Trade between China and South Korea is crucial to the economic development of the two countries. In the 30 years since the establishment of diplomatic relations between the two countries, the volume of bilateral trade has increased by more than 50 times. China has ranked as South Korea's largest trading partner for 18 consecutive years, and the trade volume between China and South Korea will exceed the $360 billion mark in 2021, close to the total trade volume of South Korea, the United States, South Korea and Japan, and South Korea and Europe
Wen | Zou Biying, a reporter from Caijing
Editor| Wang Yanchun
Recently, since the establishment of diplomatic relations between the two countries in 1992, South Korea's trade with China has rarely seen a "deficit" for three consecutive months, breaking the Pattern of South Korea's surplus that has been maintained for nearly 30 years. In South Korea, where economic growth is highly dependent on exports, the change has raised concerns.
According to the Global Times, South Korea's Ministry of Industry, Trade and Resources said on August 1 that South Korea had a $570 million deficit in trade with China in July. Previously, in May and June, South Korea's trade with China had already experienced deficits of $1.09 billion and $1.21 billion. On August 9, South Korean Foreign Minister Park Jin, who was visiting Qingdao, China, said in an online discussion with Korean overseas Chinese and entrepreneurs in China that south Korea's trade balance with China in May this year showed a deficit for the first time in 28 years, and the relations between the two countries did face many challenges, but the South Korean side will continue to strengthen economic cooperation with China.
In the same period, unlike South Korea's statistical "deficit", Chinese government data reflect that South Korea's trade with China is still in surplus. According to the "General Administration of Customs" "The Total Value table of major countries (regions) of Import and Export Commodities (US dollar value)", the "Caijing" reporter calculated that in April, May, June and July this year, south Korea's trade surplus with China reached 3.0843 billion US dollars, 1.1331 billion US dollars, 764 million US dollars and 2.489 billion US dollars, that is, China's commodity trade deficit with South Korea showed a trend of gradual narrowing and expanding.
Trade between China and South Korea is crucial to the economic development of the two countries. In the 30 years since the establishment of diplomatic relations between the two countries, the volume of bilateral trade has increased by more than 50 times. China has ranked as South Korea's largest trading partner for 18 consecutive years, and in 2021, the trade volume between China and South Korea will exceed the mark of $360 billion, close to the total trade volume of South Korea and the United States, South Korea and Japan, and South Korea and Europe. In his speech in May, Chinese Ambassador to south Korea Ji Haiming said that South Korea is also China's third largest trading partner, the third largest export market, the largest source of imports, and the second largest source of investment.
At present, South Korea's trade deficit with China has appeared, what changes does it mean? Why are the conclusions of trade data between China and South Korea so different? Will it trigger a major adjustment in South Korea's trade policy toward China?
Whether China's exports to South Korea are growing stronger than imports can be sustained
On August 9, the Korea Chamber of Commerce and Industry (KCCI) released the report "Causes and Countermeasures of the Recent Trade Deficit with China". The report believes that a combination of factors such as the widening trade balance of intermediate products such as batteries and semiconductors between the two countries, the decline in South Korea's display production, and the reduction of tariffs under the RCEP (Regional Comprehensive Economic Partnership Agreement) has led to a "deficit" in South Korea's statistical benchmarks.
From the perspective of China's exports to South Korea, the above report statistics show that in the first half of 2022, China's exports of secondary battery raw materials to South Korea "other fine chemical raw materials" were 7.25 billion US dollars, almost double the 3.83 billion US dollars in the same period last year. China's exports of battery intermediate materials to South Korea, "other batteries," grew from $1.11 billion in the first half of last year to $2.18 billion in the first half of this year. In the first half of this year, China exported $1.17 billion in key battery materials "lithium oxide" and "lithium hydroxide" to South Korea, the highest import volume ever recorded by South Korea. In the first half of this year, China exported $1.29 billion in liquid crystal display (LCD) products to South Korea, nearly three times the $450 million in the same period last year.
From the perspective of South Korea's exports to China, in recent years, the market share of Korean brands in the Chinese market has declined due to the adjustment of the layout of the global supply chain by Korean companies and the upgrading of domestic brands. Under the influence of the epidemic, the FMCG market has also changed. Chen Xiao, who is engaged in the domestic clothing industry, told Caijing that this year many guests complained that it took a month or two to buy clothes from South Korea, and even some guests bought winter coats from South Korea were not received until the end of the summer. Due to the poor control of Logistics in China and South Korea, some peers have given up Korean purchasing and docked with the domestic high-end clothing supply chain.
