[Insight & Opinion] Our Approach to the Second China Shock

China Offsets Sluggish Domestic Demand with Export Expansion
Concerns Over Market Distortion in Green Energy Sectors
Korea Must Focus on Export Diversification to Emerging Markets

It has been 23 years since China joined the World Trade Organization (WTO). With China's accession to the WTO, South Korea experienced significant growth and enjoyed a long period of trade surpluses with China. Last year, China became a trade deficit partner (USD 18.036 billion) for the first time since 1992. Despite overall export growth this year, the trade balance with China has remained in deficit (USD 4.3 billion from January to April). The proportion of imported intermediate and final goods used domestically is steadily increasing. Imports have risen in semiconductors, automobiles, and machinery, with a significant portion originating from China. Concerns are growing that the trade deficit with China may become structurally entrenched. Meanwhile, demand for Chinese light industrial products through Chinese e-commerce companies such as AliExpress and Temu is also increasing. The paradox of the world still living in an era of high inflation fueled by low-priced Chinese products persists.

The United States Trade Representative (USTR) announced that China is increasingly pursuing non-market and state-led economic policies. It assessed that China's economic practices are imposing burdens on workers and businesses in trading partner countries. It is true that the Chinese government is implementing industrial policies that inject massive financial resources to support domestic industries.

The first China shock generally refers to the late 1990s and early 2000s. This was the period when China, emerging as the "world's factory," flooded the global market with cheap products. South Korea benefited greatly by supplying intermediate goods to China and reaping the fruits of growth. The U.S. calls it a shock because China's rise led to the collapse of its manufacturing base and job losses.

Last month, U.S. Treasury Secretary Janet Yellen, after her visit to China, gave an interview to CNBC. She stated that if China does not change its subsidy methods in the green energy export sector, the U.S. might impose tariffs. The U.S. analyzes that a second China shock is approaching as China pursues policies to revive its economy by offsetting domestic sluggishness with export expansion. The influx of cheap Chinese green energy products, including electric vehicles, is driving down global market prices and could hinder the growth of the U.S. clean energy industry. The world agrees that overproduction of solar panels, electric vehicles, and batteries, like Chinese steel and aluminum, is distorting the global market.

Before Yellen's visit, in January this year, China filed a complaint against the U.S. at the WTO. China argued that the Inflation Reduction Act (IRA) of the U.S. disrupted fair market competition by providing electric vehicle subsidies. China claimed that the IRA resulted in the exclusion of products from China and other WTO member countries.

Thanks to the IRA and the CHIPS and Science Act (CSA), South Korean companies have been able to respond to China's low-price offensive in semiconductors and green products. Amid intensifying global U.S.-China conflicts and protectionism, South Korean companies' search for new opportunities may face challenges. Therefore, they must focus on market diversification and enhancing the competitiveness of export companies. Regardless of the economic cycle, domestic demand is structurally weak due to aging and low birth rates. Since the beginning of this year, exports to major markets such as the U.S., China, and the Association of Southeast Asian Nations (ASEAN) have increased, driving South Korea's economic growth. This situation may be an inevitable fate for the time being. The government's additional efforts to implement free trade agreements (FTAs) and actively pursue economic partnership agreements (EPAs) with ten emerging markets in Africa and Asia are the best solutions. Last year, the conclusion of negotiations in three areas?supply chains, clean economy, and fair economy?under the Indo-Pacific Economic Framework (IPEF) was also effective. Trade agreements must be promptly finalized to firmly establish a new economic and trade cooperation framework.

Jo Won-kyung, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center