Korea’s Trade Balance with China Turns into Deficit for the First Time in 31 Years: Impact and Analysis

Illustration = Kim Hyeon-guk

This year’s trade balance (export-import) with China turns into a deficit for the first time in 31 years. This is the first time since a trade deficit of $1 billion was recorded in the first year of diplomatic relations with China in 1992. The landscape of trade with China, which accounted for about a quarter of our exports and was one of the pillars of the Korean economy, is changing.

According to the Korea International Trade Association and the Ministry of Trade, Industry and Energy on the 13th, as of November this year, Korea’s exports to China were $114 billion (about 150.5 trillion won), imports were $132 billion, and the trade balance showed a trade deficit of $18 billion. The trade balance with China has been running in deficit for every month this year, starting with a deficit of $3.9 billion in January.

The $18 billion deficit recorded in trade with China this year is the second largest following the $22.4 billion deficit (accumulated in October) shown in trade with Saudi Arabia, the largest importer of crude oil. China, which provided Korea with the largest trade surplus for 16 years from 2003 to 2018, except for 2008, has now changed 180 degrees to the partner from which we pump money. In 2018, when we recorded the second-largest trade surplus with China in history, China is Korea’s key trading partner, accounting for 80% of Korea’s total trade surplus.

Graphics = Kim Hyun-guk

The reason why our trade balance with China has turned into a large deficit is because China, which used to manufacture and process intermediate goods exported by Korea and sell them on the world market, is now self-sufficient in many products, so we no longer have anything to sell. Conversely, Korea is in a situation where it must import large quantities of essential materials and minerals from China in the rapidly growing secondary battery market. In addition, it is analyzed that the trade balance with China has turned into a deficit for the first time in 31 years as exports of semiconductors, which were the support of exports to China, have decreased due to the sluggish industry. Cho Sang-hyun, director of the International Trade Research Institute of the Korea International Trade Association, said, “The change in the structure of trade with China, which was hidden by the optical illusion of a semiconductor surplus, is now clearly revealed,” and added, “We need to create a new trade framework going forward.”

◇There’s nothing to sell, but a lot to buy

So far, sluggish exports to China and trade deficit have been attributed to variables such as specific items such as semiconductors, geopolitical issues such as supply chain conflict between the US and China, and China’s economic slowdown. There were high expectations that exports to China would return to normal once the semiconductor market, which accounts for 30% of total exports to China, and the overall economy in China recovered. The sluggish exports to China and trade deficit were not viewed through the framework of industrial structure transformation, but were blamed on temporary external variables. However, when the packaging of semiconductors was removed, the reality of Korea’s trade with China was different. China, which has broken away from the industrial structure of importing intermediate goods from countries like Korea, processing them, and selling them to foreign countries, and has advanced its technological capabilities, has now become a competitor for our exports in the global market.

The trade surplus with China, which hit $55.6 billion in 2018, later fell to the $20 billion range. Last year, when the country had the largest trade deficit in history, it recorded a surplus of only $1.2 billion, barely avoiding the deficit. However, looking at the trade balance with China, excluding semiconductors, it plummeted from $19.7 billion in 2018 to $2.5 billion in 2020. In 2021, there was a deficit of $2.6 billion. Excluding the semiconductor surplus this year, the deficit with China exceeds $30 billion. Although the trade balance with China seemed to be in surplus due to semiconductors, other industries were already in deficit.

Graphics = Kim Hyun-guk

It is pointed out that as China’s industry is growing rapidly, our products are losing their place in the local market. Petrochemical products, which ranked third in exports to China in 2019 after semiconductors and displays, fell into a slump this year with exports plummeting 21% from the previous year. An official from a petrochemical company said, “All general-purpose products such as petrochemical intermediate raw materials and basic oils are now made in China. Even before the coronavirus incident, China’s self-sufficiency rate was around 60%, but the industry analysis is that it is now 90-100%.” . As China started making its own products that we used to export, exporting to China became difficult, except for some high-end products. Display exports to China exceeded $9 billion in 2019, but decreased to $3.3 billion this year.

Cosmetics, which were very popular in China in the 2010s and had a rapid increase in exports, have become difficult to regain the same popularity as in the past, with high-priced products losing out to France and Japan, and mid- to low-priced products giving way to local products.

On the other hand, income is increasing significantly. A representative example is secondary battery materials and secondary batteries, which have exploded as the electric vehicle era begins in earnest in the 2020s. Imports of secondary battery materials, which amounted to only $5.4 billion in 2019, have more than doubled to $12.5 billion this year. Secondary batteries were not even in the top 10 imported items in 2019, but imports of Chinese batteries such as CATL and BYD have increased, making it the third most imported item from China this year. Even the iPhone, which is an American Apple product but is mostly produced in China, also contributes to the negative trade trend with China. The amount of mobile phone imports from China is estimated to have exceeded $1 billion in October alone and reached a similar level in November.

◇Weakening competitiveness is a problem… Need for market diversification

It is pointed out that China’s product technology, backed by the government’s full support, population, and large domestic market, has now almost caught up with Korea’s, except for some high-tech industries, including semiconductors, making it difficult for Korea to dominate the Chinese market any longer. Joo Won, director of the Hyundai Research Institute, said, “Now, realistically, there are virtually no products other than semiconductors that can be sold in China,” adding, “It is time to stop caring about the Chinese market and turn our attention to other markets.”

2023-12-13 20:00:58
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