Increase in Imports from China Positively Impacts Regional Manufacturing Production and Employment

Bank of Korea Regional Economic Report... Regional Economy Maintains Previous Quarter Level

Recent analysis shows that the increase in South Korea's imports from China has had a positive impact on regional manufacturing, in contrast to major countries. While major countries such as the United States experienced negative effects on manufacturing due to a sharp rise in imports from China, South Korea's imports from China, centered on intermediate goods, were evaluated to have had a positive effect on the regional economy.

According to the regional economic report issue analysis "The Impact of Increased Imports from China on Regional Production and Employment" published by the Bank of Korea on the 24th, unlike major countries, the increase in imports from China had a slightly greater positive impact than negative impact on South Korea's regional manufacturing production and employment.

The share of imports from China in South Korea is rapidly increasing. The proportion of China in total imports rose significantly from 3.2% in 1990 to 22.2% in 2023. However, unlike major overseas countries, despite the increase in imports from China, South Korea maintained a high level of manufacturing employment last year at 94% of the 1995 level. In contrast, countries such as the United States and Europe saw manufacturing employment shrink to around 75% of the 1995 level in 2022 due to increased imports from China.

The estimated increase in manufacturing employment nationwide was about 66,000 people. Regionally, positive effects were larger in Gyeongnam, Incheon, and Gwangju, while Daegu and Gyeongbuk experienced relatively larger negative effects.

Lee Yerim, a senior researcher at the Bank of Korea's Research Support Team in the Research Department, who authored the report, explained, "Unlike major countries, the slightly positive effect was due to South Korea's imports from China increasing mainly in intermediate goods." She added, "The share of intermediate goods in South Korea's imports from China reached 67.2% last year, which is significantly higher than major countries such as the United States (31.6%), Europe (39.6%), and Japan (39.0%), while imports of final goods are relatively low."

She continued, "China and South Korea have built a mutually complementary trade relationship so far, which seems to have had a relatively positive effect on our economy. However, with the recent entry of Chinese e-commerce companies into the domestic market, if imports of final consumer goods increase in the future, it should be noted that, as seen in the cases of the United States and European countries, there could be negative impacts on manufacturing production and employment."

Regional Economy 'Stable' in Q2... Slight Improvement Expected

Meanwhile, the regional economy in the second quarter of this year remained at the previous quarter's level. Manufacturing production slightly increased due to rising semiconductor demand driven by the global spread of artificial intelligence (AI) services, as well as strong production of sports utility vehicles (SUVs) and eco-friendly cars. Service sector production remained at the previous quarter's level as freight volume increased but private consumption growth slowed.

According to the regional economic conditions assessed based on monitoring production, demand, and employment trends collected from companies and related organizations, among the seven regions nationwide, the economies of Chungcheong, Honam, Gangwon, and Jeju regions showed slight improvement, while the Seoul metropolitan area, Southeast region, and Daegu-Gyeongbuk region remained stable.

The regional economy is expected to improve slightly compared to the second quarter. Lee Jaewon, head of the Regional Economic Survey Team at the Bank of Korea's Research Department, evaluated, "Manufacturing production is expected to shift to a stable trend in automobiles and parts but slightly increase mainly in IT sectors such as semiconductors and displays." He added, "Service sector production is expected to turn to an increase in wholesale and retail trade and accommodation and food services, but real estate will continue to decline, maintaining the previous quarter's level."

Manufacturing production in the second quarter slightly increased compared to the previous quarter due to rising semiconductor demand driven by the global spread of AI services and strong production of SUVs and eco-friendly cars. By region, the Seoul metropolitan area, Chungcheong, Honam, Daegu-Gyeongbuk, and Gangwon regions all showed an increasing trend, with the Southeast region showing the most pronounced increase. The Jeju region maintained the previous quarter's level. The Bank of Korea expects a slight increase to continue, mainly in IT sectors such as semiconductors and displays.

Service sector production remained at the previous quarter's level as freight volume increased but private consumption growth slowed. By region, Honam, Gangwon, and Jeju regions increased compared to the previous quarter, but the Southeast region was the only one to decrease. The Seoul metropolitan area, Chungcheong, and Daegu-Gyeongbuk regions remained stable. The Bank of Korea forecasts that service sector production will turn to an increase in wholesale and retail trade and accommodation and food services, but real estate will continue to decline, maintaining the previous quarter's level.

Private consumption in the second quarter remained stable as goods consumption decreased and service consumption remained at the previous quarter's level. By region, the Seoul metropolitan area, Chungcheong, Daegu-Gyeongbuk, and Gangwon regions remained stable, Honam and Jeju regions increased, and the Southeast region decreased. The Bank of Korea expects private consumption to remain stable in the future due to the continued impact of high interest rates and improved real household income from slowing inflation.

Facility investment showed an overall stable trend as semiconductor investment decreased and automobile investment increased. By region, the Southeast, Chungcheong, Honam, Daegu-Gyeongbuk, and Jeju regions remained stable, Gangwon region increased, and the Seoul metropolitan area decreased. The Bank of Korea forecasts that facility investment will slightly increase as automobile investment continues to rise and semiconductor investment turns to an increase.

Construction investment remained generally stable as the scale of construction starts and SOC (social overhead capital) budget execution varied by region. By region, the Seoul metropolitan area increased, Chungcheong and Honam regions decreased, and other regions remained stable. The Bank of Korea expects construction investment to slightly decrease in the private sector due to high interest rates and the accumulation of unsold houses.

Exports slightly increased, supported by growth in semiconductors and automobiles despite declines in shipbuilding and steel. By region, the Seoul metropolitan area and Southeast region saw significant increases, and Chungcheong and Daegu-Gyeongbuk regions also increased. In contrast, Honam, Gangwon, and Jeju regions decreased. The Bank of Korea expects exports to slightly increase as semiconductor exports continue to grow and display exports improve.