Korea posts first current account deficit with China in 21 years

South Korea posted a current account deficit with China for the first time in 21 years on a plunge in chip exports, while logging a record surplus with the U.S., indicating a significant shift in the country’s global economic landscape through trade and investment.

In particular, as competition between South Korea and China is unfolding in China, which used to be the market for Korea’s intermediate goods exports, there are growing calls for a strategy to reduce dependence on China through industrial advancement and diversification of export destinations.

According to the Bank of Korea on Thursday, South Korea posted $7.78 billion in current account deficit with China last year. This is the worst performance since the statistics began to be compiled in 1998, and marked the first deficit with China in 21 years since reporting a $760 million deficit in 2001.

A decline in exports, mainly semiconductors, machinery, precision instruments, and petroleum products, and a jump in imports of raw materials, led to a sharp decline in the goods balance, which recorded a deficit of $10.06 billion. This is the first time since the compilation of statistics that the goods balance has fallen into a deficit.

“While the overall semiconductor exports to China remained in surplus, export of memory semiconductors turned negative in the second half of last year, showing a declining trend on an annual basis,” Kim Hwa-yong, the head of the International Balance of Payments Team at the BOK, said.

Import of goods also led to higher transportation expenditures, resulting in a $590 million deficit in the services balance, which includes the transportation balance. The primary income balance was $2.64 billion in surplus, but $2.31 billion lower than the previous year.

South Korea had consistently maintained a current account surplus with China since the beginning of trade between the two countries in 1991. Since the mid-2000s, the surplus has grown with China’s rapid growth, reaching a record high of $56.1 billion in 2013. However, the surplus nearly halved to $25.96 billion in 2019 due to a contraction in trade volume following the U.S.-China trade dispute in the late 2010s. It then slumped to $17.25 billion in 2020 and $23.41 billion in 2021 before suddenly turning into a deficit.

The problem is that the trade deficit with China is not a temporary phenomenon. It implies that it is difficult to rely on China anymore due to the structural changes in China‘s industries.

“South Korea has had a cooperative relationship with China, exporting intermediate goods and having China manufacture finished products for the global market,” Cho Sang-hyun, head of the Institute for International Trade under the umbrella of the Korea International Trade Association, said. “However, as China fosters its own industries, including intermediate goods, the relationship has turned into a competitive one.”

In recent years, South Korea has been able to maintain a surplus by exporting semiconductors, a key export item, but the vulnerability of the trade relationship was exposed as semiconductors were hit by the slowdown in the global information technology (IT) industry.

South Korea’s current account surplus with the U.S., in the meantime, reached an all-time high of $67.79 billion last year. Thanks to the robust exports of Korean automakers to the U.S., the goods balance recorded a surplus of $56.38 billion, the largest on record. The services balance was a deficit of $2.02 billion, the smallest since 2005. The primary income balance recorded a surplus of $13.79 billion, an increase of $4.55 billion compared to the previous year.

“The deficit in the services balance significantly decreased due to the increase in transportation imports, and the primary income balance sharply increased due to the growth in direct investment from the U.S. and dividend income,” BOK’s Kim said

The current account with the European Union and Japan also improved. The current account deficit with Japan was $17.78 billion, nearly 20 percent smaller than the previous year. This was largely due to the increase in exports of chemicals and petroleum products, which narrowed the goods deficit by $2.36 billion to $15.33 billion. Trade with the EU also posted a $7.04 billion surplus. This is the first time in a decade since 2012.

Amidst the rapidly changing trade environment surrounding South Korea, including changes in the trade environment with China, the country’s largest export destination, there are calls to diversify trade targets and products and take a value-added approach to goods and services. “We should consider diversifying our portfolio by focusing on items strategically promoted by the government, such as nuclear power plants, defense industries, and plants, and expanding trade with untapped countries such as Eastern Europe,” Institute for International Trade’s Cho said.