June 03, 2014 13:16
Korean exports to China fell 9.4 percent in May compared to the same month last year. They had grown 8.6 percent on average last year, and growth slowed to 2.7 percent during the first four months of this year before contracting at last last month.
As a result, Korea's trade surplus with China from January through May shrank 27 percent on-year to US$1.94 billion.
The main reason is the economic slowdown in China. China's economy grew 7.4 percent in the first quarter of this year, falling short of the target of 7.5 percent, while its own exports in the first four months of this year dwindled 2.3 percent on-year.
China's declining exports have dealt a severe blow to Korean companies that supply materials and intermediate goods to Chinese manufacturers.
But an underlying problem is Korean businesses' failure to adapt to the changing economic conditions in China. Since the 2008 global financial crisis, China has shifted the focus of its economic policies from quantitative growth based on exports to qualitative growth centered on boosting domestic consumption. This is why China is taking steps to increase the minimum wage at least 10 percent every year.
As a result, intermediate goods account for a decreasing proportion of China's overall imports, while the share of consumer goods continues to rise.
Another problem is that Chinese companies, once everyone else's cheap manufacturing subcontractors, have amassed the technological knowhow to produce materials and intermediate goods that can compete with Korean products. Trade in processed goods used to account for 50 percent of China's overall imports during the mid-2000s but has recently fallen to 25 percent.
Yet most Korean businesses still view China as fit only as a manufacturing base for export elsewhere. This means yet to tap into the world's biggest consumer market.
Last year, Korea beat Japan to become the largest exporter to China but ranked only fourth when it comes to its share of China's domestic market. Korean businesses are losing out to Chinese companies and foreign players in competing for a larger slice of the market there.
China is a key market for Korea. Exports to China account for more than 25 percent of its total exports, with some 10 percent growth each year even after the global financial crisis, serving as a pillar of Korea's economy. The more Korea loses out on this market, the greater the impact on its economy.
As long as Korean companies continue to rely on trade in processed goods with China, the darker their future prospects. They must formulate new exports strategies that target the changing conditions of the Chinese market. It is time for a whole new game plan.
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