Three-way division of labor breaking down among S. Korea, China and Japan

Posted on : 2017-01-22 09:55 KST Modified on : 2019-10-19 20:29 KST
Recent data show sharp drop in South Korean exports of materials and components to China
Materials and parts trade by South Korea with China and Japan
Materials and parts trade by South Korea with China and Japan

Exports to China have fallen sharply for South Korean materials and components such as semiconductors, flat-panel displays, and automobile parts. Analysts said the phenomenon, which comes amid steps by China to hasten its own technology independence and strengthen bans on processing trade, shows an increasing collapse in the three-way division of labor with China and Japan that took shape after the rapid rise of the Japanese economy in the early ’00s.

A report on 2016 exports and imports for materials and components released by the Ministry of Trade, Industry and Energy (MTIE) on Jan. 16 showed a total of US$82.7 billion (around 97.8 trillion won) in South Korean material and component exports to China last year. The number was down by more than US$10 billion from the US$95.3 billion recorded for 2014 and the US$93.5 billion for 2015. By item, exports of electronic components such as mobile phone liquid crystal displays and wireless communication devices plummeted to US$38.7 billion last year from US$46.2 billion in 2014 and US$47.2 billion in 2015. Transport machinery exports, including mechanical equipment and car parts, were down to US$5.5 billion in 2016 from US$6.7 billion in 2014 and US$6.5 billion in 2015.

“Exports have dropped off as China has improved its self-sufficiency in materials and components and strengthened restrictions on processing trade,” explained the MTIE.

“There has also been a phenomenon of reverse exports back to South Korea because of businesses that have ventured in China and produced material and component intermediate goods there but have been unable to sell them locally,” it added.

The number of items subject to Chinese processing trade bans rose from 341 in 2004 to 1,871 in 2014.

As the Chinese economy began its period of rapid growth in the ’00s, material and component manufacturers in South Korea, Japan, and Japan formed a system with a three-way East Asia division of labor. Japan, which holds a technological comparative advantage in key materials, exported materials and parts to South Korea, which developed them into components and half-finished goods for export to China, which in turn assembled and processed them as finished products for export to the global market. Fears that the system might be breaking down have been voiced for several years. Now they appear to be coming true - with a resultant shock to South Korea‘s system.

The amount of materials and parts imported by South Korea from Japan has been declining for the past several years, tumbling from US$37.4 billion in 2012 to US$30.5 billion in 2014 and US$27.2 billion last year - a decrease of around US$10 billion, or 27%, in the space of just four years. At first glance, the decrease in imports may be welcome news for the balance of trade with Japan, signaling an improvement in conditions that have persisted since the 1980s.

But sentiment on the South Korean end has been mixed. As the collapse in the three-way division of labor intensifies, the result has been a situation of both declining exports to China for South Korean industries and businesses and sharply falling imports of key materials from Japan. South Korea remains dependent on Japanese imports for some of its key materials, including mechanical equipment, semiconductors, and automobile parts, which have international trade harmonized system (HS) codes beginning with the number “8.”

It was around 2004 that China, the “world’s factory,” began seriously pushing to stop being a mere assembly base and promoting domestic production of materials and components - a phenomenon called “China inside.” In 2004, Beijing moved to curb imports of intermediate goods and boost the competitiveness of China‘s material and component industries by designating 341 items as subject to processing trade bans, including used machinery. In 2007, it extended that list to 1,140 items.

“It was right after the financial crisis in 2008 that China’s self-sufficiency rate for materials and components began to suddenly rise,” explained Hyundai Research Institute researcher Chen Yong-chan.

“Recent international technology assessment reports show South Korea is still at the stage of pursuing Japan in terms of key material technology, while China is rapidly gaining on South Korea in semiconductors and machinery,” Chen noted.

It’s a situation where improved manufacturing business competitiveness and self-sufficiency for components amid rapid advancements in technological innovation and industry structure in China are spelling emergency for South Korean intermediate good exports. South Korea’s mainstay export items to China remain material and component intermediate goods such as petrochemicals, steel, semiconductors, and displays.

By Cho Kye-wan, staff reporter

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