From Largest Surplus to Largest Deficit, South Korea’s Economy Weighed Down by China

China's National People's Congress (NPC) Standing Committee Chairman Li Zhanshu (L) attends with South Korea's National Assembly Speaker Kim Jin-pyo (R) during a joint news conference in Seoul, South Korea, on Sept. 16, 2022. (Kim Hong-Ji/Pool/Getty Images)

News Analysis

South Korea, heavily dependent on exports to China, has seen its exports deteriorate further due to China’s economic downturn. Exports to China, once Korea’s largest trade surplus, have turned into its largest deficit since 2023.

According to statistics released by the Korea International Trade Association (KITA) in late March, South Korea’s trade balance with China recorded a deficit of $3.9 billion in January, marking Korea’s largest trade deficit. In the first two months of 2023, the trade deficit with China totaled $5.074 billion. This is the first time that China has become the largest trade deficit country in South Korea in a single month. The trade deficit with China was $2.77 billion last month. As of March, South Korea’s trade deficit with China had continued for six months.

According to the KITA, South Korea had the largest trade surplus with China in 2018 at $55.636 billion, followed by the second largest in 2019, and the third largest in 2020 and 2021. In 2022, it fell to 22nd, with only $1.213 billion.

South Korea’s Economy Is In Decline

According to a report by Yonhap News agency, South Korea’s exports to China fell due to the Chinese Communist Party’s (CCP) “zero-COVID” policy and lockdown measures last year, which slowed down economic growth and reduced Korean exports to China. At the same time, imports from China surged due to rising prices of industrial raw materials, such as lithium. South Korea’s trade balance deficit with China has been a regular trend since the start of 2023. Korea is expected to post a trade deficit with China this year, 31 years after the two countries established diplomatic ties.

According to data released by the Ministry of Trade, Industry, and Energy on April 1, South Korea’s monthly exports fell for the sixth consecutive month as of March. The trade balance has been in deficit for 13 consecutive months. Korea posted a trade deficit of 22.54 billion dollars in the first three months of 2023, more than half of its $44.79 billion trade deficit in 2022.

Semiconductor chips on a printed circuit board on Feb. 17, 2023. (Florence Lo/Illustration/Reuters)

Demand for semiconductor chips, South Korea’s main export product, has declined for eight consecutive months from August 2022 to March 2023 due to the global economic slowdown. The year-on-year decline was 44.5 percent in January, 42.5 percent in February, and 34.5 percent in March.

Semiconductors accounted for 18 percent of South Korea’s exports in 2022. South Korea relies heavily on China for its semiconductor exports, with its semiconductor exports to China accounting for 40.3 percent of the total last year.

The sluggish export of semiconductors is reflected in the performance of Korean companies. Samsung Electronics, a pillar of the Korean economy, posted 600 billion won (about $460 million) in operating profit for the first quarter this year, down 95.75 percent from the previous year. It is the first time in 14 years since the first quarter of 2009 that Samsung’s quarterly operating profit fell below 1 trillion won (about $760 million).

Samsung Electronics did not disclose the specific performance of each division. Still, the securities industry believes that its semiconductor division, which accounts for 60 percent to 70 percent of its operating profit, posted a loss of about 4 trillion won (about $3 billion), the lowest in its history.

South Korea Relies on China for More Than Semiconductors

South Korea relies heavily on China not only for semiconductors, but also for core materials for rechargeable batteries.

According to the KITA, 87.9 percent of lithium hydroxide imports in 2022, including lithium oxide, were produced in China. South Korea’s dependence on China-made lithium was 64.9 percent in 2018 and has increased yearly since then. The share of imports of cobalt used in battery cathode materials from China was 72.8 percent last year, compared to 64.0 percent in 2021. The share of natural graphite used as negative electrode material from China was 94 percent last year, compared to 87.5 percent in 2021.

In late February, the Ministry of Trade, Industry, and Energy selected lithium, nickel, cobalt, manganese, graphite, and five types of rare earths as the 10 strategic core minerals, which are essential minerals for major cutting-edge industrial products, including batteries, rechargeable batteries, and semiconductors.

A rare-earth refinery near the inner Mongolian city of Baotou on the edge of the Gobi Desert. Most of China’s rare earths come from mineral-rich Baotou. (Ed Jones/AFP via Getty Images)

Among the 10 strategic core minerals, South Korea depends on China for nine minerals (including five rare earths), excluding nickel.

To reduce its dependence on Chinese imports, the Korean government has significantly reduced its reliance on Chinese imports of 10 strategic core minerals to around 50 percent.

The International Financial Center reported on April 6 that eight major global investment banks—including Barclays, Merrill Lynch, Citibank, and Goldman Sachs—forecasted in late March that South Korea’s economic growth rate in 2023 will be at an average of 1.1 percent. The average forecast for South Korea’s economic growth next year has been lowered by 0.1 percentage point from 2.1 percent in late February to 2.0 percent in late March.