January 31, 2014    Volume 21, No. 2

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Korea Passes 'U-Turn' Law With Generous Incentives For Companies To Bring Manufacturing From China Back To Korea

By Richard A. McCormack

The South Korean government has passed a new law to entice Korean companies that have set up manufacturing operations in China and elsewhere to return home. The so-called "Act on Support for Korean Enterprises Reshoring from Overseas," which the Korean government refers to as the "U-Turn Company Support Law," was enacted in December 2013. It includes generous incentives and subsidies for companies to return production to Korea.

The law "carries great significance as the first statute" of its type, says the Korean Ministry of Trade, Industry and Energy. The U-Turn law will "generate jobs and activate the local economy" by providing companies with corporate and income tax cuts on earnings generated by their re-established domestic operations, and subsidies for the purchase of land and rent. There are additional subsidies for equipment purchase and favorable export guarantees.

"If they introduce new and or used capital goods to run domestic establishments, they are entitled to tariff reductions or exemptions," says the Korean Ministry of Trade.

The Korean government also will issue visas to skilled workers who were hired overseas and need to be brought to Korea in order to help set up and run the reshored operation. "At the same time, U-Turn companies will be permitted to move into an industrial complex in a free economic zone on a long-term lease," says the Korean Ministry of Trade.

The government will also subsidize consulting fees associated with "overseas liquidation," which the ministry says is "an obstacle to U-Turn," so that "Korean offshore companies can return home after lawful liquidation."

Korea has created a "one-stop" service in its Korea Trade-Investment Promotion Agency (KOTRA) to help companies reshore production. KOTRA is also opening "U-Turn business assistance desks" at its 121 business centers in 83 countries to encourage companies to bring production back home.

Korea's Ministry of Trade and Industry says the time is ripe for Korean companies to return manufacturing from China. Chinese production costs are going up due to the re-valuation of the yuan, higher wages, higher electricity and land costs, low productivity and higher transportation costs that are making China "less attractive as a global manufacturing base," says the agency.

Within five years, the average hourly wage for a Chinese production worker will be $4.50, increasing 18 percent per year. "Moreover, management conditions in China are increasingly deteriorating," says the Korean trade ministry. "Foreign companies that have advanced into China are exhibiting a visible trend of returning to their home countries."

The Korean Trade Ministry is using the following rationale to justify its U-Turn law: "The Obama administration in the U.S. announced on January 25 [2013] a policy that would curtail support for offshore companies while subsidizing 20 percent of the moving costs for reshoring companies." Those Obama proposals were introduced in the House (HR-851 with 42 sponsors, all Democrats) and Senate (S-337 with 10 sponsors, all Democrats), and are known as the "Bring Jobs Home Acts," but have not been considered by either chamber.

Moreover, says the Korean trade ministry, with the signing of the U.S.-Korea Free Trade Agreement, Korean-based companies have become more competitive in international markets. "Korea's price competitiveness improved due to the tariffs benefits to be reaped when the FTAs between South Korea and the U.S. and between South Korea and the EU come into effect," says the Ministry of Trade and Industry. It notes that in the area of precious metals and jewelry, exports from China to the United States face an 11 percent tariff, but with the Korea-U.S. Free Trade Agreement, Korean exporting companies have no tariff on their exports to the United States. "Furthermore, overseas buyers' preference for products made in Korea improves the price competitiveness further," says the Korean Trade Ministry.

Here are the "details of support" of Korea's U-Turn reshoring legislation along with the agencies involved in their implementation:

  • Corporate income tax cuts of 100 percent for five years and 50 percent for 20 years, Ministry of Strategy and Finance;
  • Tariff cuts for the introduction of new and used capital goods, Ministry of Strategy and Finance;
  • Subsidy on location for the equivalent of 15 percent to 45 percent of land sale price, rents (up to 50 million won per enterprise), Ministry of Trade, Industry and Energy;
  • Subsidy of between 3 percent and 22 percent of equipment investment, Ministry of Trade, Industry and Energy;
  • Allowing companies that reshore to move into free economic zones, "creating exclusive industrial complexes, giving priority when moving in to national general industrial complexes, Ministry of Land, Infrastructure and Transport and the Free Economic Zone Authorities;
  • Foreign worker visas: When rehiring local production management personnel at home, allowing the use of a "special activity visa." Issuing visas to local production management personnel within 5 to 10 percent of domestic employees (up to 30 people) "considering the size of new employment at home," Department of Justice;
  • Foreign workers: Preferential treatment of foreign employee limit in proportion to domestic employees (up to 50 people), Ministry of Employment and Labor;
  • Employment subsidy of 7,200,000 won per person within 1 year (up to 20 people), Ministry of Employment and Labor;
  • Financial support: Increase the guarantee ratio (85 percent to 90 percent) and discount on guarantee fees (from 1.2 percent to 1 percent), Korea Credit Guarantee Fund;
  • Export finance: Preferential treatment of export credit guarantee limits (up to twice) and up to 20 percent discount on guarantee fees (Korea Trade Insurance Corp.), considering U-Turn enterprises' capital needs, Korea Trade Insurance Corp.
  • Customs Clearance Support: Free trade agreements -- Utilizing support, such as rate reduction when importing raw materials, simplification of procedures for issuing the certificate of origin and free consulting provisions, Korea Customs Service.

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