Korea's exports to China could drop by 6% if Trump introduces tariffs, BOK warns

Korea’s exports to China, its largest market, could decline by more than 6 percent if former U.S. President Donald Trump follows through with his campaign pledge to increase tariffs on Chinese products, a central bank report said.

Republican presidential candidate Donald Trump after speaking at a campaign rally in Michigan on July 20. [AP/YONHAP]

Korea’s exports to China, its largest market, could decline by more than 6 percent if former U.S. President Donald Trump follows through with his campaign pledge to increase tariffs on Chinese products, a central bank report said.

The latest report from the Bank of Korea (BOK), released Monday, suggested that Korea's export growth to the world's second-largest economy might not rebound to its previous robust levels, as China's supply chain dependency on Korea has been weakening due to a fundamental shift in production structures.

"Although [Korea's] export-oriented production would be positively affected in the short term if Chinese economic growth improves, the growth is unlikely to reach previous levels due to the persistence of downward pressures stemming from the change in production structure," the report said.

Ongoing tensions between the United States and China, along with the resulting slowdown in global demand for Chinese goods and the increasing relocation of production sites away from China, are expected to further weigh down Korea’s export performance.

According to the report, Korea's exports to China and export-oriented production may shrink by at least 6 percent if Trump, the Republican presidential candidate, wins the upcoming election in November and imposes a 60 percent tariff on Chinese imports, as he previously proposed.

The BOK defines export-oriented production as the production of intermediate goods shipped for final production in China.

Outbound shipments from Korea to China accounted for 19 percent of Korea’s total exports from January to July this year, according to data from the Korea Customs Service. This figure has been declining in recent years, from 25.9 percent in 2020 to 25.3 percent in 2021, 22.8 percent in 2022 and 19.7 percent last year.

Korea logged a trade deficit of $18 billion with China last year, marking the first losses recorded since trading began in 1992. The growth of export-oriented production related to China has also been slowing since the 2010s.

As this trend persists, the possibility of the United States overtaking China as Korea’s largest importer has been increasing.

“The structural slowdown in export-oriented production to China is the result of China's enhanced self-sufficiency in intermediate goods production, driven by its industrial development, as well as the growing demand for domestically manufactured end-products in China,” the report said.

The central bank suggested that “Korea needs to improve its capabilities in competitive sectors through technological innovation, as China has been enhancing its self-sufficiency in advanced technology as well."

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]