Waning Dominance
South Korea's longstanding number one export market, China, is showing signs of waning in dominance after nearly 20 years since diplomatic ties were established between the two nations. Analysts suggest that South Korea’s growth model, which benefited from selling intermediate goods like semiconductors to China during its economic boom, has run its course.
According to the Ministry of Industry, Trade and Energy on June 6, South Korea’s exports to China from January to May this year amounted to US$49.7 billion, a 27.3% decrease from the same period last year (US$68.4 billion). Monthly exports to China fell below the US$10 billion mark for the first time in three years since January 2020, with US$9.2 billion in January 2021, and have been fluctuating around that figure ever since. The negative growth trend in exports to China has continued for 12 consecutive months since June last year. Except for a brief surplus of US$600 million in September last year, the trade balance with China has remained in a deficit over the past year.
Amid these shaky export figures to China, it's worth noting the export performance with the United States. According to the Korea International Trade Association, South Korea recorded a trade surplus of US$7.2 billion with the U.S. in the first quarter of this year, making the U.S. South Korea's largest trade surplus nation. Vietnam, which was South Korea's largest trade surplus nation last year (US$5.7 billion), followed the U.S. in second place, with Hong Kong (US$4.1 billion), India (US$2.8 billion), and Türkiye (US$2.1 billion) ranking third to fifth.
Looking at South Korea's exports to the U.S. by category, petroleum products (30.5%), petrochemicals (24.7%), steel (26.6%), auto parts (16.2%), secondary batteries (50.0%), and plastic products (15.9%) all showed an increase in export volume.
South Korean exports to the U.S. have managed to hold their own, hovering around US$9 billion monthly, even amid the overall trade deficit trend over the past year. Particularly noteworthy is the fact that exports to the U.S. have nearly caught up with the declining exports to China, which fell below US$10 billion this year. In April, South Korean exports to the U.S. were US$9.184 billion, a mere US$330 million short of those to China (US$9.517 billion).
The shift in the export market is attributed to factors such as China's economic slowdown and zero-COVID policy. However, a more fundamental cause is said to be the change in the growth process of the Chinese economy, which is different from the past. Particularly, after China launched its advanced manufacturing development project, "Made in China 2025," and increased its self-sufficiency rate for intermediate goods like semiconductors, trade between South Korea and China has shifted from complementation to competition.
The Bank of Korea previously pointed out in its report analyzing the impact of China's reopening on the domestic economy that China's ongoing industrial upgrading and increasing self-sufficiency rate are causing a structural weakening of its import demand.
As China's intermediate goods export market shrinks, the shares of exports to countries like the U.S., India, and Australia are expanding. In the first quarter of this year, exports of intermediate goods to China decreased by 29.6%, leading the overall decrease in intermediate goods exports. However, the share of intermediate goods exports to the U.S. increased by 1.7 percentage points to 13.6% compared to 2021 (11.9%). The shares of India (from 2.9% to 3.7%) and Australia (from 1.3% to 2.7%) also increased compared to 2021.