China Reduces Its Dependence on S. Korean Intermediate Goods

It is forecast that a sharp drop in Korea’s surplus in the trade of intermediate goods (materials and components needed to make final products) which accounts for most of exports to China will lessen Korea’s trade surplus with China in the future.

According to a report titled “Changes in Korea’s Surplus in Trade with China and Their Implications” released by the Korea Institute for International Economic Policy on August 4, Korea's trade surplus with China sank 40 percent to US$37.5 billion last year from US$62.8 billion in 2013. The ratio of surplus to the volume of trade with China increased from 13.5% in 1993 to 25.4% in 2004 and 27.4% in 2013, but fell to 17.7% last year.

Analysis says that the drop in trade surplus with China was attributed to the fact that the Chinese government pursued import substitution policies, regulated processing trade, and Korean companies expanded production in China. Since the late 2000s, the Chinese government encouraged companies to use Chinese-made products centering on capital and intermediate goods through a domestic growth strategy. Ultimately, the policy hit Korea as intermediate goods accounted for more than 80% of Korea’s exports to China.

Researchers pointed out that the size of the trade surplus is likely to continue to shrink. This is because China is promoting its own production of major products exported by Korea such as semiconductors, display panels, automobile parts, and petrochemical products, while domestic demand for Chinese products is increasing in aerospace parts, robotics and pharmaceutical materials.

"We need to differentiate our products from Chinese products by adding high added value to and developing high technology for parts and materials," the research team suggested, "We need to strengthen our customized supply capability corresponding to new import demand that will be created by changes in China's industrial policies."