ED Trade reliance on Japan

More efforts needed to localize parts, materials

Almost two years have passed since Japan suddenly curbed exports to Korean firms of key parts and materials ― photoresist, fluorine polyimide and etching gas ― in apparent retaliation to Seoul top court's ruling in October 2018 ordering Japanese companies to compensate surviving South Korean victims of the neighboring country's forced wartime labor. According to the Korea International Trade Association (KITA) and Korea Customs Service (KCS) Sunday, Korea registered a $10.2 billion trade deficit with Japan during the January to May period this year.

This represents a 35 percent increase from $7.4 billion a year earlier. Korea's exports to Japan rose 6.6 percent to reach $11.7 billion, while imports surged 17.8 percent to $21.7 billion in the first five months of the year. KITA foresaw that the trade deficit with Japan will likely surpass last year's $20.9 billion should the current trend continue.

Korea's still heavy reliance on Japan for the supply of intermediate goods ― with the exception of etching gas, where dependency fell to 13 percent from 43.9 percent over the same period a year earlier ― is worrisome. The reliance on photoresist and fluorine polyimide decreased by only 6.7 percentage points and 0.1 percentage points, respectively.

Domestic carmakers are suffering from a lack of parts for some popular models, making consumers wait up to a year for delivery mainly due to the shortage of semiconductors for the relevant cars. Korea, the world's No. 5 carmaker, has relied on imports of chips for automotive use. More seriously Japan will likely attempt to curb the exports of related parts and materials to Korean companies again, making the most of their expanding reliance on Japan.

This means Korea remains exposed to such a risk as its carmakers will have to import more intermediate goods from Japan to assemble more cars for export. Seoul's trade shortfall with Tokyo had declined drastically following Japan's retaliatory measures against Korean firms, thanks to concerted efforts to localize key parts and materials. Yet the trade gap has begun to widen again, prompted by booming trade with Japan, and Koreans' boycott of Japanese products losing steam.

Korea has a long way to go to catch up with Japan, which has accumulated prowess in state-of-the-art technologies over the past several decades. Yet we must strive to narrow the bilateral trade deficit by reducing our excessive reliance on Japan. The country must also set up its own supply chains of materials, parts and equipment.

To that end, the government should consider providing more assistance to the relevant small- and medium-sized enterprises (SMEs). From the long-term perspective, it needs to promote the research and development activities of businesses along with efforts to diversify import channels for key industrial items.