South Korea’s foothold in the Chinese market is narrowing while its dependency on imports from China is growing. The relationship that used to yield the most trade surplus for South Korea with China seems to have reversed.
According to the Korea International Trade Association (KITA) on Jan. 28, China imported products worth approximately US$162.5 billion from South Korea last year, marking an 18.8 percent decrease compared to the previous year. The decline is more significant than that of other major countries such as Taiwan with 15.4 percent, Japan with 12.9 percent, and the United States with 6.8 percent. South Korea ranks third in terms of its share in China’s overall product imports, accounting for 6.3 percent, following Taiwan with 7.8 percent and the United States with 6.5 percent.
This marks the lowest level in 30 years since the establishment of diplomatic relations between South Korea and China in 1992. On the other hand, South Korea’s dependency on China is increasing. Last year, South Korea’s exports to China were US$18 billion, which was lower than its imports from China. This also represents the first deficit in 30 years since the establishment of diplomatic relations between South Korea and China.
China has been the country that contributed the most to South Korea’s trade surplus over the years. In 2018, 80 percent of South Korea’s overall trade surplus was earned from China. The reversal in the situation can be attributed significantly to the impact of China’s vision to strengthen industrial competitiveness, known as “Made in China 2025.”
Key export items for South Korea, such as petrochemicals, steel, and petroleum products, have lost their positions. In the case of petrochemical products, a representative intermediate good, China’s self-sufficiency in products like intermediate raw materials and basic oils has currently exceeded 90 percent. South Korea relinquished its position as China’s largest importing country, a status held for seven consecutive years from 2013 to 2019, now conceding it to Taiwan.
The KITA stated, “The slowdown in China’s imports is attributed to domestic-oriented and service-centric growth as well as an improvement in China’s self-sufficiency in production capabilities. The mutual complementary relationship, where China imports intermediate goods from South Korea for processing and re-exports, has weakened.”
The concern lies in the potential for the entrenchment of this changing dynamic. Currently, products labeled “Made in Korea” sought after in China are primarily semiconductor and display products. On the other hand, South Korea’s imports from China are expanding, particularly in consumer goods and secondary battery materials and battery intermediates.
The United States is already taking steps to reduce its dependency on China. According to data from the U.S. Census Bureau, the country’s merchandise imports by trading partner ranked Mexico at the top with US$39.81 billion as of November last year, while China fell to the second position with US$35.50 billion.
As recently as 2018, China accounted for over 20 percent of the U.S.’ merchandise imports. The change in the dynamics occurred in 2017 with the inauguration of the Donald Trump administration. The former President Trump declared a resurgence of U.S. manufacturing and imposed high tariffs on China. This trend has continued into the current Biden administration. As of November last year, the proportion of China in U.S. merchandise imports significantly decreased to 13.9 percent.