Lower trade dependence on China is key to safer future

A high-ranking South Korean government official shared a candid opinion on the limits put by Washington’s Inflation Reduction Act and the CHIPS and Science Act on corporate investments in China, saying, “It may have turned out to be good to South Korean companies because they are becoming less dependent on China.” The official said that overly high dependence on the Chinese market was one of the greatest concerns in the country’s international economic activities, adding, “Now, businesses will proactively seek to reduce China-related risks even without the government’s interventions to be made.” Indeed, experts have long warned that South Korea’s high dependence on China would be harmful. Nevertheless, it has only waited until the United States takes an explicit countermeasure against China, idly hoping that any opportunity to curb risk from China would just fall into its lap.

In fact, the government and businesses alike have paid little attention to the dark side of the massive economic gains that they have enjoyed in the Chinese market. Bank of Korea (BOK) Governor Rhee Chang-yong pointed out in a forum held by the Korea Chamber of Commerce and Industry on July 14 that the country’s industries, deadly addicted to the gains that have come from trade with China over the last decade, missed the right timing to make structural reform. “Blinded by China’s cheap labor, which kept the share of manufacturing unchanged on the country’s industrial portfolio, the country has found itself late for paradigm shift,” explained the governor. “We should associate the recent decreases in exports to China not only with the growing tension between Washington and Beijing but also with the hidden causes of the country’s economic structure.”

Indeed, the South Korean economy suffers the substantial consequences of its heavy dependence on China. With a 26 percent cut in exports to China in the first half of this year, the country recorded a trade deficit of 27.8 billion dollars as of July 20, which resulted mainly from the sharp drops in semiconductor exports amid the prolonged recession in China. A recent report issued by the BOK on the trends in the country’s export market and their implications compared the increased rates of countries’ exports recorded from January through to April and concluded that those heavily dependent on China including South Korea, Taiwan, and Vietnam fared poorly. With the tension between Washington and Beijing only growing for some time, too high export dependence on the Chinese market will burden the country heavily.

Added to this, given that security concerns are increasing globally, economic interdependence, if it rises, will turn into an obvious weakness. A great example is China’s economic retaliation concerning the introduction of the THAAD system. Even Germany, China's largest trading partner for the past six years, announced its national security strategy in June to diminish dependence on China’s raw materials and energy resources and instead diversify suppliers. Nevertheless, South Korea, as one of its adjacent countries which share airspace and territorial waters and even fought in the war against China 73 years ago, still turns to China, although it is way more prone to risk from China than any other country in the world.

According to the Korea International Trade Association, Chinese urea imports went down from 71.2 percent in 2021 to 66.5 percent last year but bounced to 89.3 percent in the first half of this year. Even after the country suffered a logistical crisis, the Chinese urea supply crunch occurred following Beijing’s halt on diesel exhaust fluid exports in October 2021 – mainly because Chinese urea is believed to ensure good quality compared to its prices. What’s worse, the Chinese government has tightened its export control of rare earth materials and raw metals such as gallium and germanium. In response, efforts need to be made to build a network with related countries to put the brakes on China’s unilateral control policy. However, more importantly, it takes nationwide determination to reduce risk from China over the long term, not lured by instant gains.