Yonhap News, Seoul
S. Korea’s economic reliance on China deepens
19 August 2012
(Yonhap) — Who will catch a cold if China sneezes? As was recently shown, the U.S., European and other major economies are not insulated to a slowdown in the Chinese economy. South Korea is also not an exemption to this phenomenon with its exposure to the world’s factory growing sharply over the past two decades.
Since 1992 when the two countries forged diplomatic ties, bilateral trade has surged with China becoming South Korea’s largest trading partner.
According to data compiled by the Korea International Trade Association (KITA), bilateral trade reached US$221 billion last year, a sharp rise from $6.38 billion in 1992. Exports to China skyrocketed 51-fold to $134 billion over the cited period, with imports soaring 36-fold to $221 billion, according to the data.
In particular, South Korea’s exports to the neighboring country increased at an annual rate of 23 percent during the cited period, far higher than the average growth of 11 percent in other overseas markets. In 2003, China became South Korea’s largest trading partner, overtaking the U.S. Since 2007, South Korea has imported the most from China.
South Korea logged a trade surplus of $44.75 billion with China last year, far greater than its overall trade surplus of $30.8 billion.
Analysts said South Korea benefited from a surge in bilateral trade with China by capitalizing on its cheap labor and vast domestic market. China has transformed itself into a trade powerhouse with market reforms and opening, but a slowdown in the world’s factory is threatening the South Korean economy.
Last year, China accounted for 24.2 percent of South Korean exports, the largest among major trading partners except Taiwan.
This means the South Korean economy is positioned to reel from the ups and downs of the Chinese economy.
According to the estimates by Hyundai Research Institute, a 1-percentage point decline in China’s economic growth would cut South Korea’s economic expansion by 0.4 percentage point.
"South Korea needs to prepare for the risks that stem from heavy reliance on specific economies," said Kang Doo-yong, an analyst at the Korea Institute for Industrial Economics and Trade (KIET). "The country should work to diversify its overseas markets."
Also, China is focusing on boosting domestic demand, which means a slowdown in South Korea’s exports. Exports to China grew 14.8 percent last year, but declined 1.6 percent on-year in the first five months of 2012.
Meanwhile, the two countries are seeking to forge a bilateral free trade accord which could help South Korean companies expand in the neighboring country.
A free trade pact with China is expected to raise South Korea’s real economic growth by 2.28 percent over 10 years on the back of increased trade between the neighboring countries, a report showed.
The report compiled by the state-run Korea Institute for International Economic Policy (KIEP) said a low-level free trade pact with China, which excludes "sensitive items" such as agricultural products, is also expected to boost South Korea’s economic growth by 0.95 percent in the five years after the pact takes effect.
"If the two countries conclude their FTA talks within three years, their bilateral relations would be further upgraded," said Kim Hyung-joo, an analyst at LG Economic Research Institute.
In early May, the two countries announced the launch of formal free trade negotiations, expecting the talks to take two years.
Agriculture and fisheries are considered to be the most sensitive sectors for South Korea, while China categorizes its manufacturing industries, which include the automobile, machinery and oil sectors, as sensitive.
According to a KIEP report, damage to South Korea’s farming industry from a free trade agreement with China may reach up to $2.8 billion.
Production by the country’s agriculture and fisheries industries may drop 14.26 percent from their combined output in 2005 if and when a free trade pact with China allows an inflow of cheap Chinese products, the report said.
It said the production cut could reach up to 20 percent from 2005 levels if the countries agree to remove import tariffs on all agricultural products.
Such a drop in production means more than 3.3 trillion won ($2.9 billion) in lost sales for the country’s farming industry annually, which is nearly four times higher than the 815 billion won in estimated damage from the Korea-U.S. free trade accord, the report said.