China has served as a great income source for the Korean economy for about 30 years since the two countries established diplomatic ties in 1992. However, Korea needs to diversify its trade partners and reduce its dependence on the neighboring country, because the Korean economy will be adversely affected if the trade deficit with China continues to grow, according to industry experts Monday.
Korea had been able to maintain a surplus in trade with China by exporting displays, smartphones, semiconductors and cosmetics. However, companies here are losing their competitiveness in the Chinese market as China has advanced its technology and manufacturing capabilities in these sectors.
Also, Korea has been importing raw materials from China to process and manufacture finished products for exports to other countries. But Korea has been under pressure to diversify its import partners as economic decoupling between the United States and China has accelerated.
According to data by the Korea Customs Service, Korea is expected to post a trade deficit with China for the fourth straight month in August. Korea logged a trade deficit of $667 million with China in the first 20 days of this month.
In May, Korea posted its first trade deficit with China for the first time since August 1994, which totaled $1.099 billion. Since then, Korea’s trade balance with China resulted in deficits of $1.214 billion in June and $575 million in July, respectively.
Hong Ji-sang, a senior researcher at the Korea International Trade Association, said diversifying trade partners and further developing technology are the solutions to this dilemma.
“In order to improve the trade balance with China, Korea needs to secure a stable import supply chain system for key materials related to industries with high growth potential,” the senior researcher said.
“It is necessary to maintain a lead over China in the technology-intensive industry to secure a foundation for export competitiveness. Also, companies need to strengthen customized export marketing strategies so that they can flexibly respond to changes in local conditions in China,” Hong added.
The implementation of the Inflation Reduction Act (IRA), signed by U.S. President Joe Biden last week, is also becoming a headache for Korea as electric cars using Chinese batteries are excluded from receiving subsidies from 2023, while 40 percent of the minerals used for batteries must be produced in North America or in countries that have free trade agreements (FTAs) with the U.S.
Kim Dae-jong, a professor at the School of Business at Sejong University, said Korea should be wary of importing more than 70 percent of any raw material from one country, pointing out that Korea’s dependence on raw materials for batteries stands at over 80 percent.
“The Chinese market, including Hong Kong, accounts for 33 percent of Korea’s total trade. In other words, one-third of Korea’s total trade involves the Chinese market. It is difficult to respond to a country’s high dependence on trade when there is a problem between countries,” he said.
The professor added that companies making consumer goods need to pursue a market leader strategy to make Chinese consumers want to buy products with high brand power.
“In this global era, only products with high brand value can survive. Even if the two products are functionally similar, consumers prefer the one with a higher value. It may be difficult, but Korean companies also need to make efforts to create products that Chinese consumers really want to buy by making products with high brand value,” Kim said.
