[30 Years of Korea-China Diplomatic Relations] ② Three Turning Points... Leader → Partner → Competitor

1992 Korea-China Diplomatic Relations Begin... Leading Economic Growth in Both Countries
2001 China's WTO Accession and Korea's Surge in Investment in China
2015 Korea-China FTA Signed... Intensified Chinese Economic Retaliation

Handshake between South Korean and Chinese Foreign Ministers
(Seoul=Yonhap News) On August 9, Park Jin, South Korean Foreign Minister, shakes hands with Wang Yi, Chinese State Councilor and Foreign Minister, before their meeting at the Jimo District Jimu Gaosheng Junlan Hotel in Qingdao, China. 2022.8.9 [Photo by Ministry of Foreign Affairs. Redistribution and DB prohibited]

From leader to partner and then competitor. The economic relationship between Korea and China, marking the 30th anniversary of diplomatic ties on August 24, can be summarized this way. The trade volume with China, which was only $6.4 billion in the first year of establishing diplomatic relations in 1992, grew 47 times to $301.5 billion last year. This was supported by the swift investments of Korean companies that turned China into a production base while maintaining a win-win relationship, along with the steep growth of the Chinese economy, a global growth engine.

However, recently China has begun to threaten Korea by emerging as the world's largest manufacturing powerhouse through technological advancement and policies fostering domestic companies. The deployment of THAAD (Terminal High Altitude Area Defense) in 2016, the intensification of US-China conflicts, and high dependence on exports to China were internal and external risks that accelerated the shift from economic cooperation partners to competitors. We review the major turning points that influenced the Korean economy over the 30 years of Korea-China diplomatic relations.

1992 Korea-China Diplomatic Relations Begin... Leading Economic Growth of Both Countries

After establishing diplomatic relations with China, Korea recorded a trade surplus of $1.222 billion with China in 1993, the following year. This was the first surplus ever achieved since trade statistics between the two countries began in the 1970s. In the early 1990s, Korea mainly exported intermediate goods such as steel plates, synthetic resins, and rebar to China, while importing raw materials like crude oil and textiles from China, building a mutually complementary industrial relationship based on comparative advantage.

According to the Korea International Trade Association, China's average annual export and import growth rate in the 1990s increased by about 13.5%. As the Chinese economy grew, trade with Korea also became active. Korea's trade balance with China, which was a deficit of $1.071 billion at the time of diplomatic relations, rapidly grew to a surplus of $20.178 billion in 2004, surpassing $20 billion for the first time. The ranking of trade volume with China also rose from 5th to 1st during the same period. Since the establishment of diplomatic relations, China has been Korea's largest export market for 18 consecutive years since 2004 and largest import partner for 14 consecutive years since 2008, playing a leading role in the economic growth of both countries as of last year.

2001 China's WTO Accession and Korea's Surge in Investment to China

On December 11, 2001, China officially joined the World Trade Organization (WTO), expanding its market globally. The Chinese government announced the goal of a "new type of industrialization" the following year and began actively fostering high-tech industries through large-scale foreign investment attraction. This marked China's transition from labor-intensive to technology-intensive industrialization.

During this period, the status of investment between Korea and China was also strengthened. Korea's investment in China was only $233 million in the first year of diplomatic relations but surged nearly 32 times to $7.432 billion in 2007, just before the global financial crisis, becoming the top investment destination. During the same period, China increased its investment in Korea from $1 million (ranked 23rd) to $384 million (ranked 8th), rapidly shifting from quantitative to qualitative growth.

The increase in investment meant Korean companies were making full-scale entries into the Chinese market. Hyundai Motor established Beijing Hyundai in 2002 with the Chinese state-owned company Beijing Automotive, and Kia also formed a joint venture with Dongfeng Motor and Yueda Group in Jiangsu Province's Yancheng that same year, setting up Dongfeng Yueda Kia headquarters. Hyundai and Kia's car sales in China rose from 134,233 units in 2003 to 1,792,022 units in 2016, just before economic sanctions intensified, a 13.3-fold increase marking a peak. Samsung Electronics also entered the domestic market from 2001 with mobile phones, LCDs, and laptops, raising its market share in China's smartphone market to 19.7% by 2013.

