The authors are economists from Shinhan Investment Corp. They can be contacted at [email protected] — Ed.
Korea runs trade deficit with China, loses export competitiveness
Korea’s trade balance has been in negative territory since the end of 2021. A closer look at the trade deficit by country tells us that it was caused not only by rising commodity prices like energy, but also by a decline in export competitiveness. Korea has recorded a trade deficit with China for two consecutive months. The Chinese government’s aggressive COVID-19 lockdowns were partly to blame, but even before that Korea’s trade surplus with China had shrunk.
The decline in export competitiveness in trade with China can be explained by: 1) Chinese policy emphasis on increasing local purchases of intermediate goods in the early 2010s, negatively affecting Korean exports traditional trade items; 2) the growing presence of Taiwan and ASEAN countries in rebuilding global supply chains; and 3) Korean consumer goods are losing ground to Chinese products as China transitions to domestic consumption-led growth.
Concerns over Korea’s long-term competitiveness and decoupling from China
The weakening competitiveness of exports to China has raised concerns about the medium/long term growth potential of the Korean economy. Korean companies that have been left out of the global supply chain shakeup are making new investments in key supply chain hubs, causing the domestic manufacturing industry to burn out. China recently ramped up stimulus to support its economy, but the benefits for Korean companies are likely to be less than expected.
A decoupling between Korea and China is evident in financial markets. The CNY has slowed its downtrend since mid-May, while the depreciation of the KRW continues. The Korean stock market is no longer in step with that of China. As Korea-China relations shift from cooperation to competition, we believe that the financial decoupling between the two countries will accelerate further in the future.