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S. Korea and China’s trading relationship

South Korea’s three-way “division of labor” with Japan and China is breaking down as China procures more and more key parts for its major industries on its own, leaving South Korea with fewer opportunities to export them, a recent analysis argues.

The analysis, titled “Diagnosis and Prognosis for Domestic and International Economic Risks,” was presented by Hyundai Research Institute economic trend analysis chief Lee Jun-hyup at a Nov. 19 seminar on “boosting export competitiveness and establishing new growth engines” at the Federation of Korean Industries Conference Center in Seoul.

“Since China began full-scale implementation of its ‘xinchangtai’ (new normal) policy, it has been increasing its self-sufficiency rate in major industries and reducing processing trade as part of a policy to improve industry structure,” explained Lee.

The result, Lee argues, has been a breakdown in a three-way division of later in which Japan exports key materials to South Korea, which uses them to make parts that are then exported to China, which assembles finished products for export to world markets.

First introduced in May 2014 by Chinese President Xi Jinping, the “new normal” policy is an economic approach by Beijing to help China make a stable transition from high growth levels of around 10% to more moderate-to-fast growth of 7-8%.

“China‘s processing trade has dropped sharply, going from 48.5% in 2000 to 31% as of September 2015,” Lee explained.

“Processing trade” refers to the practice of importing raw materials or half-finished goods from overseas and then processing and/or finishing them domestically for export. The issue is drawing increasing attention because it is evidence of the dwindling role for South Korean companies in trade with China.

“The percentage of intermediary goods (half-finished goods and parts or partial goods) among South Korea’s exports to China has fallen from 87.4% in 2000 to 78.1% in 2013,” Lee noted.

“Intermediary goods still represent a large percentage of all exports to China, but that percentage is falling,” he added.

Lee also noted that the technology gap between South Korea and China is closing.

“In the past, South Korea developed and acquired technology through loans and growth policies focusing on large companies, whereas China has been gaining technologies quickly by using its huge resources to acquire overseas companies that have key technology,” he explained.

The slipping rate of increase in South Korea’s exports to China, which has accounted for almost one-quarter of its total exports this year, was also seen as closely tied to this trend.

“South Korean exports to China dropped by 3.6% this year,” Lee noted.

“Competition between South Korea and China in the world’s export markets is only going to intensify, since most of China’s seven strategic emerging industries either overlap with or are similar to ones in South Korea,” he continued.

Among the seven industries in question are next-generation information technology (ITA), bio-technology, new energies and new energy automobile, and high-tech equipment manufacturing.

Busan University of Foreign Studies professor Lee Soon-cheol shared his analysis on the declining numbers.

“The rate of increase in South Korea’s exports stood at 28.3% in 2010, but fell to -1.3% in 2012 and has hovered at around 2-2.5% since 2013,” Lee noted. “This is less about the global economic slowdown than a general decline in South Korean industry competitiveness.”

“To get back our export competitiveness, we urgently need to shift from simple processing industries to high value-added creation industries,” he advised.

By Kwak Jung-soo, business correspondent

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