South Korea’s exports have been dragged down by China’s economic slowdown and import slump. The East Asian country has experienced a continuing trade deficit for over a year due to being heavily dependent on China for both imports and exports.
In the first two months of this year, South Korea’s trade deficit has nearly reached 40 percent of last year’s total deficit.
According to data released by the Korea Customs Service on Feb. 21, the country’s exports from Feb. 1 to 20 decreased by 2.3 percent compared to last year’s period, while its imports increased by 9.3 percent year-over-year. The trade deficit in that period was $5.987 billion, 3.3 times the same period last year.
From the beginning of this year to Feb. 20, South Korea’s trade deficit has increased to $18.639 billion, exceeding 39 percent of last year’s total. Meanwhile, the country’s total trade deficit was $47.2 billion last year, which set a historic high.
‘Chips, China, and Energy’
Trade deficits are generally uncommon for an export-oriented economy like South Korea. There have only been two separate years where the country experienced a trade deficit in the 21st century: in 2008 amid the global financial crisis and recently in 2022.According to the South Korean government, the three root causes of the continuing trade deficit are “chips, China, and energy,” namely the deteriorated business environment for its semiconductors, the slowdown of the Chinese economy, and the increase in energy imports.
For years, semiconductors have accounted for the largest proportion of South Korea’s exports, while China is its largest trading partner.
However, South Korea’s semiconductor exports and its total exports to China have both declined in recent months. Its semiconductor exports are also heavily dependent on China, with the proportion to China reaching 40.3 percent last year.
From Feb. 1 to 20, South Korea’s semiconductor exports fell by 43.9 percent year-over-year, a downward trend for the seventh consecutive month since August last year. This is directly related to sluggish demand and the price decline of memory chips such as DRAM and NAND flash, South Korea’s main product.
The country’s exports to China also fell by 22.7 percent during that period. As of February, exports to China have decreased for eight consecutive months. From Feb. 1 to 20, South Korea’s trade deficit with China was $781 million, while it has been in a trade deficit with China since October last year.
In January, the country’s exports dropped 16.6 percent year-over-year, and imports fell 2.6 percent, creating a trade deficit of $12.69 billion, the largest deficit record in a single month.
Meanwhile, its semiconductor exports plummeted 44.5 percent year-over-year, and exports to China fell 31.4 percent. The proportion of exports to China accounted for 19.8 percent of South Korea’s total exports, falling below 20 percent for the first time.
For the whole of last year, South Korea’s exports to China decreased by 4.4 percent year-over-year, accounting for 22.8 percent of the country’s total exports. Previously, amid the U.S.-China trade war between 2018 and 2021, the proportion of South Korea’s exports to China has remained above 25 percent.
Regarding the trade deficit, South Korea’s Deputy Prime Minister and Minister of Economy and Finance Choo Gyeong-ho said in mid-February that “it will be fixed by improving the country’s export structure.”
Admission of Economic Slow Down
The February issue of “Recent Economic Trends,” a monthly report released by the South Korean government, acknowledged for the first time that the country’s economy has slowed down due to declining exports and shrinking consumption. And that these trends are becoming more apparent.
South Korea’s economy contracted by 0.4 percent in the fourth quarter of last year, the first negative growth since the second quarter of 2020.
Meanwhile, its consumer prices rose 5.2 percent year-over-year in January, and domestic demand also faltered after the country’s record-high trade deficit in January due to lower exports.
On Feb. 23, the Bank of South Korea held a Financial and Monetary Committee meeting and decided to freeze the benchmark interest rate at 3.5 percent. The central bank has raised interest rates seven consecutive times since April last year.
This time, it has decided to freeze interest rates in consideration of factors such as the domestic economic depression and falling property prices.
On the same day, the central bank lowered this year’s economic growth forecast from 1.7 to 1.6 percent. South Korea’s economic growth forecast, which is highly dependent on exports, has been further downgraded as concerns over global economic stagnation persist.
