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Chinese leader Xi Jinping can be seen in this undated photo. (Xinhua/Yonhap News)

When South Korea and China first established formal diplomatic relations in 1992, trade between the two sides that year amounted to US$6.4 billion. By 2020, the scale had risen to US$241.5 billion — a 38-fold increase.

That figure is seen as representative of changes in the economic relationship between Korea and China. With rapid rises in both exports and imports, China has emerged as South Korea’s single largest trade partner.

The quantitative increase has also led to qualitative changes.

The focus of items traded has shifted from simple light industry and heavy/chemical industry products such as steel sheets and textiles to high value-added intermediate goods like semiconductors. As Chinese manufacturing becomes more advanced, the export competition between the two countries has intensified in medium-high-technology (MHT) areas.

In anticipation of the 30th anniversary of diplomatic relations between South Korea and China, the Institute for International Trade, affiliated with the Korea International Trade Association (KITA), published a report on Tuesday regarding changes in trade structure and their implications.

In it, the institute noted that the “trade structure between the two sides has been shifting from a complementary one based on specialization to one of mutual competition.”

According to KITA’s analysis, the export similarity index (ESI) level for global MHT industries has risen by 0.043 percentage points from 0.347 in 2011 to 0.390 as of September 2021 amid intensifying export competition between South Korea and China. Over the same period, the score for high-technology industries dropped from 0.527 to 0.448.

With scores ranging from 0 to 1, the ESI is a measure of similarity in export structures. The closer the value is to 1, the more similar the export structures between the two countries.

The MHT category is based on the classification system of the Organisation for Economic Co-operation and Development. It includes electrical machinery, automobiles, chemicals, miscellaneous transport machinery, and general machinery.

High-technology industries include aerospace, pharmaceuticals, computers and office devices, electronics/communication, and medical/precision optical devices.

Since the US-China trade war began heating up in 2018, the ESI score for MHT industries in the Southeast Asian region — where export competition has been particularly intense — has risen by 0.058 percentage points from 0.369 in 2011 to 0.427 in 2021. For high-technology industries, the score has climbed from 0.440 to 0.552.

In the US market, the ESI score for MHT industries rose from 0.248 in 2011 to 0.303 in 2018 before dropping to 0.278 in 2021.

High-tech industries showed a similar trend over the same period, with the score climbing from 0.379 to 0.498 before falling to 0.342.

“Export competition between South Korea and China has intensified in the US market since 2011, but the ESI has fallen, particularly for MHT industries, since the US-China trade war began escalating,” KITA observed.

Even as the competition heats up between South Korea and China, the former was found to have maintained its competitive edge in the high-tech industry areas of semiconductors, electronics and communications.

For electronics and communications, the trade specialization index (TSI) for South Korea rose from 0.212 (“close competition”) in 2011 to 0.273 (“relative advantage”) as of 2021. With values ranging from -1 to +1, the TSI indicates the level of industry specialization for trade between two countries; a value closer to +1 indicates a specialization in exports, while a value closer to -1 indicates a specialization in imports.

In terms of high-tech industries, South Korea was also noted as showing a “relative advantage” in the area of medical and precision optical devices, with a TSI score of 0.500 as of 2021. Other scores included 0.082 (“close competition”) for aerospace, -0.516 (“absolute disadvantage”) for pharmaceuticals, and -0.433 (“relative disadvantage”) for computers and office devices.

“With the recent urea water solution troubles prompting growing concerns about raw material issues and supply chain risks originating in China, attention must be paid to our high degree of dependence on China for the raw materials necessary for production in South Korea’s mainstay manufacturing industries, including petrochemicals and automobiles,” KITA concluded.

According to KITA’s study, China accounted for 1,850 out of 3,491 items for which South Korea relied on a single country for 80% or more of imports (between January and September 2021), indicating a high level of import dependence on China.

By Kim Young-bae, senior staff writer

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