[Trade Deficit 1 Year]③ China Trade Deficit for 5 Consecutive Months... "Limited Reopening Effect"

Export sluggishness to China, our country's largest trading partner, is also cited as a major cause of the trade deficit. In May last year, China imposed lockdowns on major cities such as Shanghai and Beijing to curb the spread of COVID-19, rapidly cooling trade with South Korea. Exports of mainly intermediate goods, including the largest export items such as semiconductors and displays, significantly declined. Some analysts interpret the shaky trade with China as a result of a complex interplay of domestic and international factors linked to China's growth since the early 2000s. As China strengthens its domestic demand growth policies, South Korea's export competitiveness to China, which centers on intermediate goods and processing trade, is continuously weakening.

According to the Ministry of Trade, Industry and Energy on the 2nd, the trade balance with China recorded a deficit of $1.14 billion last month. During the same period, exports ($9.88 billion) decreased by 24.2% compared to the same period last year, while imports ($11.019 billion) increased by 5.9%. Although the deficit narrowed compared to the record trade deficit with China in January this year (-$3.97 billion), the deficit continued for five consecutive months. The trade deficit with China turned negative for the first time in 28 years since August 1994, recording $1.1 billion in May last year. Except for a brief surplus of $660 million in September last year, the trade balance has been deteriorating continuously until last month. Major export items such as semiconductors decreased by 39.0% as of the 25th of last month, and most items including displays (-43.5%) and petrochemicals (-29.5%) also declined.

[Image source=Yonhap News]

South Korea's Share of Imports from China Hits Record High

The significant decline in the trade balance with China is superficially due to market stagnation and weakened consumer sentiment caused by COVID-19 lockdown measures. China is South Korea's largest trading partner for semiconductor exports, and when the global semiconductor export market stagnates, South Korea's trade deficit with China also expands. Semiconductor exports to China decreased by 46.2% in January and 39.0% last month. Changes in export structure due to China's government efforts to strengthen industrial technology competitiveness are also cited as negative factors. Korea-China trade shifted from light industry and heavy chemical products in the early 1990s after diplomatic relations were established in 1992 to a focus on high value-added intermediate goods trade in the 2000s. Intermediate goods are goods used in the production process to produce other goods, with semiconductors and displays being representative examples. As China's industrial technology grows, South Korea's imports from China have also been increasing annually. According to the Korea International Trade Association, last year's imports from China reached $154.6 billion, an 11.5% increase from $138.6 billion in 2021, marking an all-time high.

The decoupling pressure, led by the United States, to sever advanced industrial trade with China is also likely to act as a risk for future trade with China. The Biden administration implemented export controls at the end of last year that effectively prevent China from importing advanced semiconductor equipment. South Korean companies operating factories in China, such as Samsung Electronics and SK Hynix, are also subject to these controls. Korean companies received a one-year grace period, but the calculus regarding investment and trade with China is inevitably becoming more complicated. The U.S. also recently announced that it will provide subsidies to companies that actively cooperate in ensuring a stable supply of military-use semiconductors and decoupling from China, its biggest competitor.

Limited Effect of China's Reopening

Opinions are divided on the effect of China's reopening. If the Chinese economy recovers, there is hope for improvement in the trade balance through increased exports to China, but if the domestic market centered on domestic consumption recovers, the impact on the South Korean economy is expected to be limited. Moon Ji-young, a senior researcher of the China Economy and Trade Team at the Korea Institute for International Economic Policy, said, "If China recovers focusing on consumption, sectors such as food service and tourism will primarily benefit," adding, "It is hard to see a significant increase in South Korea's influence as China expands its own brands in its domestic market recently." Experts emphasize that rather than simply approaching the recovery of the trade balance with China as an issue of reopening, it is urgent to devise ways to maintain the technological gap with China in advanced industrial sectors.

The direction of this year's trade balance with China is expected to be decided at the Two Sessions (Lianghui) held in Beijing early this month. The Two Sessions is a collective term for the National Committee of the Chinese People's Political Consultative Conference and the National People's Congress. The Two Sessions, the largest annual political event where China's national policy guidelines are set, are held every March. The key focus of this year's Two Sessions is undoubtedly how much to set the economic growth target. According to the Korea Trade-Investment Promotion Agency (KOTRA), it is highly likely that China will set the economic growth target at "around 5%" this year. However, as market sentiment weakens, there is growing opinion that the target will be set lower than the two-year compound growth rate of 2021-2022 (about 5.5%).