Korea remained in first place in the Chinese import market during the first half of this year despite the row over THAAD and weakened trade between the two nations. However, Korea's market share has decreased and the gap with second-placed Japan is rapidly narrowing. We will take a closer look at the situation and consider what kind of countermeasures are needed with Cho Yong-chan, the head of the US China Institute for Industry & Economics. First, let's look at Korea's market share in China's import market.
According to the Trade Association's report released earlier this month, the share of Korean products in the Chinese import market stood at 9.4%. Korea surpassed Japan and topped the Chinese import market in 2013, staying at the top for four consecutive years. Despite China's retaliation against the deployment of THAAD on Korean soil, exports to China were able to increase by 12.4% thanks to a recovering global economy which helped China's exports increase. Also, Chinese companies increased their production of electronics and communication devices which helped increase imports of Korea's major export products, such as semiconductors and petrochemicals.
China currently trades with 239 economies around the world. China is the biggest importer of intermediary goods in the world and the biggest exporter of finished products, befitting its nickname "the factory of the world." Korea has kept its place at the top in terms of market share in this huge import market since 2013. Especially with increased sales for electronics thanks to the global economic recovery, Korea's exports of semiconductors to China increased 47.5% in the first half of this year. However, Korea cannot be content with this record when comparing the figures with other countries.
Japanese products take up 8.9% of China's import market. The difference between Korea and Japan is a mere 0.5 percentage points. The gap has been narrowing since 2015 and if Korea does not come up with appropriate measures, it will only be a matter of time before Japan overtakes Korea in China's import market and Korea may even be overtaken by the US, which is currently in 3rd place. The reason behind this is because Korea's rate of increase was the only one in single digits among the top five countries that export to China. Looking at the figures, automobile parts, which are one of Korea's main export items to China, saw a 38.3% decrease due to China's boycott, while China's imports of Korean flat screen displays also declined 8.1% year-on-year.
The gap between Korea and Japan, which is the second largest exporter to China, has decreased from last year's 0.8%p to 0.5%p this year. The ratio of US goods also reached 8.7%, becoming a bigger threat to Korea. Korea's market share also fell below 10% for the first time since 2014 when the figure was 9.7%. Although Korea scored well for main export products to China such as semiconductors, which are the biggest export item, and petrochemicals, the export of automobile parts and parts for mobile devices dropped drastically, lowering Korea's market share within China's import market. So, how can we explain this phenomenon?
There was a time when exports to China accounted for 26% of Korea's total export volume, but now that figure has dropped to 23%. Unless the dispute over THAAD is resolved, Korean products will continue to see lackluster sales in China. We are seeing Chinese consumers becoming increasingly sophisticated and as the Chinese market becomes more advanced, competition is becoming more intense. However, Korean companies that have entered the domestic Chinese market have seen their investment sentiment deteriorate due to the ongoing THAAD row and as they are blocked by China's non-tariff barrier, they haven't been able to adapt quickly to market changes.
The row between Korea and China over the deployment of THAAD is ongoing, with China continuing to impose retaliatory economic sanctions against Korea. As such, major Korean companies which have a high percentage of sales to China such as Hyundai Motor, Kia Motor, Amore Pacific, and Hotel Shilla, saw their second quarter operating profit drop 35% year-on-year. One company has been particularly hit hard due to China's retaliatory measures and that company saw sales in China drop by over 90%, recording an operating loss of 70 billion won. The tourism market is also facing losses as well. Since the THAAD row, the number of Chinese tourists to Korea dropped 66% year-on-year, only amounting to 255,000 visitors. However, as North Korea's provocations continue, it is giving rise to another variable; the US-China conflict.
If North Korea continues to act provocatively despite new UN sanctions, or if China acts like it did before and outwardly supports international sanctions against North Korea while continuing to support Pyongyang on a private level, a trade war between the US and China could become a reality. If this does happen, Korea will be hardest hit as companies here send intermediate goods to Chinese production bases and later export the finished product to the US. If the US decreases imports by 10%, Korea's total exports decrease by 0.25%. If the US cuts its trade deficit to China by a half, Korea will suffer losses of about $6 billion due to its high dependency on exports to China.
The Trump administration is putting less pressure on China as it showed support for new international sanctions against North Korea, but that doesn't mean the conflict between the two sides has been resolved. The US has emphasized China's role in stopping North Korea's provocations and put pressure on Beijing by issuing a preliminary ruling on the countervailing duty on Chinese aluminum foil. A countervailing duty is a penalty imposed on foreign products that have been imported at lower prices due to government subsidies and therefore seen to harm domestic companies. Chinese companies are opposing the move with China's government-run Global Times saying "China will strongly resist if the US begins a trade war". As the conflict escalates and the US and China wage a trade war, Korean exports to China will be hit hard. As such, Korea faces challenges of not only resolving the North Korea risk, but also making sure the THAAD row doesn’t drag on.
As Korea relies heavily on exports to China, if the ongoing THAAD row becomes prolonged it could cause a domino effect affecting the Korean economy as a whole. The government and companies must strengthen their monitoring of China's economic policy changes and regularly check the application of China's strict regulations and market advancement trends. Also, Korean products must increase their competitiveness by strategically responding to changes in the Chinese market, or participating in projects that China is actively pursuing to develop new cooperative models. Creating this kind of exit strategy will likely result in a win-win situation for both sides. Regarding North Korea, solutions must be found through international cooperation and Korea must take the lead in bringing Pyongyang to the negotiations table.
China has already been preparing for a prolonged dispute over the deployment of THAAD by changing import lines and supporting the steady growth of Chinese companies to enhance competitiveness. Although Korea is currently at the top of China's import market, it faces difficulties ahead. As such, Korean companies must take on the challenges head on by strengthening product competitiveness in line with changes to the market, while also looking for ways to resolve the ongoing THAAD row and escalating tensions caused by North Korea's nuclear program.