South Korea’s First Trade Deficit with China: Stirrings in the Global Tech Sector

By Joshua Park

For the first time in almost thirty years, South Korea quietly recorded a trade deficit with China in the May of 2022. Despite assurances from Korean policymakers that this unprecedented decline was extra-ordinary and transitory, recently released June 2022 data revealed an even steeper deficit. The underlying drivers behind this downturn, then, cannot be solely attributed to the exceptional circumstances of pandemic and war as many have done, but deeper and more structural reasons that must be traced back several years. A closer look at top trade items seems to point to China’s growing presence in the global tech sector.

Often, commentary on China’s economic weight has been discussed with fanfare and sensational headlines. In 2016, Chinese sanctions on Korean tourism, entertainment, and consumer products over the controversial deployment of the THAAD missile defense system cost the ROK an estimated $7.5 billion. Even six years after the incident, THAAD and the elephantine consideration of China continues to permeate Seoul’s discourse on economic security, even becoming a voting issue in this year’s presidential election. However, the trade deficit in May and June garnered surprisingly little attention – the cold numbers relegated to the sphere of economists while media instead focused on hotter stories.

Although ‘trade deficit’ lacks the kind of sensational firepower like China’s 2016 sanctions on K-Pop, it is nonetheless a historic and significant development in the Korea-China trade relationship. In fact, the $1.1 billion deficit in May 2022 was the first in an unbroken 333-month-long streak of surpluses that began in August 1994. If Korea continues to log monthly losses and records an overall deficit for the year, South Korea would record its first yearly trade deficit with China since Seoul officially normalized relations with Beijing in 1992. By this metric, the Korea-China trading relationship seems to be precariously tending towards the lowest point in its modern history.

Official guidance and conventional commentary assure this shocking reversal of the ROK-PRC trade relationship is temporary, citing China’s COVID-induced lockdowns, the domino consequences of the war in Ukraine, and the global confrontation with inflation. Implicit in these explanations is that when these events eventually end, Korea can revert to the more familiar relationship of surplus.

Yet these accounts for the trade deficit neglect to price in the whole picture. For one, Korean officials are miscalculating estimates by material margins; the Korea Custom Service’s forecast for June 2022, a $690 million deficit, proved to be a substantial underestimation. The final number showed $1.2 billion in the red. For another, the decline in Korea’s trade balance with China has been the trend for the better part of the past decade. That is, whatever is affecting ROK-PRC trade well preceded both the pandemic and Ukraine war. Data from the Korean International Trade Association (KITA) shows that, after a peak in 2013 with a surplus of $63 billion, the trade balance has decreased steadily with only few exceptions.
Source: KITA
This suggests that the real reasons behind Korea’s recent trade deficits with China, and indeed the downward trend of the past decade, are not transitory but more structural. In a surprising turn of events, much of the jump in Korea’s imports from China have been driven by electrical machinery items – a sector that tech-savvy Seoul has long considered its forte. For instance, imports of integrated circuits, the core building unit for semiconductors, saw a 41.8 percent year-on-year increase. With almost $21 billion of these chips purchased in 2021, integrated circuits are South Korea’s top import from China by a substantial margin.

So, at the crux of it, Korea’s trade deficit with China is really a reflection of the changing trade landscape of high-tech products. South Korea’s traditional dominance in IT is becoming challenged by China’s state-led industrial policy in its drive to become a ‘cyber great power’, a term President Xi Jinping coined in 2014. Research and development (R&D) into seven emerging technologies was coded into the PRC’s Fourteenth Five-Year Plan (2021-2025), the authoritative document for China’s medium-term strategic direction. It included integrated circuits as one of the seven technologies, alongside AI, quantum computing, and aerospace. With the aim of increasing China’s R&D budget by seven percent each year over the course of the Fourteenth Five-Year Plan, the state is estimated to invest 1 trillion yuan into its semiconductor sector alone. The world’s second-largest economy is, in Xi’s own words, actively pushing to “catch up and surpass”. The changing nature of Korea-China imports, driven by a shifting balance of chip trade, is one sign of it.

This is not to say that Seoul has fallen behind or is at fault – simply that the technology space has become more crowded, and Korea must continue to work hard to maintain its competitive edge. Indeed, Seoul, in the present, remains at the forefront of innovation. In June, South Korea’s Samsung became the world’s first company to produce the 3-nanometer chip, even beating the market leader TSMC. Similarly, SK Group, the parent company to the world’s second-largest memory chip maker SK Hynix, pledged 247 trillion won for its semiconductor, battery, and biopharmaceutical sectors over the next five years. Despite the intensifying competition, South Korean companies need only to keep doing what they do best.

The Korea-China trade deficit, the first in almost thirty years, is historic for many reasons. The confluence of once-in-a-generation phenomena ­– pandemic, war, and record inflation – is admittedly responsible for some of the downturn in recent months and years. However, the trending decline in trade over the past decade necessitates attention towards more structural factors, such as China’s increased competitiveness in the global semiconductor sector. Even though most commentators have passed by the trade deficit without the usual brouhaha about China’s economic weight, these historic trade numbers could be a symptom of greater stirrings in international technology trade.

Joshua Park studies History and East Asian Studies at Harvard University. He is an intern with the Center for Strategic and International Studies (CSIS) Korea Chair.