In the long run, will China's exports to South Korea be stronger than its imports continue?
Xu Yingming, director of the International Market Research Institute of the Research Institute of the Ministry of Commerce of China, told the Caijing reporter that recently, south Korea's trade with China has appeared in the so-called "deficit", which is reflected in China's statistical benchmarks as South Korea's trade surplus with China has narrowed. It is normal for the data to narrow monthly. In just three months, it does not show that the competitive advantages and industrial complementary structures of Chinese and South Korean products have undergone trend changes. On the one hand, the local epidemic is still sporadic outbreaks, and logistics and industrial chain supply chains have also been affected to a certain extent. On the other hand, the Russian-Ukrainian conflict, the great power game, and chip restrictions have also affected the export of some high-tech products in South Korea.
Lee Sang-hoon, chief representative of the Beijing Representative Office of the Korea Foreign Economic Policy Research Institute (KIEP), analyzed to Caijing reporters that there was a "deficit" in South Korea's trade with China, on the one hand, due to the return of South Korea's economic activity and production to normal, imports of raw materials, intermediates and other products from China have increased; On the other hand, due to the past three months in China, some production and logistics disruptions have led to certain pressures on china's economy. Under normal circumstances, China's normal and active production activities will drive the growth of Chinese consumption, and South Korea's exports to China will also increase. However, in the first half of this year, China's production, consumption and investment growth were limited, so South Korea's exports to China also decreased accordingly. According to the National Bureau of Statistics of China, in the first half of 2022, the total retail sales of consumer goods in China 210432 billion yuan, down 0.7% year-on-year.
In Lee Sang-hoon's view, South Korea's trade deficit with China is a short-term phenomenon. At present, China's epidemic prevention and control is ideal, and the economy is gradually moving towards the track of normalization. Therefore, South Korea's trade deficit with China may turn around after that. But from a long-term perspective, Lee Sang-hoon said that according to south Korean government statistics, South Korea's trade surplus with China has decreased since 2018. China's increasing technological progress and industrial structure will form a substitution effect on South Korean imports, and there will be some corresponding changes in consumption. At present, South Korea's exports to China are more concentrated in semiconductors, south Korea's investment structure in China is also upgrading, and various factors add to this, if South Korea does not accelerate some policy adjustments, the reduction of surplus may become a long-term structural change.
Semiconductors and new energy products are becoming two important variables affecting the structure of Trade between China and South Korea. In recent years, China's new energy industry has developed rapidly, and the increase in exports of battery-related products to South Korea has shown a significant increase. On the other hand, Lee Sang-hoon introduced that South Korea's dependence on the export of semiconductor single commodities is very high. In the first half of 2022, semiconductor exports accounted for 20% of South Korea's total exports. The share of semiconductors in South Korea's exports to China also rose from 20.3% in 2015 to 40% in the first half of 2022. Comparing transactions in the first half of 2022 with the same period last year, only semiconductors increased in the surplus of South Korea's exports to China; In the category where there is a deficit in South Korea, the deficit is still widening. Lee Sang-hoon believes that in the future, South Korea should pay attention to the pursuit of commodity variability and diversity, strive to enrich export categories, and further stabilize exports to China.
It is worth noting that recently, the data of semiconductor products from China to South Korea has increased significantly. The Korea International Trade Association (KITA) pointed out that in May, China's exports of semiconductor products to South Korea surged by 40.9%, which had a great impact on reversing the trade pattern between the two countries. In this regard, one view is that China already has a strong cost advantage in low-end semiconductor products, and it also has strong competitiveness in artificial intelligence (AI) chips. Another view is that China's domestic demand has decreased, and some Korean companies have exported surplus semiconductor products produced in China to South Korea, and after reprocessing, South Korea has exported to the outside world.
Will the "deficit" conclusion lead to a shift in South Korea's trade policy?
There are still some doubts about the "deficit" of South Korea's exports to China: since May this year, There has been a deficit between China's trade balance with South Korea and South Korea's trade balance with China. Comparing the trade balance results of China and South Korea from April to July this year, the data of the two countries deviate by about 2.5 billion US dollars. If you compare the total amount of bilateral trade, the data between China and South Korea will be $60 billion in 2021. In 2020, it will be about $40 billion. Why is there such a large data disparity between the two countries?
