S. Korean exports to China in a whole lot of trouble

Posted on : 2014-08-04 16:14 KST Modified on : 2019-10-19 20:29 KST
Lower exports attributable to falling Chinese trade levels, and growing Chinese self-sufficiency

By Jeong Nam-ku, staff reporter

South Korea’s exports to China, its single biggest market, look to be in serious trouble.

After seeing their rise tail off recently, exports have now been falling from their levels a year ago for three consecutive months since May. If the trend keeps up, annual exports to China may be in for their first decline since 2009, when the effects of the global financial crisis were at their most severe.

According to many experts, the problem is a structural one, with many South Korean companies continuing to regard China merely as a production base for exports to third countries even as China continues developing its domestic consumer goods market and self-sufficiency with intermediary goods.

Data released by the Ministry of Trade, Industry and Energy on Aug. 3 showed July exports to China down a 7% from the same month in 2013. It’s the third straight month that exports have fallen below their 2013 levels for the same month, with a 9.4% decline in May and a 1.0% drop in June. The overall 5% rise in all South Korean exports for July puts the decline into even sharper relief.

Part of the issue is the sharp drop in overall trade by China this year. China’s total imports and exports rose by over 7% in 2013, but in the first half of 2014 exports increased by just 0.9%, and imports by 1.5%.

The problem is the focus on processing trade, where most of South Korean companies’ exports to China are going through processing for final export to a third country. It’s a framework that leaves South Korea vulnerable when China’s exports fail to rise. Figures from the Institute for International Trade (IIT) at the Korea International Trade Association (KITA) show processing trade accounting for 47.6% of all South Korean exports to China - a larger percentage than the 46.3% for Taiwan, which is considered part of the Chinese economic realm. Levels for Hong Kong and Japan were just over 30%.

Also hurting South Korean exports is China’s growing self-sufficiency, with greater investment and technological abilities in industries where South Korean companies have supplied exports. In the case of petrochemicals, South Korean exports accounted for 48.6% of China’s supplies in 2013, but rising self-sufficiency reduced exports by 6.2% in the first half of 2014 compared to the same period last year. Ship exports declined by 33.2% for the first half of the year. Petroleum product exports plummeted 19.3% in July alone, liquid crystal devices by 5.2%, general machinery by 31.7%.

Total exports to China have bounced back slightly, with rises of just over 7% in May and June after a 3.4% decline in the first quarter compared to the same period last year. But structural issues suggest the prospects of a recovery for South Korea’s exports are dimmer. Chinese customs data show processing trade plummeting from 38.9% in 2007 to 25.5% last year as a percentage of total imports. According to KITA’s Beijing office, the list of items banned for processing trade by the Chinese government may grow going forward. The situation suggests South Korea’s exports to China can only gain so much steam under the current strategy of using the Chinese market as a processing base for the US and European markets.

Meanwhile, South Korean companies are feeling the heat in the fast-growing Chinese consumer goods market. As recently as 2009, South Korea ranked third in the world for consumer good imports in China, not including farming, fishing, and forestry products. By 2013, it was down to sixth place, passed by the US, the ASEAN countries, and even the United Kingdom. Over the same period, market share for South Korean products fell from 5.6% to 3.8%.

Markets for some main items are still growing: exports of mobile phones and other wireless communication devices rose 20.7% in the first half of 2014, and automobile exports by 9.4%. But exports aren’t increasing in the areas where China‘s imports are increasing. At the same time, cost-competitive Chinese rivals like Xiaomi are rapidly growing their market share of the mobile phone market, sparking fears that growth there could hit a wall sooner rather than later.

As the export dropoff becomes more apparent, Seoul plans to coordinate for now with the relevant agencies.

“Since the Chinese government’s policy direction is all about growing domestic consumption, we need to get away from our processing trade focus and work on increasing consumer good exports,” said Lee Bong-gul, a researcher at ITT.

“As far as intermediary goods go, we need a solution where we’re not just exporting to South Korean companies in China, but also foreign and Chinese companies,” he advised.

 

Please direct questions or comments to [english@hani.co.kr]

 

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