According to data disclosed by the South Korean Customs Administration, South Korea’s exports in April 2023 will be US$49.6 billion, a decrease of 14.2% from the same period last year. This is the 14th consecutive month that South Korea has recorded a trade deficit since a trade deficit occurred in February last year. This is an extraordinary phenomenon! Historically, South Korea had two large-scale trade deficits, which occurred during the East Asian financial crisis in 1997 and the international financial crisis in 2008. But the current round of trade deficits is unprecedented in terms of scale.
Data show that South Korea’s trade deficit will reach US$47.8 billion in 2022, compared with US$13.3 billion in 2008. Last year’s trade deficit was 3.6 times that of 14 years ago. In the first quarter of this year, South Korea’s trade deficit reached 22.4 billion US dollars! Obviously, at this rate of development, the scale of South Korea’s trade deficit will still hit a new high in 2023. This is undoubtedly worrying for South Korea, which relied on exports to create the “Han River Miracle”.
From South Korea’s perspective, the increase in the trade deficit has been attributed to rising energy and raw material import costs and a decline in key exports such as chips. South Korea believes that the sharp increase in energy prices caused by the Ukraine crisis is an important reason for the increase in South Korea’s trade deficit. At the same time, the Ukrainian crisis and the new crown epidemic have also impacted the global economy, resulting in a decline in demand for chips, so South Korea’s foreign trade performance is not good. According to the author’s research, the deeper impact on South Korea’s foreign trade pattern comes from the strategic game between China and the United States.
A South Korean Sample of Trade Changes
From the perspective of South Korea’s trading partners, there have also been some major changes in recent years. Before the outbreak of the new crown epidemic in 2019, South Korea’s top 10 trading partners were China, the United States, Japan, Vietnam, Hong Kong, Taiwan, Germany, Australia, Saudi Arabia, and Russia. Among them, China, the United States, Japan and Vietnam accounted for 24.3%, 13.5%, 7.3% and 6.6% of South Korea’s foreign trade volume, and the remaining trading partners were all below 5%. In 2022, South Korea’s top ten trading partners are China, the United States, Vietnam, Japan, Australia, Taiwan, Saudi Arabia, Germany, Singapore, and Hong Kong. China, the United States, Vietnam and Japan accounted for 21.9%, 13.5%, 6.2% and 6.0% of South Korea’s foreign trade, respectively, and the remaining trading partners accounted for less than 5%.
From 2019 to 2022, the ranking and proportion of South Korea’s trading partners have undergone major adjustments. First, the proportion of China decreased by 1.3 percentage points, while the proportion of the United States increased by 0.6 percentage points, but China and the United States are still South Korea’s largest and second largest trading partners; second, the proportion of Vietnam increased by 0.6 percentage points, ranking third, while Japan fell by 1.1 percentage points and retreated to the fourth place; thirdly, the proportion of Australia rose by 1.8 percentage points, jumping from the 8th to the 5th, and the proportion of Saudi Arabia increased by 0.8 percentage points, and its ranking rose from the 9th To the 7th place, the proportion of Singapore increased by 0.3 percentage points, and its ranking rose from 12th to 9th; the fourth is that the proportions of Hong Kong, Taiwan, Russia and Germany decreased by 1.2, 0.8, 0.7 and 0.4 respectively percentage point.
Changes in the proportion and ranking of trade often reflect the impact of major geopolitical crises. Russia’s position in South Korea’s foreign trade fell from 10th in 2019 to 15th in 2022, and it is the partner with the most significant position movement in these three years; Germany’s position slipped 1 place from 7th, and Germany Global competitiveness has also been reduced by the Ukraine crisis. The decline in South Korea’s trade with Russia and Germany was driven primarily by the crisis in Ukraine.
The decline in the proportions of mainland China, Hong Kong, and Taiwan is more serious than that of Russia and Germany, obviously affected by the strategic game between China and the United States, especially the ranking of Hong Kong, China, which has dropped from 6th to 10th. As the United States continues to intensify efforts to contain, contain and suppress China, South Korean companies are facing increasing uncertainty when doing business with companies connected to China.
