[Han-Jung-Il Economic Turbulence]③ "China, the era of being helpful like the past 20 years is over... Must widen the technology gap"

'De-Chinaization' has become a core task for our economy. Lee Chang-yong, Governor of the Bank of Korea, emphasized in his New Year's address at the beginning of the year that "we must reduce excessive dependence on the Chinese economy in the process of responding to the global supply chain restructuring." The fact that Governor Lee unusually mentioned de-Chinaization reflects the growing risks originating from China. China, the world's largest market, has been the 'growth engine' of our economy for over 20 years, but due to sustained trade deficits and the fallout from the US-China conflict, it has gradually turned into a 'weakness' and become a target to escape from.

'Export Powerhouse' China... Increasing Deficits

China is South Korea's largest trading partner. As of last year, China accounted for 22.8% of exports and 21.1% of imports. In terms of a single country, the trade volume with China is larger than the combined trade with the United States and Japan. The proportion of South Korea in China's trade is similar. According to the total value table of export-import goods by country from China's General Administration of Customs, last year China's total trade volume with South Korea reached $362.3 billion (approximately 448 trillion KRW), surpassing Japan to rank second. Since the establishment of diplomatic relations between South Korea and China in 1992, the trade volume between the two countries has increased 47-fold over 30 years, and China's share in South Korea's trade has expanded sixfold.

However, despite the growth in size, our trade conditions are worsening. Exports to China have been in negative growth compared to the same month of the previous year for seven consecutive months since June last year. The export decline rates were -0.8% in June, -2.7% in July, -5.5% in August, -6.7% in September, -15.7% in October, -25.5% in November, and -27.1% in December, showing an increasing downward trend. In last year's ranking of countries with trade surpluses, China was only 22nd. While about 80% of the trade surplus once came from trade with China, that position is now being replaced by Vietnam, Hong Kong, India, and Singapore.

South Korea's Import Supply Chain Particularly Vulnerable to China

The continuous deterioration of the trade balance with China is due to decreasing exports and increasing import dependence. South Korea lacks natural resources, resulting in a high import ratio of major raw materials and capital goods, with particularly heavy dependence on China. As China shifted from a simple assembly and processing role to a manufacturing powerhouse of intermediate goods, our import supply chain has become concentrated in China. China has been advancing its manufacturing technology while significantly increasing its acquisition of mineral resources such as rare earths, lithium, and cobalt, currently exerting considerable influence over South Korea in items like raw materials, semiconductors, and chemical products.

According to the Bank of Korea's analysis last year on the vulnerability of our economy's import supply chain, out of 5,381 total imported items, 2,144 (39.8%) were identified as vulnerable. Among these, raw material items such as mining products, textiles, and feed showed high vulnerability, most of which have very high import dependence on China. Examining the import shares of major countries for globally vulnerable items, China accounted for 20.5%, Germany 9.2%, and the United States 7.9%. Particularly, major minerals like copper, aluminum, and zinc were imported from China at an average rate of 67%. These items are core materials for our key industries such as semiconductors and secondary batteries.

If China Sanctions Intensify, South Korean Economy May 'Stagger'

As import dependence on China grows, uncertainties in our economy due to internal Chinese circumstances and US-China hegemonic competition have also increased. The Bank of Korea pointed out, "China's influence significantly surpasses that of other countries, so if supply chain disruptions within China, such as government lockdown measures, are prolonged, the ripple effects on the global network are likely to expand greatly." In fact, the average number of trading partner countries per item for major countries is 97 for China, 72 for the US, 75 for Germany, but only 24 for South Korea, indicating high vulnerability.

The prolonged Russia-Ukraine war has also disrupted the global supply chain system and triggered moves to weaponize resources, which is problematic. China is highly likely to strengthen controls over export-managed items such as rare earths, rare metals, and energy resources essential for advanced industries. Although the South Korean government is striving to reduce dependence on China, overseas resource development projects require enormous costs and time, making it difficult. Su In-hong, a professor in the Department of International Studies at Renmin University of China, recently told the Hong Kong South China Morning Post (SCMP), "Because the South Korean economy is heavily dependent on China, Koreans are more likely to become targets of (Chinese) sanctions."

Disperse Production Bases and Widen Technological Gap with China

Kim Jeong-sik, Professor Emeritus of Economics at Yonsei University, said, "Industries where we had strengths, such as shipbuilding and steel, have already been taken over by China, and sectors like electronics are also being lost, so the outlook for our economy is not bright." He added, "Bio, batteries, and defense industries remain, so it is necessary to quickly advance technological capabilities in new industries to widen the gap with China." Professor Kim advised, "To achieve this, the education system, including universities, should be restructured to better suit human resource development, and the government should increase support for improving corporate technological capabilities."

Kang Sam-mo, Professor of Economics at Dongguk University and former president of the Korea International Finance Association, said, "The era when China was beneficial to our economy for the past 20 years is over." He added, "Due to the US-China confrontation, we have no choice but to reduce dependence on China, so production bases must be further dispersed to countries like Vietnam and Indonesia." Regarding dependence on Chinese imports, Professor Kang pointed out, "China offers significant cost reduction effects due to cheap labor and transportation costs, but as experienced in the 'urea shortage crisis,' import sources should not be chosen solely based on cost." He warned, "Excessive dependence on China could lead to bigger problems later."

Kim Han-gyu, President of the 21st Century Korea-China Exchange Association, Park Jin, Minister of Foreign Affairs, Xing Haiming, Chinese Ambassador to Korea, and Lim Chae-jung, Chairman of the Korea-China Future Development Committee, are cutting a cake at the reception commemorating the 30th anniversary of Korea-China diplomatic relations held on the afternoon of the 24th at the Four Seasons Hotel in Jongno-gu, Seoul. Photo by Joint Press Corps