Glacial Bilateral Ties
After two decades since the establishment of diplomatic relations in 1992, China is likely to be knocked out from its role as the largest trading partner of the South Korean economy. The void left by China is quickly being filled by Korea’s ally, the United States.
South Korea’s current account surplus with the United States jumped 48.9 percent to US$67.79 billion in a year from US$45.54 billion, according to data from the Bank of Korea (BOK) and others on July 26. This is the largest surplus since the Korean government began to compile regional current account data in 1998. This was driven by an increase in exports, mainly passenger vehicle exports, which led to the largest surplus of US$56.38 billion in the goods balance in South Korea’s trade with the United States since 2014.
South Korea’s current account in trade with China, on the other hand, saw the largest deficit on record, turning from a surplus of US$23.41 billion in 2021 to a deficit of US$7.78 billion last year. This marked the first time since 2001 (-US$760 million) that the public current account has been in deficit. In particular, South Korea’s trade deficit with China has been running for nine months since October 2022. This is because exports of machinery and precision equipment and petroleum products to China fell significantly, while imports of raw materials from China increased. Machinery, precision equipment, and petroleum products are the mainstay of the Korean economy in exports to China.
This trend is raising the possibility that South Korea’s largest trading partner will shift from China to the United States for the first time in 20 years. South Korea’s exports to China and the United States have been around 25 percent and 15 percent, respectively, but the ratio is likely to reverse after April. Korean Ambassador to the U.S. Cho Hyun-dong recently said, “If the current trend continues, the United States can become South Korea’s largest trading partner again in 20 years.”
As South Korea’s largest trading partner and main export products are changing, it is urgent for Corporate Korea to diversify its exports. “China is catching up with Korea’s technological prowess at a rapid pace, and considering China’s political conflict with the United States, it seems not easy for Corporate Korea to recover its exports to China at a fast pace,” said Kim Jung-sik, professor emeritus at Yonsei University’s Department of Economics. “We need to sharpen our export competitiveness by fostering new industries such as the biotech and defense industries.”