‘Korea suffers as China reduces imports of intermediate goods’

South Korea has faced a critical barrier in exports to China over the past decade as the Asian superpower has enhanced its policy to curb imports of intermediate goods, a Bank of Korea research report claimed Wednesday.

Korea had enjoyed huge shipments of intermediate products, including knockdowns, before completion of assembly in China, which actively utilized its labor workforce at dirt-cheap rates from the late 1970s to the late 1990s, said the central bank report.

It said the giant importer, however, began restricting purchases of intermediate goods under its policy to revamp the broker trade structure, which generally yields low added value, starting in 1999.

“As a result, China scaled back the ratio of intermediate goods for processing trade out of its total imports from 53.7 percent in 1998 to 32.8 percent in 2014,” it said.

Despite the worsening situation, Korea has yet to scrap its earlier stance. Unfinished goods shipped to China took up 73 percent of Korea’s total exports to its largest export destination at the end of 2014.

In contrast, consumer goods targeting Chinese citizens stood at only 7 percent of its total exports.

“Korea should map out revised export strategies keeping in mind that that the Chinese government is pushing for 100 percent assembly in its local factories for the sectors such as automobiles, machinery and a variety of components,” said a BOK economist in the report.

Local private think tanks are also spouting the necessity of dropping the traditional shipment structure.

“As China’s industrial competitiveness is growing rapidly, there is a high possibility that made-in-China intermediate goods will replace those of Korea (in the coming years in many manufacturing segments),” said a research fellow of Hyundai Economic Research Institute.

The export sector accounts for about half of Korea’s gross domestic product. And the volume, including intermediate goods, shipped to China accounts for a quarter of Korea’s total shipments to the world.

By Kim Yon-se (kys@heraldcorp.com)