Korea, a country poor in natural resources, has turned itself into a major exporting powerhouse during the past six decades. It owes its rapid rags-to-riches transformation to huge export earnings.
Korea’s prowess as an exporter, however, is nowhere to be found when it comes to trade with Japan. It has recorded no trade surplus ever since its liberation from Japan’s colonial occupation in 1945.
At long last, however, Korea sees a possibility of selling more to Japan than buying from it. This possibility, no matter how remote it may be, should be a source of solace for a nation that had to cope with imperial rule and, after liberation, had enormous catching-up to do.
Though trade with Japan sustained a huge deficit again last year, it was not as onerous as before. The deficit marked a big drop ― to $28.59 billion last year from $36.12 billion in 2010. Even more encouraging was that the growth rate of imports from Japan had steadily been declining.
True, imports from Japan declined on two occasions: the 1997-98 Asian financial meltdown and the 2008-09 Great Recession. Korean exports dropped during the periods, which led to a reduction in domestic investments and then in imports from Japan ― mostly parts, materials and machinery.
But it was different this time. The trade deficit with Japan was cut by as much as $7.53 billion at a time when Korean exports were increasing. The total volume of Korean exports surpassed the $500 billion mark for the first time in 2011.
The decline in the trade deficit may not be a one-off event if the trend of quarterly imports from Japan is any indication. Year-on-year growth, which peaked at 40 percent in the first quarter of 2010, dropped to 17.5 percent in the final quarter of the year. The slide continued from 12.3 percent in the first quarter of 2011 to 9.1 percent in the second quarter and 5.7 percent in the third quarter.
The continuous slowdown undoubtedly results from the change in the structure of the Korean economy, which heavily relied on parts, materials and machinery of Japanese origin for the manufacture of final products for export. In other words, the more Korea exported, the more it had to import from Japan. Now this pattern is being broken as Korea pushes for localization and substitutes Japanese imports with those from China and elsewhere.
Another notable development is a sharp increase in the exports of Korean-made parts and materials to Japan. According to a report from the Korea International Trade Association, auto parts exports jumped 38.8 percent in the January-April period of this year, followed by parts for wireless communication devices with 20.4 percent and steel plates with 11.1 percent.
The change in the bilateral trade of parts and materials undoubtedly results mainly from an improvement in the quality of Korean-made products. Mitsubishi, Toshiba and other Japanese conglomerates are reportedly interested in sourcing parts from Korea. A Korean producer of auto parts is quoted as saying, “These days, Japanese automakers are offering to visit us for purchases. That is something we could hardly dream of several years ago.”
The improvement in quality is not limited to parts and materials. It applies to finished products such as television sets and passenger cars. As such, Samsung has surpassed Sony in TV sales, and Hyundai and Kia are rapidly catching up with Japanese automakers.
Few would doubt that Korea has come a long way in its efforts to improve the terms of trade with Japan. Its achievement is truly praiseworthy.
Nonetheless, it cannot afford to be assured of balancing the bilateral trade anytime soon, not to mention any noteworthy surplus. Imports still exceed exports by far, although the gap is closing. Moreover, the pursuit of balanced trade may be hindered if Japan’s strong currency should weaken.
What Korea needs to do to reduce its trade deficit with Japan is continue to push for quality control. Samsung, LG, Hyundai and other conglomerates will have to provide technical assistance for their parts suppliers. At the same time, government-funded research institutes will have to help small and medium-sized corporations develop technically sophisticated parts for import substitution and exports.
