[Why&Next] Is a Shift from China's to the US's Largest Exporter Possible... Smallest Margin in 19 Years

The gap between China, South Korea's top export destination, and the United States, the second largest, has narrowed to its smallest margin in 19 years. This is due to a slowdown in the Chinese economy and semiconductor market, alongside a significant increase in automobile exports to the U.S. Instead of the decades-long export drivers of 'China and semiconductors,' 'the U.S. and automobiles' have recently emerged as key contributors to exports.

As a result, there are forecasts that South Korea's largest export destination will soon shift from China to the U.S. Even excluding factors such as economic downturns in China and the semiconductor sector, it is difficult to expect the same level of exports to China as before, considering China's improved self-sufficiency in intermediate goods and U.S.-centered export regulations targeting China.

Experts hold differing opinions. Some suggest that if the technological gap with China narrows further and semiconductor exports decline more, the U.S. could regain its position as South Korea's top export destination in the long term. However, many believe that such a structural shift in export and economic patterns is unlikely to happen easily, making the possibility of such a major change small.

Declining Exports to China... Will the U.S. Become the 'Top Export Destination' Again?

According to the Bank of Korea and the Korea International Trade Association on the 27th, South Korea's exports in the second quarter of this year amounted to $30.6577 billion to China and $28.24743 billion to the U.S., with a gap of only $2.35833 billion. This is the smallest margin since the fourth quarter of 2004, when the gap was $1.81421 billion, nearly 19 years ago.

On a quarterly basis, since the third quarter of 2003 when China ($9.31747 billion) surpassed the U.S. ($8.11756 billion), the export ranking between China and the U.S. has never reversed. After 2010, dependence on exports to China increased further, and the gap between the U.S. and China widened to nearly $25 billion (third quarter of 2018). Even at the peak of exports to China in the fourth quarter of 2021 ($45.03098 billion), exports to the U.S. were only $24.98797 billion.

However, the export gap between the U.S. and China has recently narrowed sharply. The trend is clear even on a monthly basis. Since September last year, exports to China have sharply declined, while exports to the U.S. have steadily increased, showing the closest export trend line since the export reversal between the U.S. and China in 2004.

Exports to China have decreased from $15.64233 billion in March last year to around $10 billion recently, while exports to the U.S. have increased from $4.58935 billion in May 2020 to around $9.5 billion. One of the biggest reasons for this is the sluggish Chinese economy and favorable conditions for U.S. automobile exports.

China's real estate market has contracted, and manufacturing inventories have accumulated, leading to weak overall import demand, especially for IT products. For South Korea, which has a large share of exports to China, the economic downturn in China is inevitably critical. According to the Bank of Korea, from January to April this year, the decrease in exports to China was due to a 64.7% drop in China's own demand and a 35.3% decline in competitiveness within China.

On the other hand, despite the Federal Reserve's aggressive tightening monetary policy, the U.S. labor market remains robust, and the economic slowdown is not as severe as in China and other countries. The implementation of the Inflation Reduction Act and other policies has led to a significant increase in factory construction, and import demand for mobile phones, machinery, and other goods remains strong.

In particular, automobile exports to the U.S. have increased significantly. In the second quarter of this year, despite contractions in private consumption and investment, net exports improved, resulting in a 0.6% growth in real GDP, with automobile exports playing a major role. The Bank of Korea explained, "The increased brand preference for our companies in the U.S. and other automobile markets is also a factor expanding our exports."

If this trend continues, there is a possibility that the U.S. will become South Korea's largest export destination. According to customs statistics released from April 1 to 10, for the first time in 20 years, exports to the U.S. ($3.045 billion) surpassed exports to China ($2.666 billion). On a monthly basis, the recent export difference between the U.S. and China is only a few hundred million dollars.

Kim Jeong-sik, emeritus professor of economics at Yonsei University, said, "Since the export structure is changing, the ranking of the largest export destination can change. When China opened its economy, we greatly increased exports to China, but now China has technologically advanced a lot, so there are fewer products we can sell. It is a transition period in trade structure."

The intensifying U.S.-China rivalry and the changing global economic structure are also variables. The U.S. government is strengthening regulations, such as requiring prior approval for semiconductor equipment exports to Chinese companies, which also applies to South Korean export companies like Samsung Electronics and SK Hynix. If the U.S. government further tightens export regulations to China or does not exempt Korean semiconductor companies, future exports could be significantly impacted.

U.S. as Top Export Destination? Experts Say "Not Easy Immediately"

However, at this point, the reversal of the top export destination remains only a 'possibility.' The Bank of Korea also states that the narrowing export gap between China and the U.S. alone does not make it easy to predict a change in the largest export destination.

First, the economic factors causing the decline in exports to China may ease from the second half of the year. Although China's GDP growth rate remains below market expectations even after reopening economic activities, Chinese authorities are actively pursuing economic stimulus, making a rebound possible in the second half.

The Bank of Korea expects the economy to show a 'low-high' pattern from the third quarter as China's economy and semiconductor exports recover. Recently, signs of semiconductor market recovery have led to rising stock prices, especially among foreign investors, and a global IT market recovery is expected to improve exports to China.

There is also uncertainty surrounding U.S. export controls targeting China. Recently, the Semiconductor Industry Association (SIA) in the U.S. issued a statement urging restraint on additional regulations, saying, "China regulations could weaken the competitiveness of the semiconductor industry." Although South Korea and Japan currently participate in U.S. export controls on China, if their export companies suffer significant damage, cracks could appear in the alliance.

Above all, it is difficult to change the export structure centered on China and semiconductors, which has been structurally built over decades. Kim Sang-hoon, head of the international trade team at the Bank of Korea, said, "The IT supply chain centered on China remains solid. Structural changes do not happen easily, so it is difficult to say how the largest export destination will change in the long term."

In fact, South Korea's top five export items are electronic devices, automobiles, machinery, mineral fuels and energy, and plastics, with electronic devices overwhelmingly accounting for the largest share. China is the largest importer of these electronic devices. In contrast, the top export item to the U.S. is automobiles, followed by electronic devices.

Kang Sung-jin, professor of economics at Korea University, said, "The U.S. policy encourages companies to build factories and produce directly in the U.S. rather than exporting to the U.S., so it seems difficult for U.S. exports to surpass China in the short term. Also, if the global economy improves and exports to China increase, South Korea's exports to China will also rise accordingly."

Professor Kang added, "Of course, if China further develops semiconductor technology, it will locally source parts it used to import from South Korea. We also need to develop high value-added industries further." Professor Kim Jeong-sik emphasized, "The decline in exports to China is essentially an economic crisis. We must enhance competitiveness to maintain the technological gap with China."