In a significant economic shift, South Korea’s trade balance with China has turned negative for the first time in 31 years, departing from the trend since 1992 when South Korea experienced a 1 billion dollar trade deficit in its first year of diplomatic relations with China. The recent deficit signifies a transformation in the dynamics of bilateral trade, as China traditionally accounted for approximately one-fourth of South Korea’s exports, playing a pivotal role in the country’s economic landscape.
According to data from the South Korea International Trade Association (KITA) and the Ministry of Trade, Industry, and Energy, South Korea’s trade deficit with China has deepened throughout the year, reaching 18 billion dollars by November. From January to November, South Korea’s exports to China amounted to 114 billion dollars (approximately 150.5 trillion won), while imports totaled 132 billion dollars. This persistent trade deficit trend has unfolded since January, indicating an unbroken streak of monthly deficits in South Korea’s trade with China.
The 18 billion dollar deficit recorded in South Korea’s trade with China this year is the second-largest. It trails the 22.4 billion dollar deficit that Saudi Arabia recorded in October. This reversal marks a significant shift, considering China had been South Korea’s primary source of trade surpluses for 16 years, except for 2008. In 2018, China contributed to 80% of South Korea’s overall trade surplus, registering the second-largest trade surplus in history. However, the current scenario illustrates a complete turnaround, with China becoming a major contributor to South Korea’s trade deficit.
The recent massive trade deficit in South Korea’s trade with China can be attributed to the evolving landscape where China, once reliant on South Korea for intermediate goods, has gained the capacity to produce a considerable portion of its products independently. This shift has resulted in a diminished market for goods South Korea traditionally exported to China.
Conversely, South Korea finds itself in a challenging position, particularly in the rapidly growing electric vehicle battery market. The country now needs to import essential materials and minerals on a large scale from China, further contributing to the trade deficit. Compounding this, the semiconductor industry, a stalwart supporter of South Korea’s exports, is experiencing a downturn, reducing overall exports and contributing to the trade deficit.
Joh Sang-hyun, the Director of the Institute for International Trade at KITA, highlighted the need to “formulate a new paradigm for trade moving forward.” He said, “The underlying shift in the structure of South Korea-China trade, previously obscured by the illusion of a semiconductor surplus, is now glaringly apparent.”
Historically, the sluggish performance of South Korea’s exports to China and the persistent trade deficit has been attributed to specific factors such as semiconductor-related challenges, geopolitical tensions between the U.S. and China, and China’s economic slowdown. The expectation was that once the semiconductor market, constituting 30% of total exports, and China’s overall economic conditions improved, South Korea’s exports to China would regain strength. The narrative had often framed the export underperformance and trade deficits as outcomes of temporary external variables rather than a structural shift in industrial dynamics.
However, peeling away the packaging of the semiconductor narrative reveals a different reality for South Korea’s trade with China. China has shifted away from a manufacturing framework that relied on importing intermediate goods. The nation, now equipped with advanced technological capabilities, has emerged as a formidable contender in the worldwide market.
In 2018, South Korea recorded a trade surplus with China amounting to 55.6 billion dollars. However, this surplus gradually decreased to 20 billion dollars in subsequent years. Last year, which marked the largest trade deficit in history, South Korea barely managed a surplus, reaching a modest 1.2 billion dollars.
Examining the overall South Korea-China trade balance, excluding semiconductors, there was a significant decline from 19.7 billion dollars in 2018 to 2.5 billion dollars in 2020. In 2021, the trade balance further worsened with a deficit of 2.6 billion dollars. Even this year, excluding the surplus from the semiconductor industry, the overall trade deficit with China is estimated to reach 30 billion dollars. This indicates that despite a surplus in the trade balance, various sectors have fallen into a deficit when excluding semiconductors.
As China’s industrial sector experiences rapid growth, concerns have been raised about South Korea’s products losing ground in the local market. As recently as 2019, petrochemical products, which ranked third in South Korea’s exports to China following semiconductors and displays, have faced a downturn this year, with exports plummeting by 21% compared to the previous year.
“China now produces petrochemical intermediates and base oils,” a representative from the domestic petrochemical industry said. “Before the pandemic, China’s self-sufficiency was around 60%, but industry analysis now suggests it has reached 90-100%,” they added.
With China increasingly capable of producing what South Korea used to export, except for certain high-end products, it has become challenging for South Korea to maintain a foothold in Chinese exports. Display exports, which reached 9 billion dollars in 2019, have shrunk to 3.3 billion dollars this year.
This article was originally published on Dec. 14, 2023.
