manufacturing.
  - FDI flows to China have seen much slower growth over the past five years and experienced a sharp contraction in 2023.
  - Korea’s FDI in ASEAN countries has grown steadily, potentially reflecting relocation of production facilities from China to Southeast Asia.

### Industrial policies in major trading partners and implications for Korea’s strategic sectors
- Selected industrial policy initiatives and key quantitative elements:
  - U.S. CHIPS and Science Act (2022):
    - Direct some $278 billion toward scientific R&D and semiconductor production over 10 years.
    - $52.7 billion for American semiconductor research, development, manufacturing, and workforce development.
    - 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.
    - Guardrails: recipients cannot build certain facilities in China and other countries of concern; restrictions on use of taxpayer funds for stock buybacks and dividends.
  - U.S. Inflation Reduction Act (2022):
    - From $739 billion tax revenue raised by tax reform, to invest $369 billion in Energy Security and Climate Change programs, $64 billion in Affordable Care Act subsidy extension, $300+ billion in Deficit Reduction over 10 years.
    - For qualified clean energy vehicle purchases: maximum $7,500 tax credit.
    - $3,750 critical minerals portion of the credit requires vehicle’s battery to contain a threshold percentage (in value) of critical minerals extracted or processed in a country with which the U.S. has an FTA or recycled in North America: threshold percentage is 40% up to 2023, 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026.
    - $3,750 battery components portion of the credit requires percentage of battery’s components manufactured or assembled in North America to meet thresholds: 50% in 2023, 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% after 2029.
  - EU European Chips Act (2023):
    - Invest more than €43 billion in existing programs and actions in research & innovation in semiconductors to increase Europe’s global market share of cutting-edge semiconductors from 10 percent to 20 percent.
  - Japan The Strategy for Semiconductors and the Digital Industry (2021):
    - Invest $25.7 billion between 2022 to 2025 in the semiconductor industry.
    - Establish government-funded chip venture Rapidus.
  - China:
    - Made in China 2025 (2015): increase Chinese-domestic content of core materials to 40 percent by 2020 and 70 percent by 2025.
    - National Integrated Circuit Industry Fund: $21.8 billion in Phase 1 (2014-2019); $29.1 billion in Phase 2 (2019-2024); $47.5 billion in Phase 3 (2024-2039).

### Investment responses by Korean firms and sectoral dynamics
- Korean corporate investment announcements since 2022 (selected figures):
  - Semiconductor:
    - Samsung Electronics expected to invest more than $40 billion in Texas, U.S. and to receive up to $6.4 billion in direct funding under the CHIPS and Science Act. (As of April 2024)
    - SK Hynix expected to invest an estimated $3.87 billion in Indiana, U.S. and to receive up to $450 million in direct funding under the CHIPS and Science Act. (As of August 2024)
  - Electric Vehicle and Battery:
    - Hyundai Motor Group expected to invest more than $10 billion in the U.S. by 2025 including a $5.54 billion new EV & battery manufacturing facilities. (As of May 2022)
    - LG Energy Solution expected to invest $5.5 billion in Arizona, U.S. to step up EV and ESS battery production in North America. (As of March 2023)
    - SK on and Samsung SDI implementing joint ventures with several automobile manufacturers in the U.S.
- Effects of IP-driven investment:
  - Surge in investment and investment-related exports from Korea to the U.S., boosting demand for Korean capital goods (e.g., construction machinery).
  - Deepening cooperation in supply chains, workforce development, and R&D between Korea and the U.S. could help Korean firms maintain competitiveness in advanced technologies.
  - CHIPS Act “guardrails” limit beneficiaries, including Korean companies, from expanding production capacity in China — a major concern for Korean businesses with large China operations.

### Risks and longer-term implications
- Short- to medium-term competitive effects:
  - Technology restrictions have shielded Korean firms from growing competition with Chinese chipmakers in the near term.
- Long-term risks:
  - Restrictions and subsidy-driven capacity expansion in the U.S. and elsewhere may reduce demand for non-U.S. manufactured chips, lowering Korea’s semiconductor exports.
  - Expansion of global semiconductor fabrication capacities, including in China for legacy chips, may put downward pressure on semiconductor prices if demand does not expand at the same pace, decreasing the export value of Korea’s semiconductors.
  - Shift of some production from Korea to the U.S. could boost primary income from rising investments abroad but reduce quality employment opportunities in Korea and worsen income inequality.
- Sectoral vulnerabilities:
  - Semiconductor: over 40 percent of Korean-manufactured chips are produced in China; inability to upgrade those facilities undermines long-term competitiveness.
  - EV batteries and minerals: dependence on China for over 80 percent of key materials creates cost and supply risks, while sourcing restrictions may in time increase supply-chain resilience through diversification.

