Agility matters for the Korean economy

Korea’s trade structure requires an entirely new way of thinking. Last year, the country incurred an annual deficit of $18 billion in trade with China for the first time since the normalization of ties in 1992. China had been the biggest export and trade income source for Korea over the past three decades.

On the other hand, Korea raked in a surplus of $44.5 billion in trade with the United States last year. The U.S. became the largest trade surplus market for Korea for the first time in 21 years. Exports to the U.S. in December reached $11.3 billion, compared to $10.9 billion to China. On an annual basis, China still was the No.1 export market for Korea, accounting for 19.7 percent of total exports in 2023. But the gap sharply narrowed, with the U.S. taking up 18.3 percent.

A trade deficit with China was foreseeable. Demand in China decreased due to its slowing economy, and Korea’s chip shipments to China also shrank. But Korea’s imports of the materials for secondary batteries and other minerals from China rose steeply. A bigger reason is structural. The Chinese industry has advanced to the extent of importing less intermediary goods from Korea. The first-ever trade deficit with China underlines Korea’s waning competitiveness.

Korea has been incurring a deficit with China in products apart from chips since 2021. The Chinese industrial structure has changed dramatically and has pivoted toward strengthening its domestic economy. China, which used to rely on Korean intermediary inputs for exports, now source the products from home. China plans to hoist up self-sufficiency in chips from under 30 percent to 70 percent by 2025. It can’t be bluffing, given the shriveling of Samsung Electronics’ share in the mobile phone market to 1 percent from 20 percent just a decade ago.

The government last year made a wrong bet on the normalization of the Chinese economy and trade after its reopening in March. Gone are the days when Korea could ride on China’s staggering growth as the world’s largest manufacturing and consumer market.

Our strength in chips, batteries and electric vehicles can determine the future of the Korean economy. The government must remove regulations and reignite our entrepreneurship. High-tech competitiveness should be honed through continued investment and R&D in strategic categories. Korea must expand to the Asean and other markets but should not tilt too much toward certain markets or items. Going all-out on the U.S. to avoid the China risk is also dangerous. Yale University Professor Paul Kennedy advises companies to learn from Taiwan Semiconductor Manufacturing Company, or TSMC, which produces high-end chips in Taiwan and mass-market chips in America. Korea needs an agile strategy to cope with seismic changes in global value chains and the deepening protectionism.