Rise in trade with China exposes Korea to pressure

HONG KONG (Yonhap News) ― Korea has come up against a dilemma as its export-led economy grows more dependent on China, which poses both opportunities and risks at the same time, experts say.

China’s influence on the Korean economy is ever more visible as the world’s second-largest economy has become the largest destination of its products. For China, Korea is its third-largest trading partner after the United States and Japan.

When it comes to its relationship with China, however, Korea has had a hard time juggling to balance its economic interests and geopolitical security woes.

Despite its close economic relationship with Korea, China has often ended up siding with its ideological neighbor, North Korea, as shown in a recent series of deadly border incidents provoked by the North.

Some experts warn that as Korea becomes more economically reliant on China, it will become more vulnerable to pressures China may exercise.

“China has its own way to solve its diplomatic issues,” Chun Ka-lim, a Chinese affairs professor at Korea’s Hoseo University, told Yonhap News Agency. “China’s leadership in the economy does not necessarily lead to its leadership in other areas.”

“Amid rising security risks, Korea should seriously reconsider its relationship with China and approach the country with new strategies,” he said.

In one of the most recent examples, Chun said, China has forced Japan to surrender in a territorial dispute by withholding exports of its rare earth minerals.

Korea’s exports to China accounted for 25 percent of its total overseas shipments in 2010, almost equivalent to all of its exports to the United States, Japan and the European Union combined that year.

The weight of Korea’s trade with China made up 20 percent of its total shipments abroad last year, reaching the 20 percent mark for the second year in a row. Thirty percent of consumer goods imported to Korea were made in China.

The data underscores the vulnerability of Korea’s consumer prices that can be easily affected by ups and downs in inflation in China.

Trade is not the only economic clout with which China can arm itself. The country has recently been looking to expand its presence in the Korean financial markets.

China has increased its holding of Korean government debts, snapping up around 5 trillion won ($4.44 billion) during the January-October period in 2010. It was equivalent to 20 percent of the Korean Treasury bonds worth 31.3 trillion won that have been bought by foreign investors since July 2009.

Market watchers warn against the strong Chinese appetite for Korean assets, saying that it could add to upward pressure on the Korean currency, the won. In a recent case, the won’s value shot up when foreigners aggressively purchased Korean Treasuries.

In a similar situation last year, Japan was alarmed when China aggressively bought Japanese government bills, which it believed sent its currency, the yen, rising to a record high against the greenback.

Choi Byung-il, dean of the Graduate School of International Studies at Seoul’s Ewha Womans University, stressed that Korea should reduce its weight of China-bound goods and diversify its export markets.

“Korea can easily be swayed by risks stemming from China,” Choi said. “It must diversify its export destinations.”

Korea, Choi said, should ratify its free trade agreements with the European Union and the United States and invest in and build up trade partnerships with emerging countries such as India, Brazil and Indonesia.

“Korea should not let China use ‘trade’ as a pressuring tool on it,” he said.

Choi stressed that any trade deals Korea forges with China should be more binding, so that their trade relationship will not be affected by non-economic, geopolitical situations. 

(Yonhap News)