China Trade Surplus in Sight, but Structural Deficits Persist

South Korea is on the verge of achieving a trade surplus with China for the first time in four years, but experts caution that this should not be viewed as a structural recovery. While rising semiconductor prices have contributed to the improvement in the trade balance, the structural vulnerabilities related to China's self-sufficiency in intermediate goods and dependence on core minerals remain significant.

According to the Ministry of Trade, Industry and Energy and the Customs Service, the cumulative trade balance with China from January to May this year recorded a surplus of $9.9 billion, indicating a strong possibility of breaking free from the trade deficit that has persisted since 2023.

The shift in trade dynamics with China this year is largely attributed to a surge in semiconductor prices. Last month, semiconductor exports to China reached $9.87 billion, a staggering 243.2% increase compared to the same period last year, accounting for more than half of total exports to China. In contrast, traditional key items such as petroleum products (-18.2%), petrochemicals (-10.4%), and general machinery (-2.1%) continued to struggle.

With the semiconductor sector expected to remain robust this year, the likelihood of a trade surplus with China for the first time in four years is increasing. However, experts believe it is premature to consider this a structural recovery.

Kim Tae-hwang, a professor at Myongji University’s Department of International Trade, stated, "The current improvement in the trade balance with China should be seen as a temporary phenomenon resulting from the semiconductor cycle. If it weren't for the semiconductor boom this year, it is highly likely that we would have recorded a deficit."

In reality, South Korea's trade structure with China has undergone rapid changes in recent years. In the past, South Korea exported intermediate goods such as semiconductors and displays to China, which would then process them for sale in the U.S. and Europe. This structure allowed South Korea to achieve a trade surplus of $62.8 billion with China in 2013.

However, as China's manufacturing competitiveness has rapidly increased, the situation has changed. Chinese companies have begun to produce the intermediate goods that South Korea used to supply, weakening South Korea's export competitiveness in key sectors such as electronics, chemicals, and machinery.

The Korea Institute for International Economic Policy (KIEP) also noted in a report that "China's export structure centered on intermediate goods is strengthening, while its import structure is weakening." According to KIEP, during the period of significant trade deficits with China in 2023, the intermediate goods sector, excluding semiconductors, recorded a deficit of $7.5 billion. The surplus in the electronics and chemical sectors, which had previously driven the trade surplus, has also significantly diminished.

KIEP identified not only the global ICT downturn but also China's self-sufficiency in intermediate goods and the weakening competitiveness of South Korean products as factors contributing to the trade deficit.

Supply chain risks remain a concern. South Korea relies heavily on China for a significant portion of core minerals essential for high-tech industries, such as rare earth elements and graphite. As China tightens its strategic management and export controls on these minerals, supply chain risks are likely to increase.

Experts emphasize the need for a dual strategy: reducing dependence on China through long-term supply chain diversification while maintaining a stable procurement system in the short term. The United States, which also has a high dependence on Chinese core minerals, should expand cooperation with major mineral-producing countries while implementing realistic supply chain strategies.

Additionally, there are calls to explore new avenues for trade with China beyond semiconductors to enhance the sustainability of trade relations. It is particularly important to secure new export drivers not only in goods trade but also in the service sector.

Professor Kim stated, "Rather than general-purpose products that China is rapidly catching up on, we should increase investments in areas like HBM, advanced semiconductors, and OLEDs, where China finds it difficult to follow. Ultimately, maintaining a technological edge is the key to preserving our trade competitiveness with China." He added, "While China is quickly catching up in goods trade, South Korea still holds a competitive advantage in service sectors such as finance, healthcare, law, and education. It is essential to secure new export drivers through the expansion of the service sector in the Korea-China FTA."