In particular, after the Biden administration successively introduced measures to restrict the development of China’s high-tech industry, Korean companies with a strong position in the chip field are also facing increasing pressure from the United States. In addition, the new South Korean government is trying to please the US government. The options for Korean companies will be further compressed in the future. It can be said that concerns about this uncertainty have largely led to a sharp drop in South Korea’s trade volume with the “China Economic Circle”, with a total drop of 3.3 percentage points in the three places. What needs to be paid attention to is that, from the perspective of the decline, the impact of the Sino-US strategic game on South Korea’s foreign trade pattern is far greater than the impact of the Ukraine crisis.
Worries about this uncertainty have largely led to a sharp drop in South Korea’s trade volume with the “Chinese Economic Circle”.
On the other hand, among South Korea’s trading partners, the United States, Vietnam, Saudi Arabia, Australia, and Singapore are the main ones that have risen in status. Except for Saudi Arabia and Australia, which are caused by rising prices of crude oil and coal, the other parties can all be regarded as the result of South Korea’s initiative to adjust its foreign trade strategy. In particular, it is worth pointing out that the share of the US and Vietnam increased by the same amount, although the weight of the former was much heavier.
In South Korea’s view, it may be a reliable hedging strategy to transfer part of the trade from Hong Kong and Taiwan, which are deeply affected by the strategic game between China and the United States, to Southeast Asia. Therefore, under the background of the intensified strategic game between China and the United States, the foreign trade pattern of South Korea has clearly shifted to Southeast Asia. After the Yun Xiyue government came to power, it changed the “New Southern Policy” proposed by the Moon Jae-in government to the “ASEAN Policy”, which also strengthened this trend change.
Why Southeast Asia Matters
Southeast Asia is unique in the international economy. On the one hand, the countries of Southeast Asia unite for self-improvement, forming a unique “ASEAN way” in regional integration, emphasizing peace, cooperation and consensus; Competitive with a large workforce. The total population of ASEAN is about to reach 700 million, and its land area exceeds 4.5 million square kilometers. Of course, there are many regions in the world with low wages and advocacy of integration, and there are many secrets to the success of ASEAN. Such as openness, and neighboring regions are also countries pursuing economic growth, and the countries in the region have jointly created a good atmosphere to promote common development.
In the impression of the Chinese, the status of Southeast Asia seems to have been rising. Since the beginning of the 21st century, China and ASEAN have taken the lead in establishing a free trade area, leading the development trend of free trade in East Asia. In recent years, the China-ASEAN Free Trade Area has been upgraded one after another. In November 2021, President Xi Jinping announced in Beijing the establishment of a comprehensive strategic partnership between China and ASEAN, hoping to fully leverage the role of the Regional Comprehensive Economic Partnership Agreement (RCEP) to improve trade and investment liberalization and facilitation.
In November 2022, when the then Chinese Premier Li Keqiang attended the 25th China-ASEAN Leaders Meeting in Phnom Penh, Cambodia, he announced that the China-ASEAN Free Trade Area 3.0 negotiations were officially launched. The two sides hope to further improve the level and quality of trade and investment cooperation, especially It is hoped to further enhance the security of the industrial chain, supply chain and value chain. Behind the policy change, the basic motivation behind it is that China and ASEAN are each other’s largest trading partners.
Since 2020, ASEAN has surpassed the European Union and the United States to become China’s largest trading partner. According to Chinese customs data, between 2020 and 2022, China-ASEAN trade volume has increased from US$641.4 billion to US$975.3 billion, while Sino-US trade volume has increased from US$541.4 billion to US$759.2 billion. The current gap between the two is about 220 billion Dollar.
