South Korea’s unprecedented 3-month long trade deficit with China not seen as ‘systematic change’
- South Korea’s trade with China recorded a US$570 million deficit in July following shortfalls of over US$1 billion in both May and June
- South Korea’s semiconductor exports to China increased by 10.9 per cent month on month in July, but steel, petrochemical and petroleum products all declined
South Korea’s unprecedented three-month long trade deficit with China does not indicate an immediate “systematic change” in the relationship, with both the Seoul government and analysts pointing to the slowdown in the world’s second largest economy.
Last month, South Korea’s trade with China recorded a US$570 million deficit following shortfalls of over US$1 billion in May and US$1.2 billion in June, according to official data released on Monday. Before May, South Korea last registered a trade deficit with China in 1994.
South Korea’s total exports to China in July fell by 2.5 per cent month on month to US$13.2 billion, while imports hit US$13.8 billion, according to the Ministry of Trade, Industry and Energy.
“[The trade deficits are the] result of a combination of the effects of China’s slowing economic growth, regional lockdowns caused by the coronavirus,” the Korean government said.
As Korea’s trade dependence on China is very high right now, the slowdown in China’s economic growth rate has led to a slowdown in exports
The unprecedented figures have, though, still prompted domestic concerns about decreasing Korean export competitiveness in China.
“As Korea’s trade dependence on China is very high right now, the slowdown in China’s economic growth rate has led to a slowdown in exports, which in turn led to a trade deficit and decreased exports for Korea,” said Kang Sung-jin, an economics professor at Korea University.
China is South Korea’s biggest export partner, accounting for nearly 25 per cent of its total exports.
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South Korea was also China’s largest import partner for seven years until 2020, when it was overtaken by Taiwan.
Analysts played down suggestions that the trade deficit was a result of Chinese companies catching up to and replacing Korean firms in industries that South Korea is traditionally strong, including semiconductors.
South Korea’s semiconductor exports to China increased by 10.9 per cent month on month in July, with steel, petrochemical and petroleum products all declining by 8.3, 14.1 and 1.2 per cent, respectively, as factories reduced imports due to the uncertainty caused by Beijing’s zero-Covid policy.
In the case of the high-end chip market, the technology gap [between the two countries] is not expected to be narrowed down easily
“Semiconductor exports to China actually rose strongly in the first half of the year. Also in the case of the high-end chip market, the technology gap [between the two countries] is not expected to be narrowed down easily,” said Kang Min-joo, a senior economist focusing on South Korea and Japan at ING Economics.
Kang Min-joo added that even though the competition between the two countries in the semiconductor industry is set to intensify, it will take time for China to replace Korean products with domestically produced alternatives.
“[This is] because the semiconductor production and supply chains are highly intertwined globally, … and it will have to cross multiple borders to produce the final product,” Kang Min-joo added.
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But Korean export competitiveness may gradually weaken in China in the long term, cautioned Kang Sung-jin from Korea University.
“Considering that Korea’s current economic development stage has reached the level of advanced countries, the degree of the country’s dependence on trade surplus will reduce in the future. The country’s trade competitiveness vis-à-vis China will reduce as well,” the professor said.
“Therefore, from the perspective of Korea, it is appropriate in the long run to pursue an advanced economy structure that induces a current account surplus through capital movement or strengthening competitiveness in the service industry.
“Since the commodity market will lose international competitiveness compared to China, it will be difficult to maintain a trade surplus with the current model.”
