ED Trade deficit with China

Korea needs to keep technological lead, diversify markets

Korea's trade deficit with China topped $800 million in the first 10 days of this month, according to provisional data of the Korea Customs Service. Following the trade shortfalls of $1.1 billion and $1.2 billion in May and June, chances are high that Korea might sustain a trade shortfall with China for the third consecutive month. The nation had been recording a trade surplus with its largest partner for 29 years since 1993. However, that could change this year.

For over three decades, China served as the “world's factory,” importing parts to assemble finished products for export. As a result, Korea enjoyed a special boom by supplying materials and components to its giant neighbor. However, in recent years, China has become a cutting-edge manufacturer in its own right capable of procuring parts and producing finished goods independently. As a result, the shares of Korea's major exports, including memory chips and cellphone parts, have dwindled sharply in China. In contrast, the country's imports of petrochemical and textile products from China have increased steeply.

So far, Korea has offset its trade deficits with other countries with the surplus of trade with China, but this is becoming more difficult. Moreover, many Korean manufacturing companies rely on China for a considerable proportion of core parts, and consumers increasingly use Chinese daily necessities. All these factors contributed to this country's record-high trade deficit of $15.9 billion in the first half of this year. Korea's trade deficit with Japan has long been chronic, and if this export-dependent country allows China to overtake it in trade, its economic prospects appear doomed.

To outplay China, Korea has no choice but to upgrade its industries to add value. Moreover, the global economic landscape is changing as the world is split into the West and the rest under what political economists call the “New Cold War,” in which supply bottlenecks become commonplace. Therefore, Korean industries should do all they can to maintain their technological lead over their Chinese competitors while diversifying export destinations. In addition, Korea Inc. needs to shift from goods to service exports, including cultural products, making the most of the K-pop and K-dramas that are highly popular in the world's most populous country.