[Editorial] Korea Should Keep Ahead of China in Materials and Parts Industry

China’s raw material and parts industry has been growing at a rapid pace, shaking up the trade structure of Korea, China, and Japan. Korea has been buying high-quality raw material and parts from Japan, and exporting medium and low quality materials and parts to China to maintain a trade surplus. If China manages to overtake the world’s mid-to-low price markets for products and materials, there is a possibility that Korea may end up becoming a chronic trade deficit nation.

This year China has expanded its production infrastructure for the raw material industry, such as petrochemical and steel. They are gushing out related products and caused the international price for ethylene, the basic material for petrochemicals, to plummet from $1020 per ton to $760 as of late March. Goldman Sachs predicted that as China becomes a net exporter of steel, the steel prices will also drop.

Korea had a trade deficit of $17.1 billion with Japan in the materials and parts sector last year. This is because Korea’s technology is only at 78.8 percent of Japan’s and other advanced nations. Meanwhile, Korea experienced a surplus of $16.3 billion with China. However, Korea is only 2.1 years ahead of China in 99 core technological skills for the future such as aerospace technology. There is no guarantee that Korea will not experience a deficit in the materials and parts sector with China in a few years.

This sector has experienced low productivity, lack of source technology and other structural problems because the companies in the industry are mostly small and medium sized enterprises. After the financial crisis, due to the lack of investment in infrastructure, labor productivity growth has been only half of what it was before the crisis. The government, since the 1970s, has supported the industry by diversifying importers and implementing “Action Plan to Build Specialized Companies for Materials and Parts,” but has not made much progress. They were only concentrating on the short-term profits and failed to attain competitiveness in the long run.

The materials and parts industry accounts for 46 percent of exports and 36 percent of manufacturing production. Korea’s economy cannot grow without the growth of this sector. Materials and parts industry must attain technology at par with global standards in order for large corporations such as Samsung Electronics and Hyundai Motors to survive in the international markets. The small and medium sized firms for parts and materials should not merely wait for orders from large corporations but try to get into the international market. Large corporations should support the small and medium sized firms for simultaneous growth. The government should actively support the development of source technology, which needs long-term investment, and expand related infrastructure such as education and finance.