Korea losing ground to China in intermediate goods imports by Vietnam

Posted on : 2023-11-09 16:56 KST Modified on : 2023-11-09 16:56 KST
A new report from the Korea Development Institute analyzes mid- to long-term changes in Korea’s trade structure
Busan Port. (Yonhap)
Busan Port. (Yonhap)

The market share of South Korean-made intermediate goods has been in decline since 2017 even as more and more exporting businesses have left the Chinese market for Vietnam over the past few years, a new analysis has shown.

The reason for this decline is their rapid replacement with Chinese-made intermediate goods boasting a comparative advantage in terms of competitiveness.

On Wednesday, the Korea Development Institute published a report entitled “The Effects of China’s Construction Industry Contraction and Implications for Medium- to Long-Term Trade Structure Changes.”

The report explained, “As Chinese intermediate goods become more competitive, the international division of labor between South Korea and China has weakened, and competition with China has also been intensifying in overseas intermediate goods markets.”

Vietnam is the country that many South Korean exporters of intermediate goods have turned to as an alternative to the Chinese market. Between 2007 and 2022, the percentage of South Korean intermediate goods exported to China fell from 29.4% to 25.7%, while the percentage exported to Vietnam rose sharply from 2.0% to 10.7%.

China has not taken the situation lying down. Instead, it has been working to build its capabilities through its domestic demand market and using them to target other intermediate goods markets.

Vietnam is a prime example of this. While South Korea’s market share of Vietnam’s intermediate goods imports has been falling since hitting its peak of 24.8% in 2017, China’s has been rising steeply over the same period.

By 2017, the difference in the two countries’ market shares had narrowed to 4.6 percentage points. As of 2021, it had expanded to 13.2% percentage points (35.3% for China vs. 22.1% for South Korea).

The institute said that while the widening gap between South Korea and China “necessitates export market diversification in response to changes to the international division of labor vis-à-vis China,” it also “shows that export diversification may not be effective if the international competitiveness of South Korean companies is not improved.”

The numbers also bear out a weakening trend in the division of labor where South Korea exports intermediate goods and China manufactures and re-exports final products.

In 2007, intermediate goods accounted for 37.2% of South Korean items exported to China. That percentage has since dropped to 23.6% in 2014 and 22.0% in 2022.

The reason is that as China’s technology for producing intermediate goods has developed, it no longer needs the South Korean ones. Another factor is China losing its appeal as a final production site as wage levels there have risen.

The report also included an analysis of the potential impacts on South Korea from the recently worsening financial soundness of Chinese real estate construction businesses.

According to the KDI’s analysis, a 10% decline in Chinese construction industry production would translate into a 0.4% decline in South Korea’s gross domestic product based on the decrease in exports of intermediate goods to the Chinese market, including construction materials, chemicals and metal products.

“The impact on the South Korean economy could be even greater if we consider additional indirect ripple effects of declining income,” it predicted.

By Ahn Tae-ho, staff reporter

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

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