Korea Falling Behind in Trade with China, Japan

      June 19, 2009 11:56

      As of 2008, Korea's top trading partner was China followed by Japan. But Korea's trade surplus with China has been shrinking since 2005, while the chronic deficit in trade with Japan shows no signs of improving.

      ◆ Trade Surplus with China Shrinks

      China has become Korea's top trading partner, accounting for 20 percent of trade. The trade surplus with China, which amounted to less than US$5 billion ($4.9 billion on customs cleared basis), began increasing rapidly in 2002 and reached $23.3 billion in 2005. The booming Chinese economy strongly benefited Korea, which exported capital goods, components and materials to fuel China??s explosive growth.

      But the trade surplus with China peaked in 2005 and has been shrinking ever since. In 2006, it was $20.9 billion. In 2007, it shrank to $19 billion and to $14.5 billion last year. But in the first five months of this year, it rose to $9.54 billion, up from the $7.55 billion achieved during the same period last year.

      Intermediate goods like parts and materials account for 61.5 percent of Korea's exports to China (2007 standard) and that is decreasing as Chinese industries become more sophisticated and better able to produce their own.

      ◆ Trade Deficit with Japan Widens

      Korea's trade deficit with Japan is a chronic ailment with a long history. For the last 45 years since Korea began tallying trade figures in 1965, it has achieved no trade surplus with Japan. The trade deficit with Japan has grown even more since 2000. In 2001, it amounted to $10.1 billion, tripling to $32.7 billion in 2008. The main reason is Korea's high dependence on Japan for cutting-edge technology. Korea may be able to produce over 90 percent of primary components for semiconductors and digital products, but it still relies heavily on Japan for more complicated parts.

      ◆ Hope in Bolstering SMEs

      Bae Sang-keun, an economist at the Federation of Korean Industries (FKI), said the best way to maintain a trade surplus with China and reduce the deficit with Japan is to bolster Korea's parts and materials industries and make them more competitive. That means supporting small and mid-sized businesses to achieve growth.

      Meanwhile, Kim Yang-hee, a Japan expert at the Korea Institute for Industrial Economic Policy (KIEP), said Japan has grown increasingly reluctant to transfer technology to Korea due to the similarities of the two economies. Kim added Korea must receive advanced technology from the United States or Europe and bolster its components and materials industries through aggressive spending on research and development.

      Another alternative is to be more aggressive in tapping into the Chinese market. Lee Jang-kyu, head of the China team at KIEP, said Korean businesses should change their strategies and aggressively seek out new buyers in China.

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