Chinese and Korean experts interviewed by Caijing reporters all believe that statistical caliber and entrepot (intermediary) trade are the two main influencing factors. Xu Yingming introduced to reporters that from the perspective of statistical caliber, exports are calculated according to fob prices and imports are calculated according to cif prices; Whether imports are calculated according to the national border, or whether they are calculated at the customs border or to the bonded area will also affect the deviation of the data. In addition, whether the statistics include entrepot trade through Hong Kong will also affect the final data results.
Li Shangxun introduced, first of all, there are different types of statistical standards for trade data. One way is to count the actual amount of transactions at the point, and the other way is to count the nodes at the time of shipment and customs clearance. Now South Korea and China use the same benchmark, exports are counted in FOB (delivery price on board), imports are counted in CIF (cost plus insurance premium plus freight), but there will be a difference in the price of goods exported from the two countries and imported, so the same statistical dimension will also allow deviations of about 5%.
Li Shangxun believes that another major reason for the difference in data is intermediary (entrepot) trade, that is, whether the trade statistics through a third-party country or region are the total import and export value of the two countries, and the data is adopted according to the standard of origin. For example, korean goods exported to Hong Kong or Chinese mainland will be counted as trade in Hong Kong and Chinese mainland respectively. However, when China counts intermediary trade, it uses the origin as the standard and counts imports and exports from South Korea. The number of intermediary trade between the two countries through the Hong Kong area of China is relatively large, and there may be some statistical deviations in the coming and going.
"The statistical discrepancy is certainly not due to falsification of data from any country." Li Shangxun introduced that in order to avoid trade disputes between countries, they are more likely to be less reporting for exports and more reporting for imports. At present, in order to discuss the differences in trade statistics between the two countries, the Korea Customs Agency and the General Administration of Customs of the Republic of Korea also hold trade statistics-related meetings every year to actively negotiate to avoid misunderstandings and problems. Similar deviations may slowly decrease in the future.
It is worth noting that although for Sino-South Korean trade, who is the "surplus" and who is the "deficit", the data draws different conclusions. But what the two countries agree is that in the first half of 2022, the growth rate of China's exports to South Korea is much higher than the growth rate of imports. According to data from the General Administration of Customs of China, in US dollar terms, from January to July, the total value of China's exports to South Korea increased by 17.8% year-on-year, and imports increased by 2.7% year-on-year. Does South Korea's "deficit" or weakening exports to China affect the adjustment of South Korea's trade policy toward China?
On June 29, Choi Sang-mook, chief economic secretary of the South Korean Presidential Office, told the media during the NATO summit that the era of achieving South Korea's export economic prosperity through China is coming to an end, and it is necessary to strengthen cooperation with Europe to develop south Korean economy. A few days ago, the relevant person in charge of the South Korean trade department said that in the future, it may be necessary to upgrade the South Korean-Chinese FTA or strengthen the use of RCEP, while striving to achieve import diversification and technical security.
In this regard, Lee Sang-hoon explained and analyzed that South Korea is an export-oriented country, and international trade is very important for the country's economic development. In 2004, South Korea reached FTA cooperation with Chile for the first time, and so far, it has signed a total of 18 FTAs with 58 countries, which shows that South Korea has always adhered to the principles of free trade and multilateralism, and it is likely that it will not make a major change in its trade policy with China because of the "deficit" in trade with China. But at the same time, as an open trading nation, South Korea does need to ensure that its companies and products are competitive in the international market. At present, the epidemic, the bottleneck of the global supply chain superimposed on the Russian-Ukrainian conflict, etc., the external risk is very high, and for South Korea, it is necessary to ensure stable product production and stable product exports. Considering the continuous progress of Chinese technology, the acceleration of digital upgrading, and the increasingly fierce competition between Korean and Chinese enterprises, South Korea will continue to ensure technological security through technological innovation and strive to expand the export of high-tech products or high-end products.
"As one of the four Asian tigers, South Korea is certainly worried that the 'deficit' is a reflection of its industrial competitive advantage." Xu Yingming believes that China's industrial structure will continue to upgrade, but there is still much room for cooperation between China and South Korea in their advantageous areas. The China-South Korea Free Trade Agreement came into force in 2015, and if the ongoing FTA upgrade negotiations are settled, the benefits of the China-South Korea Free Trade Agreement will certainly benefit more enterprises of the two countries, such as the scope of zero tariffs is getting wider and wider, and the degree of trade liberalization and investment facilitation is increasing.
