South Korean companies will likely be bruised by additional logistics costs in rerouting their exports bound for Hong Kong direct to China in the widening fallout from the row between Washington and Beijing over the island, a key intermediate trade for Korean exports to mainland China.

Among the Korean companies, chipmaking giants like Samsung Electronics and SK Hynix are seeking direct delivery to China and financial firms are considering their operation in Singapore instead of Hong Kong.

Hong Kong is the fourth largest export destination to Korea after China, the U.S. and Vietnam. It has been used as an intermediate point by Korean exporters to China thanks to various benefits like zero tariffs and low taxes.

Korea’s exports to Hong Kong reached $31.9 billion as of 2018, of which 82.6 percent went to China. Semiconductors took up 69.8 percent of all the exports, which is why Korean chipmakers now are closely watching the development of the conflict over Hong Kong between the U.S. and China.

Beijing a day earlier on Tuesday passed a sweeping new security law for Hong Kong to strengthen its control over the semi-autonomous region with greater freedom than the mainland. The move came amid strong opposition from the U.S. and Europe, and Washington now is seriously considering taking steps to eliminate Hong Kong’s special trading status with the U.S.

Facing an increase in logistics costs, Korean chipmakers will be able to arrange direct exports to China. The real problem is that intensifying row between the world’s two largest economies could disrupt the supply and demand in the entire memory chip industry.

Financial institutions also are gearing up for a better response to the challenge. A total of 24 Korean names in banking, brokerage, asset management and insurance have so far entered Hong Kong, and many of them now are reviewing to move their operation to Singapore.

By Kim Gi-chul, Moon Il-ho, Chun Gyung-woon and Lee Ha-yeon

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