Trade Surplus With China Will Not Last

A pessimistic outlook was presented indicating that Korea’s large-scale trade balance of surplus with China will not be maintained.

This stance was part of the dissertation of Professor Lee Geun of Seoul National University and Professor Kim Min-soo of Incheon University that was presented at the International Seminar entitled “Rising China and the East Asian Economy” held at Lotte Hotel, Seoul on March 19-20 by KIEP (Korea Institute for International Economic Policy).

Since 1993, Korea has shown a continued trade surplus with China including last year’s $13.2 billion surplus, 88 percent of the overall trade surplus.

Professor Lee and Professor Kim both pointed out the recent fundamental changes within the industry’s division of labor in both countries as to why Korea’s trade balance with China changed from a “large scale trade surplus” to a “trade balance.”

In other words, the trade surplus with China soared because the Korean enterprises entering China imported vast amounts of various raw materials and intermediate materials from Korea for local production and manufacturing.

However, the two professors analyzed that recently it has become harder to expect export of intermediate materials to China as intermediate material manufacturers are beginning to accompany big corporations into China.

In fact, corporations including Samsung Electronics and Hyundai Motor entered China en masse over the past couple of years. Once this trend establishes itself, the virtuous cycle of “increase of local sales of Korean big corporations in China à increase of imported parts from Korea à increase of exports to China” breaks.

Professor Lee expressed his concerns by stating, “There is a big difference from enterprises entering China during earlier times as the Korean enterprises entering China in recent years are capital and technology intensive companies with relatively high value-added” and added, “As economy becomes advanced and intensified, hollowing out of the manufacturing industry becomes inevitable, yet Korea’s exceedingly fast pace becomes an problem”.

At this seminar, KIEP researcher Nam Young-suk affirmed, “Since the late 1990s, as local parts enterprises entered China en masse alongside large corporations there have been concerns that the export of intermediate materials to China will decrease and the trade surplus will eventually drop.” She added, “Until 2007, the trade surplus to China will continue to increase. However, in the long run, it is possible that the course might reverse and lead to a trade deficit.”

Jong sik Kong Ki-Jeong Ko kong@donga.com koh@donga.com