[Public Trade Deficit] Staggering from China Lockdown Aftermath... Warning Signs of Deficit for 3 Consecutive Months

$3.15 Billion Cumulative Deficit from May to Early July
Impact of China's Market Slump and Consumer Sentiment Decline
Semiconductor Market Share Down 7.4%P Since THAAD

25.2% Dependence on Exports to China a Burden
China Drops from 1st to 3rd in Import Ranking Among Trade Partners
China's Share in Korea's Imports Up 6.1%P Over 10 Years

Warning signs have been lit for trade with China, South Korea's largest trading partner. The trade balance with China, which had recorded a surplus for 28 consecutive years, has been in deficit for three months as of early this month. The main cause is China's lockdown measures due to the spread of COVID-19. May, when the trade balance with China turned negative, was the period when China imposed full or partial lockdowns on key major cities such as Shanghai, Beijing, and Shenzhen to curb the spread of the virus.

So, can the export stronghold status be restored once the shockwaves of the lockdown subside? It is not easy to guarantee. Looking at key economic indicators, the Chinese economy hit bottom in April and showed signs of recovery from May, but the trade balance with China continues to deteriorate. The trade deficit with China, which turned negative in May (-$1.099 billion), further widened to -$1.214 billion in June. The situation this month is even worse. The deficit recorded from the 1st to the 10th alone exceeds $844 million. This article examines the causes of the trade balance trend moving in the opposite direction to China, which is gradually recovering from the lockdown shock, analyzes the market share trends of major export items in China's import market, and discusses future challenges.

The trade balance with China turned negative from May, but abnormal signs were detected as early as the beginning of this year. In January, the export growth rate to China was 13.4%, down 8.8 percentage points from 22.2% in the same period last year. It continued to decline by 10.7 percentage points in February and 9.3 percentage points in March, and in April, the export growth rate finally contracted by 3.4%. This led to a deficit reversal for the first time in 28 years since August 1994. Of course, the cumulative trade balance with China this year is still a surplus of $4.2 billion. However, if this trend continues, the annual cumulative figure could soon turn negative.

The shaky trade with China is not a temporary phenomenon appearing this year. Since 2000, a combination of domestic and external factors has gradually caused cracks, according to analysis. China has shifted to a domestic demand growth policy to overcome the dual challenges of market stagnation and weakened consumer sentiment caused by prolonged U.S.-China conflicts and COVID-19 lockdown measures. The problem is that if China accelerates its domestic growth policy and import structure reorganization, South Korea's export competitiveness, which centers on intermediate goods and processing trade, will weaken. Intermediate goods are products used in the production process to manufacture other goods, such as semiconductors and displays. According to the Korea International Trade Association, China accounted for 25.3% of South Korea's total exports last year, ranking first among major countries. However, during the same period, South Korea's market share in China's import market was 8.0%, down 1.9 percentage points compared to 2017.

China's economic retaliation following the deployment of THAAD (Terminal High Altitude Area Defense) in Sangju, Gyeongbuk, in 2016 also negatively affected exports to China. In particular, the decline in market share was prominent in major export items to China with a large import share. South Korea's memory semiconductor market share in China dropped from 52.3% in 2017, the year after THAAD deployment, to 44.9% last year, a decrease of 7.4 percentage points. Other major export items such as non-memory semiconductors (-21 percentage points) and wireless communication device components (-2.0 percentage points) were no exception. South Korea's rank as an import partner for China fell from first place in 2016 to second place for two consecutive years in 2020 and 2021, overtaken by Taiwan.

China's increased industrial technology competitiveness has also become a burden on trade with China. The trade volume between the two countries grew 47 times over 30 years, from $6.4 billion at the establishment of diplomatic relations in 1992 to $301.5 billion last year. Korea-China trade initially focused on simple light and heavy chemical industries but evolved into high value-added core intermediate goods. This inevitably increased dependence on exports to China. The export dependence on China surged after 2000, peaking at 26.8% in 2018, then slightly decreased to 25.2% last year but remains high.

As of last year, the top export items with high dependence on China were semiconductors at 39.8%, displays at 37.9%, and synthetic resins at 33.6%. However, since the early 2000s, as the Chinese government began actively fostering advanced technology industries, competition in major export items has intensified. China's manufacturing value-added has ranked first globally for 11 consecutive years from 2010 to last year, showing superiority in fields such as solar power, new energy vehicles, home appliances, and smartphones. The share of Korean products in China's imports of ICT products such as computers and peripherals, communication equipment, and electronic components fell from 20.5% in 2017 to 17.9% last year, the largest drop among major countries. Korean memory semiconductors are also fiercely competing with emerging regional countries like Taiwan and ASEAN nations.

While Korean companies are losing competitiveness in China, the increasing share of Chinese products in the Korean market is another issue. The scale of imports from China has risen more sharply than exports over the past three years. Last year, imports from China reached a record high of $138.6 billion, up 27.3% from $108.8 billion the previous year. Even when exports to China shrank by 22.2% from $162.1 billion in 2018 to $132.6 billion in 2020 due to the COVID-19 impact, imports increased by 2.1%, setting new records every year.

Last year, China accounted for 22.5% of South Korea's total imports ($615 billion), up 6.1 percentage points from 16.4% in 2011 over the past decade. While import items at the start of trade were mostly plant-based products, crude oil, fiber crops, cement, and coal, high value-added items such as semiconductors, computers, and precision chemical raw materials have dominated the top ranks over the past decade since 2011. In particular, imports of semiconductors, the top import item from China, increased 253% from $6.6 billion in 2011 to $23.3 billion, and their share of total imports rose from 7.6% to 16.8%, reflecting China's technological advancement.

Cho Seong-hwan, head of the Economic Policy Office at the Korea Chamber of Commerce and Industry, said, "China's export restrictions due to the U.S.-China hegemonic competition are affecting South Korea's intermediate goods exports," adding, "It is necessary to diversify export markets concentrated in China by developing alternative markets such as Southeast Asia."