Japan and South Korea Experience First Trade Deficit in 31 Years

Recently, South Korean media reported that for the first time in 31 years, trade with China has recorded a deficit. Koreans are exclaiming in surprise, questioning what has led to this situation. Who has offended Korean manufacturing, or rather, who has defeated it? The situation has developed so rapidly that even the Koreans themselves may not have fully grasped the answer to this question. In reality, it is indeed not a simple issue.

According to data from the Korea International Trade Association, just in the first 11 months of 2023, South Korea's exports to China amounted to $114 billion, while imports from China reached $132 billion, resulting in a trade deficit of $18 billion. This marks the first time since the establishment of diplomatic relations between China and South Korea in 1992 that South Korea has experienced a trade deficit with China after 31 years.

Over the past decade or so, Korean products have flooded the Chinese market, earning a significant amount of foreign exchange and establishing a high-quality image for Korean manufacturing in sectors such as semiconductors, automobiles, electronics, and shipbuilding.

As one of the world's leading manufacturing powers, it is highly unusual for South Korea to experience a trade deficit. The question of who has offended Korean manufacturing is not only a concern for South Korea but also something we are eager to understand.

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Some might argue, isn't it obvious? Since South Korean President Yoon Suk-yeol took office last year, he has fully aligned with the United States and Japan, especially by explicitly supporting Japan's discharge of nuclear-contaminated water into the sea, engaging in various clumsy performances against us, and even interfering in our internal affairs. Therefore, this is seen as a self-inflicted predicament.

If you hold this view, then you are oversimplifying the issue of an economic decline or even collapse of a developed country.Let's consider two very important facts that are quite illustrative of the situation.

The first fact is that South Korea's trade deficit is not limited to trade with China; it has been experiencing a general trade deficit for more than 20 consecutive months since the beginning of 2022. A quick look at the data makes it clear: South Korea's trade deficit in 2022 was $47.2 billion, a historical high, and it marked the country's first trade deficit since 2008. However, in 2022, South Korea still had a trade surplus of $1.21 billion with China, which, despite a significant decrease of 95%, was still a surplus. This indicates that the $47.2 billion deficit that year was essentially unrelated to China. It was not until 2023 that South Korea's trade with China also turned into a deficit, which suggests that the main problem lies primarily within South Korea itself. As one of the world's most important manufacturing countries, is South Korea's economy on the verge of collapse?

The second fact is that the largest surplus in South Korea's trade with China in the first half of 2022 came from semiconductors, amounting to $14.3 billion, an increase of $2.33 billion compared to the same period in 2021. However, throughout 2023, South Korea's semiconductor exports to China have been very sluggish. Data from South Korea's Ministry of Industry shows that in the first half of 2023, South Korea's semiconductor exports to China were $60.18 billion, a sharp decrease of 39.8%. This trend only began to show positive growth in November, which is clearly due to the relaxation of export restrictions on South Korean consumer chips following the introduction of the U.S. chip final rules in October.

Based on the above analysis, we can summarize three main reasons for South Korea's trade deficit.Firstly, the impact of the U.S. chip restriction policy is significant.

How significant is its impact on South Korea? Data indicates that chip exports to China account for 60% of South Korea's overall semiconductor export volume. Therefore, a decline in chip exports to China is extremely detrimental.

Secondly, it is the result of competition between China and South Korea, where we have achieved export substitution in some industries. However, this is not only against South Korea. Some industries have begun to surpass South Korea in the global market, such as the automotive and shipbuilding industries, which are very familiar to everyone. This is the main event.

This is entirely the result of fair competition. We are not intentionally targeting South Korea; it only indicates that South Korea itself has fallen behind and is gradually losing competitiveness. As a developed country backed by a powerful United States, why has South Korea fallen behind?

This is the result of the third reason we want to discuss: although South Korea itself has not done well, the root cause lies with the United States.

Thirdly, and more fundamentally, the United States has declined. It not only cannot lead its allies but even demands that advanced manufacturing industries, such as chips, which the U.S. has nurtured, be moved to the United States.

Both South Korea and Japan have developed by relying on the technological dividends accumulated by the United States during the last industrial revolution, as well as the dividends from two wars in Asia.

South Korea and Japan have introduced a large amount of American technology and equipment, and even manufacturing giants have developed based on military industry.

It is evident that in the new round of manufacturing competition, not only has the United States become hollowed out, but the technological dividends have also gradually been exhausted. This objectively leads to the manufacturing industries of South Korea and Japan no longer being as advanced.

Therefore, South Korean manufacturing has not offended us but has offended the increasingly declining United States. If South Korea continues to actively rely on and expect the Americans to save it, the hope is obviously slim.