Japan and South Korea in Northeast Asia have traditionally accounted for half of China’s trade with its neighbors. From 2020 to 2022, the trade volume between China and Japan will increase from US$315 billion to US$357.4 billion, and the trade volume between China and South Korea will increase from US$284.6 billion to US$362.3 billion. China-ASEAN trade volume also exceeds Japan and South Korea’s trade volume with China. For China, shifting its trade layout to ASEAN is a brand-new trend. The big difference from the past is that it is not just China that attaches importance to ASEAN.
South Korea replaced Japan as China’s largest trading partner in Northeast Asia. This reflects two trends. One is that South Korea is catching up with Japan at an accelerated pace. Whether it is South Korea’s industrial level or economic development, its gap with Japan has been greatly narrowed, replacing the market share of some Japanese companies in China. At the same time, China has also stepped up cooperation with South Korea. For example, China and South Korea have reached a free trade area, but China and Japan have not.
Second, to a certain extent, Japan follows the United States more closely than South Korea, so it is more worried about geopolitical impacts and has taken precautions in advance. Japanese companies have begun to implement the “China + 1” strategy as early as the Sino-Japanese dispute over the Diaoyu Islands, that is, to deploy in Southeast Asia, South Asia and other regions without abandoning the Chinese market, so as to “hedge” the uncertainties that the Chinese market may bring sex.
Therefore, China, Japan, and South Korea have all significantly strengthened their industrial cooperation with ASEAN. Apart from the rising status of ASEAN itself, an important reason behind this is the change in Sino-US relations. Since the Sino-US trade friction in 2018, Chinese companies have begun to use Southeast Asia as an important base to circumvent US trade barriers.
Among them, Vietnam has become one of the biggest beneficiaries of the Sino-US trade friction. The bilateral trade volume between China and Vietnam jumped from about US$120 billion in 2017 to about US$235 billion in 2022, almost doubling. Surprisingly, the trade volume between China and Vietnam in 2022 will even exceed the trade volume between China and Germany, and the German economy is more than 10 times the size of Vietnam. Obviously, the surge in Sino-Vietnamese trade cannot be explained by economic scale. The driving force behind it is value chain trade, which can effectively avoid tariff wars and, to a certain extent, can also be used to deal with geopolitical shocks.
Value chain trade is an increasingly prominent form of international trade since the 1990s. When teaching traditional trade knowledge in textbooks, most of the time it is reflected in the “North-South” model, that is, developed countries export manufactured products, and developing countries export raw materials. This traditional trade model has dominated for hundreds of years, and it has also formed the basis for many people to understand the international economy, leading many people to take it for granted that developed countries dominate international trade, and only by trading with developed countries can they get rich.
However, value chain trade is different from the form of trade that most people recognize in economics textbooks. Although developed countries have a large share in the industrial chain, they are not the only ones, nor are they completely dominant, otherwise it is difficult to explain The US government often says that it is “too dependent on China”.
East Asia has become a “world factory” due to its good labor force, a government that is good at governance and implementing policies to integrate into the international market, and a large number of (Chinese) entrepreneurs who are good at management, producing a large part of the world’s manufactured goods.
On the one hand, the leaders of value chain trade are of course large multinational corporations. In American academia, the trade theory based on these large companies is called “New New Trade Theory”, which basically emerged in the early 21st century to distinguish it from the New Trade Theory (also known as “New Trade Theory”) in the 1980s. strategic trade policy). Through the analysis of the transnational business behavior of large transnational corporations, the new trade theory tries to integrate the direct investment of transnational corporations with international trade. Intra-firm trade.
On the other hand, while large companies dominate, many small and medium-sized enterprises have easily joined the production chain dominated by multinational companies through modern communication and information technology and improved transportation infrastructure. Under the premise of this, it participates in a larger market and effectively promotes local development, which further proves the legitimacy of the government’s preferential and convenient policies for enterprises to integrate into the international market. East Asia has become a “world factory” due to its good labor force, a government that is good at governance and implementing policies to integrate into the international market, and a large number of (Chinese) entrepreneurs who are good at management, producing a large part of the world’s manufactured goods.
