While domestic demand including consumption continues to remain weak, exports, which have been driving up Korea’s economic recovery, are also facing a threat on the account of a slump in exports to China. Exports to China grew by more than 16 percent in January this year, snapping a 19-month streak of negative growth, but they have been sluggish this month after shifting back to a drop in February.
According to the Korea Customs Service on March 19, Korea’s exports to China fell 2.4 percent year on year to US$9.65 billion in February. Exports of memory semiconductors (48.8 percent) and semiconductor manufacturing equipment (6.7 percent) ascended but precision equipment (-30.9 percent), petroleum products (-28.7 percent), and broadcasting equipment (-52.8 percent) plummeted. As a result, exports to China, which had turned positive in January with a 16.1 percent increase, returned to a decline within a one-month period. Although exports increased for five consecutive months from October 2023 to February 2024, exports to China showed a different trend.
The slowdown in exports to China is due to a delay in China’s recent economic recovery. Deflation led to a slowdown in China’s domestic demand, which was bad news for Korea’s exports to China.
Adding to the problem is the fact that trade relations between Korea and China is structurally shifting against Korea’s favor. According to a report titled “Characteristics of China’s International Trade in 2023 and Implications for Korea-China Trade” by the Korea Institute for International Economic Policy (KIEP), South Korea’s exports to China sank 19.9 percent to US$124.8 billion in 2023. The drop was bigger than -16 percent in 2019 when exports plunged amid a U.S.-China trade dispute. From 10.9 percent in 2015, South Korea’s import dependence on China fell to 6.3 percent last year.
By industry, computers, communication and other electronic equipment accounted for 41.5 percent, the biggest share of Korea’s exports to China. They were worth US$51.82 billion last year, down 28.4 percent from 2022. Chemical raw materials and chemical products took the second-largest share (23.5 percent), contracting 15.7 percent. Korea’s surplus in trade of computers, communication and other electronic equipment and chemical raw materials and chemical products with China slid by US$26 billion and US$11.7 billion, respectively, compared to 2018.
By processing stage, exports of intermediate goods to China declined at an average annualized rate of 4.3 percent over the past five years. As a result, Korea’s trade surplus in intermediate goods shrank from US$65.7 billion in 2018 to US$8.9 billion last year. If semiconductors are excluded, China’s trade balance with the United States in intermediate goods was in deficit for the first time last year (US$7.5 billion). Among intermediate goods, batteries and auto parts switched to a deficit in 2018, chemical fibers in 2020, and basic chemical raw materials and plastics in 2022 and last year. As China becomes more competitive in electronics, chemicals, and intermediate goods, Korea is faced with the solidification of trade deficit structures in key categories where trade surpluses were once commonplace.