Korea sinks further into trade deficit with China amid inaction from government

Posted on : 2023-07-10 16:54 KST Modified on : 2023-07-10 16:54 KST
South Korea is on pace to record its first annual trade deficit with China in the 31 years since they established diplomatic relations in 1992.
Containers carrying trade goods fill an open-air storage yard. (Getty Images Korea)
Containers carrying trade goods fill an open-air storage yard. (Getty Images Korea)

A seismic shift has occurred in the trade structure between South Korea and China. While China has historically been South Korea’s biggest trading partner and a contributor to its trade surplus, it is now responsible for a massive deficit.

In June, South Korea’s overall trade balance reached a surplus of US$1.13 billion, its first positive figure in 16 months. But in the case of trade with China, the deficit was larger than the total surplus — meaning that the foreign currency that it has managed to earn through exports has ended up going to China.

This suggests a strong possibility that a new annual record will be set this year: South Korea’s first annual trade deficit with China in the 31 years since they established diplomatic relations in 1992.

The mounting deficit is casting doubts on predictions that South Korea will regain its growth momentum amid a recovery in exports during the second half of the year thanks to China’s “reopening.” Some analysts are even voicing fears that the reversal in the trade situation with China could end up solidifying.

From surplus source to deficit drag

Since the 2000s, China has been the single biggest contributor to South Korea’s growing exports and trade balance surplus.

A look Monday at Korea Customs Service import and export figures based on customs clearance showed an annual average surplus of US$45.59 billion in South Korea’s trade with China for the 11 years from 2010 to 2021. China accounted for 84.3% of South Korea’s total annual average trade surplus of US$54.07 billion.

The surplus continued at an annual average of US$35.37 billion even during the five years of the Moon Jae-in presidency (2017–2022), a period plagued by multiple complicating factors including the backlash over the Terminal High Altitude Area Defense (THAAD) anti-missile system deployment and the COVID-19 pandemic.

But recently, China’s status as a trade partner has been shifting rapidly. Apart from September of last year, South Korea’s trade balance with China has not recorded a monthly surplus since May 2022.

As recently as 2021, China accounted for South Korea’s third-largest annual trade surplus. Last year, it plummeted to 22nd amid a huge drop in the surplus total.

This year, it has represented South Korea’s largest trade deficit. An examination of cumulative trade balances through May — the last date for which statistics by nation are available — showed China accounting for the largest trade deficit at US$11.83 billion, ahead of US$11.6 billion in the case of Saudi Arabia.

The deficit in trade with China was even larger than the US$8.99 billion recorded with Japan, a country that South Korea has traditionally recorded deficits with.

The worsening of the trade balance with China is the result of exports dropping more sharply than imports. In the case of exports to China during the first half of 2023 — chiefly intermediate goods in the IT sector, with semiconductors as the mainstay — the 19% decrease from the same period last year was larger than the 12.3% decline for overall export performance.

In contrast, imports from China fell by 5% over the same year, a lower rate than the overall decline of 7.7%. Contributing to the deficit were increases in imports of industrial raw materials such as precision chemical and battery materials, as well as items such as computers and electric machinery for which South Korea is highly dependent on China.

Some experts predicted the drop-off in exports to China and the resulting trade deficit could end up being a persistent phenomenon rather than a temporary one.

“There are various factors at play in the decline of our trade balance with China,” said Lee Seung-shin, a senior research fellow at the Korea Institute for International Economic Policy.

As an example, he explained, “Intermediate goods such as semiconductors and petrochemicals account for an extremely high percentage of exports to China, and the trend over the past few years has been an increase in the rate of China procuring those key items on its own.”

Lee Hyeok-jin, a professor of China studies at Incheon National University, said, “South Korea’s trade surplus with China should be seen as an optical illusion resulting from semiconductor exports, which account for such a high percentage.”

“In other major trade items besides semiconductors, a reversal in the trade structure has already become increasingly entrenched over the last seven or eight years,” he explained.

Seoul declares “all-out battle” to increase exports

“We need to treat economic policies as our priority tasks and devote all our energies to increasing exports, a mainstay of our economy and source of jobs where our reliance on overseas is the highest in the world.”

These words were shared by South Korean President Yoon Suk-yeol while he presided over the 18th emergency economic livelihood meeting on July 4, the date that he announced his economic policy course for the second half of the year. Yoon also shared a plea for related ministries and offices to implement and review appropriate follow-up measures to expand exports.

The problem is that the economic policy course jointly developed for the second half of the year shows no signs of any effective strategy or policy tasks for increasing exports to China.

The government’s projected economic growth rate for this year — which has been lowered from 1.6% to 1.4% — presupposes an export recovery and trade surplus in the second half of the year. The Bank of Korea previously announced a predicted growth rate of 1.4%, which presumed a current account surplus of around US$26 billion in the second half of the year and US$24 billion for the year overall. Attaining those numbers will require an average surplus of around US$4 billion per month for the rest of the year.

The key question is whether South Korea can improve its trade balance through a recovery in exports to China.

Lee Hyeok-jin noted, “China’s economic growth may have tailed off, but it still accounts for over half of value-added production in global manufacturing.”

“It will be difficult to anticipate a stable export recovery if we can’t regain our vitality in the Chinese market,” he predicted.

“We need to hurry up and develop a joint government/private sector strategy and measures to expand investment and trade with China,” he urged.

Lee Seung-shin advised, “For us to increase our exports to China and achieve competitive advantage in the global market, we will need to diversify into the consumer goods that China is increasingly importing and work on developing our existing complementary trade relationship.”

By Park Soon-bin, senior staff writer

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

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