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Korea Could Suffer Chronic Trade Deficit With China

Posted June. 07, 2008 08:39,   

한국어

Korea could see a trade deficit with China in three or four years, a development which could last long term.

The Korea Institute for International Economic Policy (KIEP) and the Korea Institute for Industrial Economics and Trade (KIET), two think tanks with branches in China, and the Korea Trade-Investment Promotion Agency have analyzed the “seismic shift” in trade with China and are formulating measures to cope.

○ Shrinking Korean exports to China

According to the Korea International Trade Association, Korea’s trade deficit from January to April this year was 6.3 billion U.S. dollars, the first since 1997.

The narrowing trade surplus with China was a major factor behind the rise in Korea’s overall deficit. Korea saw its trade surplus with China peak at 23.3 billion dollars in 2005, but the figure fell to 5.6 billion dollars between January and April this year.

The report “Korea’s Response to China’s Shift in Trade Structure” released by KIEP’s branch in Beijing said that with slowing exports in parts and materials, two items that have driven Korea’s exports to China, the era of Korea’s trade deficit with China is highly likely.

Computer exports (including parts and fully assembled products), a leading Korean export to China, is likely to see a deficit for the first time this year. Auto parts exports enjoyed a surplus of 300 million dollar in trade with China last year but are expected to go into the red this year.

The report said Korea’s major export items such as steel, computers, auto parts and machinery are giving way to China, thus Korea’s trade surplus with China will end in a few years.

KIEP researcher Yang Pyeong-seop in Beijing said, “It is difficult for Korea to record a trade surplus in fully assembled products or consumer goods in the Chinese market. Even Korean exports of parts and intermediate goods will also see a deficit. This points to a great shift not only in trade but also in the economic relationship between the two countries.”

○ China’s emergence as a parts and materials exporter

When the two countries formed official ties in 1992, the share of Chinese parts as a part of Korea’s imports accounted for only 1.6 percent. That figure has since risen to 16.6 percent in 2000 and 21.5 percent last year. China’s share of Korea’s capital goods imports such as machinery also jumped from 2.6 percent in 1992 to 18.7 percent last year.

With growing imports of “H beams,” Korea saw a deficit in its steel trade with China in 2005 and the figure has grown since. In 2005, China recorded a steel trade surplus of 530 million dollars and 335.1 million dollars this year between January and April. Korea’s steel trade deficit with China is expected to exceed 10 billion dollars by year’s end.

Korea is also suffering from a trade deficit in consumable goods and computer parts with China, with a computer trade deficit of 127 million dollars between January and April this year, the first in eight years.

KIET researcher Cho Cheol said, “Last year, China’s auto parts exports recorded 31.1 billion dollars, double that of imports. Korea’s auto parts industry faces a big crisis.”

These developments are largely due to the aggressive efforts of the Chinese government to strengthen processing trade regulations since the second half of 2006, and to produce intermediate goods, parts and materials on its own.

China is transforming itself from an importer to exporter of household appliances and parts for electronics, audio, computers, cars and machinery except for semiconductors, LCD panels and plastic goods.

○ Korea being squeezed by Japan and China

Korea has enjoyed a trade surplus in parts and materials with China while recording a deficit with Japan. Korea’s net trade surplus with China and Japan, calculated by subtracting Korea’s trade deficit with Japan from the trade surplus with China, rose from 1.9 billion dollars in 2005 to 4.2 billion dollars in 2006, but fell to 358 million dollars last year. The deficit rose to two billion dollars from January to April this year.

Korea’s combined trade deficit with China and Japan soared from 1.1 billion dollars in 2005 to 10.9 billion dollars last year. Between January and April this year, Korea saw a deficit of 6.1 billion dollars.

KIET researcher Lee Moon-hyeong said, “The trend shows that the worst-case scenario is coming true, in that the gap between Korea and Japan in technology and price competitiveness is widening and the gap between Korea and China is narrowing.”

Korea’s slowing exports to China is also blamed on lack of marketing to Chinese companies or multinationals in China.

Kwak Bok-sun, the head of the Beijing office of the Korea Trade-Investment Promotion Agency, said, “The Chinese market is worth an estimated 1.2 trillion dollars and growing by 100 billion dollars a year. Korean companies cannot survive much less grow if they do not conduct marketing in the Chinese market.”



bonhong@donga.com