Can Korea cut its long-standing trade deficit with Japan?

Can Korea cut its long-standing trade deficit with Japan?. November. 22, 2011 03:53. weappon@donga.com.

A heavy equipment maker based on Hwaseong, Gyeonggi Province, recently changed its supplier of construction equipment controller from a Japanese company to a German one.

An essential tool in the use of heavy construction equipment, controllers cost tens of millions of dollars. A long-term buyer of high-tech Japanese controllers, the Korean company was forced to shift to a German company to avoid the impact of the stronger yen and take advantage of reduced tariffs from Korea’s free trade deal with the European Union.

An import director at the company said, “We changed our subcontractor due to risk of further appreciation of the yen. European controllers are also good technology-wise and we can also benefit from lower tariffs."

Korea’s trade deficit with Japan is projected to fall 10 billion U.S. dollars this year, giving hope that Korea`s chronic trade shortfall with its neighbor will finally ease.

The Korea Customs Service said the trade deficit with Japan in the first nine months of this year reached 22.5 billion dollars, down 17.9 percent from the record-high 27.4 billion dollars a year earlier. Against this backdrop, Korea`s trade deficit with Japan is expected to narrow to around 26 billion dollars this year from a record 36.1 billion dollars last year.

The shrinkage in the deficit is due to Korean exports to Japan rising faster than imports. Between January and September, exports to Japan climbed 45.6 percent year-on-year to 29.2 billion dollars, whereas imports rose just 8.9 percent to 51.7 billion dollars.

Excluding the impact of the strengthening yen, imports from Japan reached 180,000 tons, down 9 percent from 197,000 tons a year ago and lower than 195,000 tons between January and September 2008 in the wake of the global financial crisis.

A decline in imports from Japan caused by the March 11 earthquake coupled with a record-high value of the Japanese currency triggered a jump in import prices. After staying at 1,300 won to 100 yen last year, the won-yen exchange rates has spiked to around 1,500 won in the wake of the earthquake and the European debt crisis.

Another reason for the decline in Japanese imports is Korea`s diversification of import markets to benefit from lower import tariffs from free trade deals with the 11 member countries of the Association of Southeast Asian Nations.

Analysts say the narrowing deficit with Japan could be temporary, however, given that shipments from Japan declined from slower exports of semiconductors and electronics products in the wake of the downturn in advanced economies. They cite Korea`s still-high dependence on Japan for key parts and materials.

Electronics goods-related machinery equipment and parts saw the biggest import decline, with inbound shipments of flat-panel displays, heavy electronics devices and semiconductor manufacturing equipment plunging 46.3 percent, 18 percent and 7.2 percent, respectively.

Exports of oil products and food to Japan jumped courtesy of the Japanese earthquake, suggesting outbound shipments to Japan could slow next year.

Major electronics parts makers in Japan are relocating production to Southeast Asian countries to avoid the strengthening yen, also adding to speculation that reduced parts imports from Japan cannot mean the easing of Korea’s overall trade deficit with Japan.

Sarong Mok, a researcher at Korea Institute for Industrial Economics and Trade, said, “Korea has suffered a steady trade deficit with Japan since the establishment of diplomatic ties. The key to resolving this matter lies with fostering industries that produce Korea-made parts and materials.”