[Column] Divorce from China and turn to other markets

Korea’s industrial structure must become advanced, its technology stay unrivaled and its trade markets be diversified.

Lee Sang-ryeolThe author is an editorial writer of the JoongAng Ilbo. The biggest headwind to the Korean economy comes from China or specifically reduced demand from the vast market. The latest phenomenon underscores the geopolitical and structural weakness of the Korean economy. Exports to China have contracted for nearly a year since last April, except for a brief rebound of 1.3 percent in the following month.

The trade deficit with China amounted to $7.84 billion in the first quarter, accounting for 35 percent of Korea’s trade deficit in the first three months. That’s the first time the country has incurred a deficit — and for so long — since the normalization of diplomatic relations with China 30 years ago. China had been a gold mine for Korean enterprises for decades. From 2001, when China joined the World Trade Organization, to 2022, Korea raked in $681.6 billion in surplus in trade with China, or 91.3 percent of its total trade surplus of $746.2 billion during the period.

Outbound shipments have shaken upon losing the primary market. As exports have been falling for six straight months, the trade balance has been in the red for 13 consecutive months. Korea’s share in global exports sank to 2.74 percent, the lowest since the 2007-08 global financial crisis. At this rate, Korea may have to surrender the title of “export powerhouse.” Red lights are flashing for the export-oriented economy.

Some, including the government, still hope for a rebound in exports to China. Last year, the government attributed the fall in exports to China to the lockdowns from the “zero Covid” policy. However, as the sluggishness continues months after the reopening in China, the government is getting nervous. Choo Kyung-ho, deputy prime minister for economic affairs, cautiously predicted that the Korean economy would be positively affected some time after the Chinese economy rebounds.

Wishful thinking can blind one from seeing reality. Since the declaration of the “Made in China 2025” initiative to upgrade China’s manufacturing capacity, the complementary nature of trade between Korea and China has shifted to a competitive one, according to experts. In other words, the bilateral trade structure has fundamentally changed. Beijing has doled out massive subsidies since 2016 to localize key parts and materials needed for industrial activity. As a result, Chinese products came to replace Korean brands in China and compete with Korean products in overseas markets.

It is a universal strategy for developing countries to build up technologies on their own to replace imports. Just like Korea has strenuously tried to catch up to Japan, China is trying to catch up to Korea. The shocking trade balance is the outcome of China catching up to Korea.

The business and academic communities have long called for a restructuring of Korea’s trade structure to stop relying on China too much. But Korea has been complacent after sucking up all the juices from trade with China. Former President Moon Jae-in even demeaned Korea’s national dignity by referring to China as “a high mountain peak” while calling Korea “a small nation” in a speech at Peking University in 2017. The Korean economy comfortably rode on China-led supply chains and lost a precious opportunity to reduce its reliance on China. Major Korean companies like Hyundai Motor and Lotte had to pack out or close factories or businesses in China upon losing out to their Chinese competitors.

The worse is to come. Some politicians call for closer diplomatic ties with China. Democratic Party Chair Lee Jae-myung stressed the need for “practical diplomacy for national interests” to improve relations with Beijing. But the past approach of relying on the U.S. for security and on China for the economy no longer stands in a never-ending hegemonic contest between the U.S. and China. It is naïve to think that closer ties with China could help improve the trade balance.

We must first shake out the mindset that China is a surplus market for Korea. China is rapidly transforming into a domestic demand-oriented — and self-sufficient — economy. China won’t likely buy Korean products at the expense of incurring a trade deficit when they can be made at home.

The answer is out there. Korea’s industrial structure must become advanced, its technology stay unrivaled and its trade markets be diversified. The transition could be painful. We must not be afraid of divorcing from China and turning to different markets and technological innovations. We are already very late.