Korea must wean off China and find diverse trade partners

The Korea Customs Service said on Monday that the country’s trade deficit from China has reached 800 million U.S. dollars, based on provisional data on the imports and exports with China between July 1 and 11. This will likely mark the third consecutive month of trade deficits against China, following May and June, which incurred 1.1 billion and 1.2 billion dollars in red, respectively. The trade surplus with China sustained from August 1994 for 28 years is showing signs of cracks.

The trade deficits are not a temporary phenomenon but the ramification of structural problems. In the past, China was stuck in a labor-intensive industrial structure characterized by a vertical form of division of labor, which imports intermediary goods from South Korea and exports complete products to third countries. However, China is morphing into a high-tech manufacturer that can procure parts and materials on its own thanks to technological advancement. South Korea has long witnessed the disturbing fall in the share of Korean exports in China including memory chips and cellphone parts. By contrast, Korea is importing an increasing amount of Chinese second batteries, petrochemical products and textile goods.

If prolonged, Korea’s trade deficits from China might translate into a permanent red in the entire trade balance, nudging the tumbling growth into a freefall. As of Sunday, the trade deficit stands at 15.9 billion dollars, already an all-time high. Facing chronic trade deficits with Japan, Korea is also witnessing a shift in America to build a self-sufficient system from design to manufacturing.

China used to be the last resort for South Korea to offset the deficits from other markets, but now it is barely making any profits from trading with China. What is more, many local manufacturers are relying on Chinese imports for essential materials and products for wide use. Deficits from China are growing, and so is the dependency on Chinese imports. A disruption in the supply chains can lead to another acute shortage of essential resources as seen in the case of urea solution.

The landscape of trade is shifting as China is witnessing a dramatic industrial transition and the world is getting divided into West and non-West against the backdrop of a new cold war. Supply failures of major raw materials or parts are also becoming more frequent owing to the pandemic-induced logistical disruptions. No country can survive in the current global market with the old playbook. Korea must create a technological gap with China by focusing resources on value-added industries including material, parts, and equipment, while making inroads into new market territories. Revamping the current trade structure that is partially weighted towards certain products and countries is a make-or-break deal for us.