Chinese Factors in the East Asian Industrial Chain
The reason why small and medium-sized enterprises in East Asia can quickly join the regional production network is also inseparable from the role of China. China has played an active role in the past 20 years, whether it is shaping a peaceful environment in the region or providing infrastructure for regional countries to integrate into regional production networks. For example, during the East Asian crisis in 1997, China announced that the RMB would not depreciate. After the global financial crisis in 2008, China took the lead in stabilizing and expanding its domestic market. In 2013, it proposed the “Belt and Road” initiative and initiated the establishment of the Asian Infrastructure Investment Bank. These international cooperation platforms and international public goods provide many opportunities for small and medium-sized countries to enter the international market.
This kind of vitality in East Asia has lasted for decades. The reason behind it is not only that the United States implements an open policy and provides markets for many Asian countries, but also that East Asia has a culture and system that encourages hard work to get rich. The place of origin is obviously China. Otherwise, it would be difficult for us to explain why other regions of the world did not achieve such good development as East Asia did, and several waves of economic miracles appeared one after another. Whether it was Japan in the 1960s or the “Four Tigers” in East Asia in the 1980s, they could all be called “economic miracles” at that stage. However, its influence cannot be compared with China’s economic rise.
China’s current economic aggregate exceeds 18 trillion U.S. dollars, and its huge market size is breaking the US “monopoly” on the interpretation of free trade. Because of China’s economic scale, not only can it change the price of the world market, but also with its sovereign independence and thousands of years of civilization tradition, it has a political influence that is completely different from the previous rounds of East Asian economic miracles.
On October 28, 2022, Goyang City, Gyeonggi-do, South Korea, “Ghost Robot” appeared at the Professional Robot Exhibition
Under such circumstances, a considerable number of people in the United States believe that China is challenging the hegemony of the United States, so the Biden administration has adopted a “de-Sinicization” measure. The British “Economist” even proposed a new term “Asian Alternative Supply Chain” in an attempt to create public opinion that divides Asia. But in fact, it is very difficult to kick China out of the Asian production network.
At the beginning of May this year, the International Monetary Fund (IMF) released the new “Asia-Pacific Regional Economic Outlook” in Seoul, South Korea. The forecast for October 2019 was raised by 0.3 percentage points. The main reason for the upward revision of the IMF’s forecast is China’s reopening and economic restart.
The IMF also emphasized that economies in the Asia-Pacific region (excluding the United States) will contribute 70% of global economic growth this year, which is significantly higher than in previous years. The IMF predicts that China’s economic growth will reach 5.2% in 2023. Normally, for every one percentage point increase in China’s economic growth, the average annual growth of the rest of Asia will increase by about 0.3 percentage points.
Transforming China from a “world factory” to a “world market” through further institutional innovation is not only a need for China’s industrial upgrading, but also helps to narrow the relationship with neighboring countries and shape the industrial chain in East Asia.
It should be noted that the IMF also specifically emphasized that the spillover effect driven by China’s economic growth this year is different from the past. In the past, it relied on the demand for investment goods, but this year it is mainly due to the increase in China’s domestic consumption demand. In other words, this statement by the IMF actually acknowledges the effect of the Chinese government’s acceleration of the formation of a new development pattern with the domestic cycle as the main body and the domestic and international dual cycles promoting each other.
At present, China’s per capita GDP has exceeded 12,000 US dollars, and the per capita GDP of many cities in the eastern coastal areas has exceeded 20,000 US dollars. China has a middle-income population of more than 400 million people, which is larger than the total population of other developed economies in East Asia. Therefore, China has in fact become a huge consumer market, which can drive more people into the economic circle and improve the quality of economic development from a deeper and wider division of labor. Transforming China from a “world factory” to a “world market” through further institutional innovation is not only a need for China’s industrial upgrading, but also helps to narrow the relationship with neighboring countries and shape the industrial chain in East Asia.