*Source: IMF Selected Issues Paper — "Korea in a Changing Global Trade Landscape" (January 21, 2025).*

### 12.      IPs of major economies are intensifying competition in the global market. As IPs spur

### 12.      IPs of major economies are intensifying competition in the global market. As IPs spur

### Competition and export dynamics
- Intellectual policies (IPs) in major economies are spurring capacity building and incentivizing innovation, intensifying competition along both quality and quantity dimensions.
- China’s subsidies, concentrated in priority sectors including automobiles, semiconductors, and green technology, are found to have promoted Chinese exports and reduced its imports.
- As the gap in export sophistication between Korea and China shrinks, Korean and Chinese industries have become more competitive and less complementary.
- Korean exports to China are likely to continue to decline while exports to much of the rest of the world will face more intense competition.

### Korea’s policy response: K- Chips Act and semiconductor support
- In 2022 and 2023, the Korean government introduced a 15 percent tax credit (25 percent for small and medium enterprises) for investment by domestic and foreign firms to expand facilities in a set of “National Strategic Industries” including semiconductors.
- Since the K-Chips Act, the Korean government has continued to expand public support for the semiconductor sector.
- In May 2024, the government announced another $19 billion incentive package, in addition to a project to form a cluster of semiconductor production in the Gyeonggi province, with around $470 billion in private investment over the next two decades.
- Support to Korea’s semiconductor sector has been increased to maintain its competitiveness in response to policies of major economies and can be viewed as a second-best solution to challenges brought about by the global rise of IPs.

### Policy recommendations (design principles for industrial and innovation policy)
- Industrial policies should remain confined to specific objectives where externalities or market failures prevent effective market solutions.
- When used, industrial policies should:
  - minimize trade and investment distortions;
  - be consistent with international obligations;
  - avoid discriminating between domestic and overseas producers.
- Authorities could focus on horizontal (sector-neutral) policies to maintain competitiveness across the economy to enhance economic efficiency and avoid resource waste.
- Continue engagement with major trading partners to mitigate disruptive effects from IPs.

### Innovation policy priorities and expected impacts
- Promoting innovation to maintain competitiveness in Korea’s key export sectors is crucial given intensifying global competition and rising investments worldwide.
- Korea’s high domestic knowledge spillover increases the importance of innovation policies.
- Recommended mix of instruments and their roles:
  - Public research: scale up to advance fundamental research with strong spillovers to private R&D; Korea’s public research is relatively low compared to some world leaders.
  - R&D tax incentives: cost-effective for established firms and cheaper to administer.
  - Research grants: useful for start-ups.
- Empirical finding: increasing spending on a mix of these policies by 0.5 percentage points of GDP could raise GDP by up to 2 percent.

### Product, labor market, and regulatory reforms
- More flexible product and labor markets and a lower regulatory burden would help Korean firms remain competitive.
- Despite improvement, product market regulation stringency still allows room to:
  - reduce barriers to trade and investment;
  - reduce state involvement in business operations;
  - lower barriers to entry in services.
- Boosting firm productivity via:
  - reducing regulatory burden;
  - accelerating uptake of new technology;
  - increasing participation in international trade.
- Labor market reforms to boost labor productivity:
  - tackle labor market duality;
  - promote performance-based pay;
  - improve job mobility.

### Services, export diversification, and supply chains
- Boosting new export items, including services, will help maintain exports as the main engine of economic growth.
- While global goods trade has slowed, service trade (particularly digital services) has been expanding faster.
- Korea’s service exports account for a much smaller share of GDP compared to advanced economies; ICT, travel, and insurance services account for lower shares of service exports than OECD peers.
- Policy actions to expand services exports:
  - Promote services with growing external demand: cultural content, manufacturing-related services, information and communications.
  - Ease longstanding bottlenecks by lowering legal barriers to entry and startup costs and simplifying complex licensing and permit requirements.
- Identified emerging and rising export items: defense industry, food and beverage (rising with cultural influences).

### Diversification of destinations and supply chains
- Diversifying trading partners and upgrading/signing trade agreements can build a more resilient trade network and reduce risks arising from geoeconomic fragmentation (GEF).
- The Trade Policy Roadmap and authorities’ efforts to expand FTAs, strengthen economic partnerships with regions such as Asia and Africa, and focus supply chain cooperation on strategically important items (such as minerals) through WTO-consistent deep and broad-based FTAs and enhanced multilateral agreements are welcome.

### Key figures and indices (as presented)
- Tax credit under K-Chips Act: 15 percent (25 percent for small and medium enterprises).
- May 2024 semiconductor incentive package: $19 billion.
- Projected private investment in Gyeonggi province cluster: around $470 billion over the next two decades.
- Policy spending scenario: increase by 0.5 percentage points of GDP could raise GDP by up to 2 percent.

*Source: IMF staff analysis in "REPUBLIC OF KOREA — Selected Issues" (section on industrial policies and competitiveness).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025014.pdf_