BOK calls for Korea’s 'fundamental' shift in exports to China

South Korea’s exports to China maintained on-year growth, overcoming the downtrend until 2016, while new research by the central bank hinted at the need for Korea to shift away from its focus on exporting manufactured goods to China to continue the uptrend.

From Aug. 1-10, the volume of Korean exports to China jumped 28.8 percent compared to the previous year, according to data compiled by the Korea Customs Service on Monday.

This came alongside the on-year growth streak in 2018 until July. In the first half of this year, exports to China came to $79.2 billion, up 20.7 percent on-year, accounting for 8 percent of the entire Korean volume of exports. Also in 2017, Korean yearly exports to China grew by 14.4 percent compared to that of 2016.

On the contrary, exports to China had extended losses for three consecutive years up until 2016, according to the KCS, falling 0.3 percent in 2014 on-year, 5.8 percent in 2015 and 9.3 percent in 2016, respectively. 

Meanwhile, a research paper by the central bank cited Korea’s high concentration in manufactured goods as the reason behind Korea’s declining exports to China as part of the global supply chain until 2016.

Titled “Accounting for the Sources of the Recent Decline in Korea’s Exports to China,” the paper released Monday implied South Korea’s weakening ties with China as the exporter of manufactured goods or intermediaries used to make capital goods.

The BOK paper suggested a “sharp reduction” in China’s “desire to accumulate capital and consume manufactured goods,” by calculating shocks such as investment shocks and preference shocks through a model-based decomposition methodology.

These shocks suggest lower imports of capital goods from trading partners including Korea, due to more considerable negative investment shocks and a shift away from consuming manufactured goods in China in the period 2014-2016.

“To the extent these shocks are persistent, it suggests that the decline in exports could persist unless other Korean fundamentals (such as productivity in nonmanufacturing) change,” read the paper.

Given Korea’s exports to China were “highly concentrated in manufactured intermediate and capital goods,” one of the co-authors of the paper and BOK economist Choi Moon-jung called for a far-sighted approach to foster capabilities as service industry exporters to China. The paper was also co-authored by Kei-Mu Yi, a professor at University of Houston.

“Korea’s declining exports to China were partly attributable to slowdown in world trade then, but there has been a lack of a model-based approach to elaborate on the reason for dwindling exports to China,” Choi told the media Monday.

To complement the research result, Choi also suggested a weaker global value chain between Korea and China since 2010, through a methodology called within-between accounting decompositions. 

By Son Ji-hyoung
(consnow@heraldcorp.com)