[Public Trade Deficit] Shock from China's Lockdown Policy... Shaking the Export 'Stronghold'

Public Export Deficit Continues from May
Break in 28-Year Consecutive Trade Surplus
Prolonged Trade Deficit Expected if No Economic Rebound in China

Warning signs have been lit for trade with China, our country'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 in response 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. Although China's manufacturing sector in June, after lifting lockdowns in major cities since last month, briefly shifted to an expansion phase for the first time in four months, the trade balance with China continues to worsen. 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. If the deterioration of exports to China, which accounts for a quarter of our total exports, continues, the time required for the overall recovery of our country's trade balance is likely to be prolonged. The cumulative trade deficit has already surpassed $10 billion in the first half of the year and exceeded $15.8 billion as of the 10th of this month.

The problem is that the Chinese economy, which showed signs of a brief rebound after the lockdown was lifted, is falling again. China's growth rate in the second quarter of this year was 0.4%, lower than the initial market forecast of 1.0%. This represents a 4.4 percentage point drop from the previous quarter and raises alarms about achieving China's annual growth target of around 5.5%. Although there is potential for recovery in the second half of the year, the foundation remains unstable, and significant improvement is expected to be difficult.

When the Chinese economy falters, South Korea, which has a high proportion of intermediate goods exports, inevitably takes a direct hit. In 2021, 79.6% ($129.684 billion) of South Korea's exports to China were intermediate goods. This article examines the outlook for the recently deficit-turning trade with China, its impact on the Korean economy, and future challenges.