In fact, the RCEP is a low-level, wide-coverage free trade agreement that has a limited direct effect on promoting trade between China and South Korea. Since the China-South Korea FTA has been in operation for nearly a decade and there are many tariff policy preferences, the RCEP has little practical effect on promoting South Korea's exports to China after it takes effect this year. Li Shangxun said that what South Korea is more worried about now is that there was no direct FTA agreement between China and Japan before, And Japan enjoyed tariff preferences after joining the RCEP, and the competition between Korean companies and Japanese companies in the Chinese market would be more intense. 80% of South Korea's exports to China are intermediate products, and raw materials, parts, equipment and other products are precisely Japan's advantageous areas, and South Korea is worried that its company's share in the Chinese market has decreased.
But at the same time, Lee Sang-hoon pointed out that in the long run, RCEP can provide more indirect impetus for expanding the space for diversified cooperation between China and South Korea, including increasing mutual investment, strengthening cooperation in third-party markets in the region, and supply chain cooperation. Currently, most RCEP member states are both members of the CPTPP (Comprehensive and Progressive Trans-Pacific Partnership) or IPEF (Indo-Pacific Economic Framework). If the RCEP is to move forward, it needs to allow Member States to gain more economic benefits through the opening of the RCEP. Therefore, in the long run, RCEP should evolve into a more open FTA. In this process, as the main economies in the region, the China-South Korea FTAs can develop to a higher standard and play a leading role.
In fact, China and South Korea have launched negotiations on the upgrading of the FTA of the China-South Korea Free Trade Agreement in 2017. On August 9 this year, State Councilor and Foreign Minister Wang Yi held lengthy talks with ROK Foreign Minister Park Zhen in Qingdao, Shandong Province. The two sides agreed to speed up the negotiations on the second phase of the China-ROK FTA and strive to reach an agreement as soon as possible. Agreed to carry out dialogue on maintaining the stability of the production and supply chain, and committed to the integrity, safety, smoothness, openness and inclusiveness of the production and supply chain. Adhere to trade and investment liberalization, abide by WTO rules, and adhere to the principles of non-discrimination, non-exclusion, openness and transparency. Wang Yi stressed: The two sides should sum up the useful experience accumulated in the past 30 years of establishing diplomatic relations, grasp the correct direction of the development of bilateral relations, and open up the next 30 years of common development and prosperity.
In Xu Yingming's view, the changes in the surplus and deficit between China and South Korea may still be in a stage of repeated anxiety. However, in the future, the incremental space of China-SOUTH Korea trade will not only be reflected in trade in goods, but also in cooperation in service trade, digital trade, and investment between the two sides. Especially now, the growth rate of China's trade in services is far greater than the growth rate of trade in goods, and the two countries are expected to have a lot of room for cooperation in the future. Li Shangxun said that China and South Korea can also carry out investment cooperation in third-party countries such as ASEAN. China and the ROK may expand investment in labor-intensive industries in the ASEAN region, and in the future, the two sides can join forces to establish industrial cooperation parks or open up new markets in the local area. In addition, in the field of multinational cooperation such as the Digital Economy Partnership (DEPA) and RCEP, as well as the stabilization of supply chains and the response to climate change, the future substantive cooperation between China and the ROK is also worth looking forward to.
Caliber of Chinese statistics
Source: General Administration of Customs of China: US$ million
| month | Exports to South Korea | Imports to South Korea | Trade Balance | South Korea statistics |
| July | 14274.9 | 16763.9 | 2489 (2.489 billion) South Korea surplus | -575 million South Korea deficit |
| June | 15733.1 | 16497.1 | 764 (764 million) South Korea surplus | -1.209 billion Korea deficit |
| May | 15475.5 | 16608.6 | 1133.1 (1,133.1 million) South Korea's surplus | -1.089 billion South Korea deficit |
| April | 13455.0 | 16539.3 | 3084.3 (3,084.3 million) South Korea's surplus | South Korea's surplus of 522 million |
South Korea statistics
Korea's Trade Balance with China Trend Data Source: Ministry of Industry, Trade and Resources Unit: US$100 million
