Fundamental Measures Needed
South Korea, once the largest exporter to China, fell to fifth place among exporters to China in the first half of this year. This is because exports of intermediate goods to China, which account for more than 80 percent of South Korea’s exports to China, have been on a sharp decline. On the other hand, imports of intermediate goods to Korea from China have been on the uptick, resulting in South Korea’s trade deficit in the first half of this year. Analysts point out that fundamental measures are needed due to a change in China’s economic structure.
According to Chinese customs authorities, South Korea accounted for the largest share of China’s import market from 2013 to 2019, but fell to third place in 2020, second place in 2021 and 2022, and then ranked fifth this year. Taiwan remained the largest exporter to China from 2020 to this year, followed by the United States, Australia, and Japan. Korea’s share of China’s import market peaked at 11.6 percent in 2005, but has gradually declined to 6.2 percent in the first half of this year.
This is blamed on a decline in South Korea’s exports of intermediate goods to China. After turning negative at -10.2 percent (year on year) in October 2022, South Korea’s exports of intermediate goods to China have been contracting at a double-digit rate every month, including a drop of 34.1 percent in March of this year. Meanwhile, Korea’s imports of intermediate goods from China have been on the rise. As a result, South Korea’s intermediate goods trade surplus with China shrank from US$63.6 billion in 2018 to US$25.9 billion in 2022. Then, in the first half of this year, Korea posted a cumulative deficit of US$700 million in trade with China.
This means that South Korea is losing competitiveness on intermediate goods. Such items are not limited to just semiconductors. According to the Korea Institute of Industrial Economics and Trade, excluding semiconductor trades, South Korea’s exports to China in 2021 were US$111.6 billion, and South Korea’s imports from China US$114.3 billion, already leading to South Korea’s US$2.7 billion deficit. In the first half of 2022, South Korea’s trade deficit with China, excluding semiconductor trades, reached US$9.7 billion.
South Korea is showing sluggish export performances in heavy industries, chemicals, electronics, and machinery, which accounts for 89 percent of South Korea’s exports to China. According to the Korea Economic Research Institute, exports of electrical and electronic products to China, including semiconductors, fell 29 percent year on year in May. Drops were also marked for steel (-23 percent), chemicals (-20 percent), and machinery and precision equipment (-12 percent).
Korea’s export competitiveness in intermediate goods is lagging behind Taiwan and the ASEAN. According to the Korea International Trade Association, Korea’s share of information and communication technology (ICT) products, such as computers and peripherals, telecommunications equipment, and electronic components, which are steadily increasingly imported by China, fell from 20.5 percent in 2017 to 17.9 percent in 2021, the largest decline among major countries.
During the same period, Taiwan and the ASEAN’s share of exports to China increased by 5.6 percentage points and 1.9 percentage points, respectively, enabling the two to replace South Korea. Taiwan continues to hold the top spot in China’s high-tech intermediate goods import market due to the competitiveness of its key products such as non-memory semiconductors and solid-state drives (SSDs).
Under these circumstances, South Korea has changed to a country with a trade surplus from a country with a large trade deficit with China. China recorded its second-largest trade deficit with South Korea for 20 years from 1998 to 2018. But South Korea ranked third in China’s trade deficit nation standings from 2019 to 2021. Then it slipped to sixth place in 2022 and dropped out of the top 10 this year. South Korea has posted trade deficits with China for 10 months since October 2022, with a deficit of US$585 million in the first 10 days of August.
For years, suggestions have made to diversify South Korea’s export structure, which has been too lopsided toward intermediate goods, into a higher-value consumer goods-oriented one, but little has changed. From 2011 to 2020, the proportion of consumer goods in China’s total imports nearly doubled from 6.2 percent to 11.2 percent.