'Connector countries' bridging US and Chinese economies

Korea linked to both markets through Vietnam

Report urges reducing reliance on specific production hubs

The Chinese and American flags fly side by side in the wind. [AFP]
The Chinese and American flags fly side by side in the wind. [AFP]

Even as the US-China trade war drags on, global trade has remained relatively stable — and a new analysis points to "connector countries" such as Vietnam, India and Mexico as a key reason why. These nations have emerged as intermediate hubs linking China's production networks to the US consumer market, effectively serving as bridges that prevent the complete severing of economic ties between the two powers.

According to a report released Sunday by Jeong Seon-yeong, head of the Bank of Korea's Asia-Pacific Economy Team, and her co-authors, global trade has maintained a comparatively stable trajectory despite the prolonged US-China rivalry and other geopolitical tensions, including the war in Russia and Ukraine.

The report identifies "connector countries" as the driving force behind that stability. The term refers to nations closely integrated with both the US final market and China-centered production networks, allowing them to sustain economic linkages between the two powers. Vietnam, India and Mexico are cited as prime examples. These countries function as intermediate nodes in production and procurement networks, filling gaps left by direct US-China trade friction. More recently, their role has deepened beyond simple transit — expanding into local production and foreign direct investment, strengthening their function as actual manufacturing bases.

A defining characteristic of connector countries, the report finds, is what it calls "dual alignment." An analysis of countries' relationships with the US and China using UN General Assembly voting data found that connector countries have moved closer to the US on political and security matters, while maintaining or even shifting further toward China on economic and development issues. This divergence between political alignment and economic interest amounts to a form of decoupling between strategic choices and commercial realities. By contrast, South Korea, Japan and Australia broadly maintained a middle position between the US and China on both political and economic dimensions.

The shift has left a clear imprint on South Korea's supply chains. A Bank of Korea analysis of OECD Inter-Country Input-Output tables from 2016 to 2022 found that the share of value added generated by South Korea's exports to Vietnam that ultimately linked to US demand rose from 11.1 percent in 2016 to 18.5 percent in 2022, while the share linked to Chinese demand climbed from 7.3 percent to 13.9 percent. In other words, South Korea's export value added became more deeply connected to both the US and Chinese markets through Vietnam's production networks.

The trend was particularly pronounced in semiconductors and the broader computers, electronics and optical equipment sector. Over the same period, the share of value added routed to the US through Vietnam jumped from 12.8 percent to 21 percent, while the share linked to China rose from 11.2 percent to 19.4 percent.

The pathways through which South Korean value added reaches the US market have also shifted. The share flowing directly from South Korea to the US held roughly steady, edging down from 73.1 percent in 2016 to 72.4 percent in 2022. Among indirect routes — where Korean intermediate goods pass through third-country production bases before reaching the US — the share transiting through China fell from 10.7 percent to 6.8 percent, while the share routed through five ASEAN countries including Vietnam rose from 4.9 percent to 8.3 percent. In the computers, electronics and optical equipment sector, the ASEAN-5 share consistently climbed and by 2022 had surpassed the China share, at 18.6 percent versus 17 percent.

"Despite recent geopolitical fragmentation, economic linkages between countries have not been severed," the report said. "Rather, established global supply chain routes are being reconfigured and sustained."

The report added that South Korea's ability to maintain connections to both the US and Chinese markets by leveraging existing ASEAN production networks "acts as a factor enhancing supply chain resilience, as it broadens the options available for production and export routes when geopolitical shocks occur." It recommended that South Korea "diversify its supply chains in a direction that reduces dependence on specific production hubs or routes, while also making use of the buffer function provided by connector countries."


kimstar@heraldcorp.com