South Korea posted a trade deficit of US$3.8 billion in September 2022 — higher than experts predicted in a Reuters poll at the end of September but slightly lower than South Korea’s Customs Services forecast. The latest official data of South Korea shows that the trade deficit reached US$7 billion in November and the cumulative trade deficit has reached US$42.6 billion since the first deficit in April 2022.

A container ship leaves Pusan Newport Terminal in Busan, South Korea, 1 July 2021 (Photo: Reuters/Kim Hong-Ji)

A container ship leaves Pusan Newport Terminal in Busan, South Korea, 1 July 2021 (Photo: Reuters/Kim Hong-Ji)This is the eighth consecutive month of trade deficits. Neither the number of consecutive months of deficits nor the size of the trade deficit have been seen at this scale since 1997.

Two major conclusions can be drawn from looking at South Korean imports and exports. First, the government has implemented a trade strategy towards the Southeast Asian market. Second, trade relations between China and South Korea are undergoing major changes.

One reason for the deficits is the increasing value of energy imports. In the first eight months of 2022, South Korea imported US$145 billion of energy, accounting for 29.4 per cent of its total import quota. Energy spending in the first eight months of 2022 has surpassed 2021’s total and is nearly US$64 billion higher than the same period.

A more important factor contributing to South Korea’s massive trade deficit this year is the decline in Korean exports. This was mainly caused by a sharp drop in semiconductor-related exports. In January–August 2022, semiconductor exports fell by 49.4 per cent from 2021 to US$36.2 billion. Semiconductor exports accounted for 7.7 per cent of South Korea’s total exports in 2022, down from 17.7 per cent in 2021. This is the biggest drop among all South Korean export categories.

China is South Korea’s main export destination for semiconductor-related products. In recent years, China has imported over 40 per cent of South Korea’s semiconductors. In the first eight months of 2022, South Korea exported US$12.2 billion of semiconductors to China, a year-on-year decrease of 58.9 per cent from 2021. The Chinese market share has dropped from 40 to 33.7 per cent. This instability has not been seen since China and South Korea formally established diplomatic ties in 1992. At the same time, South Korean semiconductor-related exports to Vietnam, Taiwan and Singapore have increased significantly.

In 2021, more than half of South Korea’s trade was conducted with China, the United States, Japan, Vietnam and Taiwan — accounting for 23.9 per cent, 13.4 per cent, 6.7 per cent, 6.4 per cent and 3.8 per cent of South Korea’s total trade respectively. In the first nine months of 2022, China’s share decreased the most, close to 1.9 per cent. The decline of Chinese–South Korean trade is one of the most important reasons for its trade deficit.

But South Korea’s trade deficit cannot be solely attributed to China. Japan, Australia and Singapore are also major contributors to South Korea’s trade deficit. In the first nine months of this year, South Korea’s trade gap with these economies reached US$42.5 billion. Surprisingly, South Korea’s export growth to these countries is far greater than its import growth.

China’s technological progress is an important reason for this paradigm shift. China’s trade deficit with South Korea has been on the decline in recent years, from US$95.9 billion in 2018 to US$60.6 billion in 2021. Based on this data, China may have already reached the peak of its trade deficit with South Korea. Accordingly, South Korea needs to adjust to a more balanced trade relationship with China.

Changes in China–South Korea economic and trade relations reflect broader changes in the global political economy. China–US competition has forced South Korea to diversify its trade relations. In both China and the United States, global challenges such as pandemic prevention and control have compromised economic growth.

The depreciation of South Korea’s currency against the US dollar is another important factor in South Korea’s trade deficit. The won has depreciated by more than 20 per cent since early January 2022. The last time that this occurred was during the 2008 global financial crisis.

2022 marked the third peak in South Korea’s trade deficit. Out of 66 years of trade balance data, the Korea International Trade Association has registered 39 years of deficit. The previous two peaks of South Korean trade deficit occurred during major economic and financial crises. South Korea’s trade deficit peaked at US$20.6 billion in 1996. In 2008, South Korea had an annual trade deficit of US$13.3 billion.

Given such a history, South Korea’s current trade deficit reflects a bleak global economic trend. South Korea is famous for its export-oriented economic model. It is the seventh largest commodity exporter in the world, and its economic growth is highly dependent on trade. South Korea’s unprecedented trade deficit in 2022 indicates a larger international economic and financial crisis looming.

Zhong Feiteng is a senior research fellow at the National Institute of International Strategy, Chinese Academy of Social Sciences.