It is time to rebuild Korea’s trade structure

Trade balances of South Korea posted deficits in July for four months in a raw, the first in 14 years after the country suffered 2008 global financial crisis. The main cause comes from significant volume rise of imports over exports, and the situation is too serious to be simply treated as a temporary struggle blaming the war in Ukraine and recent global supply chain disruptions.

The July deficit gap doubled the one from April to June this year. The accumulated deficit from January to July is 15.03 billion dollars (approximately 19.6 trillion won), the highest in 66 years. A big part of the problem originates from the three month-consecutive trade deficits with China. From May through June, the causes of such imbalance could have been attributed to the shutdowns of major cities of China as well as the stoppage of factories there, leading to the sales drop of Korea-produced intermediate goods. However, even in July where the situations were somewhat stabilized, the imbalance still persists – and this could be a potential indicator that status may continue even in post-pandemic era.

South Korea’s trade with China has been always on the plus side since its turnover to surplus back in 1993, one year after the two nations established diplomatic ties. Among exports from Korea, intermediate goods account for 80 percent, while 60 percent of Korean-manufactured semiconductor are sold to China and Hong Kong. However, recent technological advancement of Chinese businesses led to drop in demands of such goods. While the ‘Made in China 2025” policy’ in which China aims to produce 70 percent of semiconductor domestically, is looking ahead a bumpy road due to pressures from the U.S., some eval‎uates that, other than the memory semiconductor, the Chinese technologies on designing, and producing as an outsource of, system semiconductors are superior than that of South Korea.

Yet, Korea’s dependency on Chinese raw materials is growing – 40 percent and 90 percent of raw materials that the country uses to produce semiconductor and battery respectively, are coming from China. Unlike Korea’s dependency on Japanese materials, components and equipment, which has declined over the three-year period since Japan restricted its exports of materials used for semiconductor productions in July 2019, its dependency on Chinese raw materials is in fact moving upward.

Such trade deficit is a red light to the overall profit structures of Korea’s 30-year-old exports system as well as its entire economic situations. Price stability of international oil and raw material markets and following improvements in trade balances will not automatically lead to the recovery to previous status. It is time for the Korean government, along with its businesses, to rebuild its current China-centered export and import structures from the very foundation. The landscape of global economy is currently being reformed as a new-cold war from U.S.–China, and U.S.–Russia relations, emerges. If South Korea sticks to the business-as-usual by simply hoping to things to be better, it will not be able to survive as an export-led economy amid such new global dynamics.