The Korea-China relationship was elevated during this period as well. In 2008, then-President Lee Myung-bak and Chinese President Hu Jintao agreed on a "strategic cooperative partnership," reaching the pinnacle of cooperative growth extending beyond the economic sector to diplomacy and security. According to KOTRA, Korea's trade surplus with China surged more than tenfold from $6.353 billion in 2002, right after China's WTO accession, to $62.8 billion in 2013, marking an all-time high.

2015 Korea-China FTA Signing... Intensified Chinese Economic Retaliation

Korea-China FTA Agreement Reached
(Beijing=Yonhap News) Reporter Do Gwang-hwan = On the morning of the 10th, at the Great Hall of the People in Beijing, China, Minister of Trade, Industry and Energy Yoon Sang-jik and Chinese Minister of Commerce Gao Hucheng signed the Korea-China Free Trade Agreement (FTA) while President Park Geun-hye and Chinese President Xi Jinping watched, then exchanged signed documents and shook hands. 2014.11.10
Photo by Do Gwang-hwan

On December 20, 2015, after more than three years of negotiations, Korea and China officially implemented the Korea-China Free Trade Agreement (FTA). It was agreed to gradually eliminate tariffs on over 90% of all items over a maximum of 20 years. Since the FTA's implementation, Korea-China trade volume has set new records annually, expanding in scale, but it was also a period of qualitative transformation in the trade structure with China.

Seven months before the FTA signing, on May 8 of the same year, Chinese Premier Li Keqiang announced the "Made in China 2025" strategy. Aiming to develop from a "manufacturing country" to a "manufacturing power," China set goals to become a leader in advanced industries such as information technology, smart manufacturing, artificial intelligence (AI), 5G mobile communications, and aerospace. The Korea-China relationship shifted from partnership to actual competition. According to the Korea International Trade Association, China’s R&D investment grew at an average annual rate of 8.7% from 2015 to 2019, surpassing Korea (7.0%), the US (6.6%), Germany (6.1%), and Japan (0.4%).

China rapidly restructured its imports toward high-tech products, showing a clear trend of expanding imports of high-tech goods. Semiconductors have been China's largest import item since 2013, accounting for about 16% of total imports. Korea's imports from China also shifted toward semiconductors, computers, and precision chemicals. Competition between Korea and China intensified especially in mid-to-high technology industries such as chemicals, general machinery, automobiles, and electrical machinery. In 2011, Korea had a competitive advantage over China in general machinery and automobiles, but by 2021, these sectors had become competitive or relatively disadvantaged, especially in electrical and machinery sectors.

China's economic retaliation following Korea's 2016 decision to deploy THAAD also dealt a significant blow to the Korean economy. Samsung Electronics' market share in China's smartphone market plummeted from its peak in 2013 to 0.6% last year, and Hyundai and Kia's sales in China dropped by 73.3% to 477,282 units compared to just before the THAAD deployment. Lotte Department Store, which entered China in 2017, decided to close its stores in 2020 after only three years.

Dependence on imports of key raw materials from China has also deepened. As of last year, about 95% of tungsten oxide used in semiconductor wafer manufacturing, over 80% of lithium hydroxide, a key material for secondary batteries, and 100% of magnesium ingots used for producing aluminum alloys essential for lightweight automotive bodies and aircraft parts are imported from China.

Experts emphasize the need to revise the long-term export strategy to China from "Made with China" to "Made for China." Bohee Jeon, senior researcher at the Korea International Trade Association's Institute for International Trade and Commerce, advised, "To prepare for China's independent technology development and accelerated localization of intermediate goods, it is urgent to establish a national-level strategy and comprehensive support system for Korea's key export industries to China."