Seismic changes in the intermediary goods trade

The changes of the intermediate goods trade mechanism are demanding fundamental solutions for 10, 20 years ahead.

HAN WOO-DUKThe author is a senior reporter at China Lab. The trade balance has been in deficit for 15 months straight. Trade with China is the major factor. Exports to China, which used to make up about 30 percent of our exports, have shrunk for the past 12 consecutive months. Alarms from China are ringing here and there.

Looking back, it was sweet. China’s growth over the past 30 years has been a blessing to the Koran economy. The windfall came from the intermediate trade of parts and semi-finished products. When parts were made in Korea and exported to China, Chinese factories assembled them to make finished products.

The finished products were labeled as “Made in China” and sold to the United States at low prices. It was a win-win strategy for Korea, China, and the United States.

There were two underlying premises for the intermediate goods trade with China. The first is the global value chain (GVC). With the collapse of the Soviet Union in the late 1980s, U.S.-centered globalism spread. After companies sought the most optimal environment and built production and distribution networks, densely intertwined GVCs were established. China joined the trend and entered the World Trade Organization in 2001. It was the birth of China as the “factory of the world.” Korea served the role of providing intermediate goods to that factory.

The second premise is technological superiority. Intermediate goods use a higher level of technology than finished products. China was also lucky to be able to bring high-tech parts from its neighbor. Korean companies invested money earned in China back to technology, and the industry has become advanced.

But the sweet times are passing as the two premises are being broken. With the U.S.-China trade war in full swing, GVCs are distorted or disintegrated. China is eager to build a “red supply chain” to complete all production processes domestically. The room for Korean intermediate goods to penetrate is getting smaller.

Now, the technological advantage is also shaking. Hyundai Motor’s Beijing plant once took about 80 percent of all parts from Korea. Now, all parts are sourced from China. Instead, Korea has to import parts from China. Industry sources say, “Nothing is left except for semiconductors.”

The solution must also be found from GVCs and technology. Economic diplomacy should focus on securing GVCs that cross between the U.S. and China. How can security be possible without economy?

Internally, we need to draft new technology and industrial policies for Korean intermediate goods and technology to be appealing to China again. We also need to build multiple layers of “semiconductor iron fortresses” to withstand China’s offensive.

The trade deficit could turn into a surplus even next month. But we should not be in joy instantly. The changes of the intermediate goods trade mechanism are demanding fundamental solutions for 10, 20 years ahead.