South Korea posted a trade deficit for the fourth consecutive month this week. It failed again to escape from a trade deficit in figures for July, as imports increased more than exports did, due to high energy prices. According to the Ministry of Trade, Industry and Energy, exports rose 9.4 percent year-over-year to $60.7 billion last month, but they were outpaced by imports that expanded 21.8 percent to $65.37 billion. It is the first time in 14 years after the 2008 global financial crisis that the country suffered a trade deficit for four months in a row. Trade deficit accumulated from January to July already exceeded $15 billion. It is an all-time high for the seven-month period. The figure went well over $13.3 billion in an annual trade deficit in 2008.
This is not a negligible matter. It is perplexing that trade deficit kept growing for three months ~ from $1.6 billion in May to $2.57 billion in June to $4.67 billion in July. It seems difficult to dismiss these data as a temporary phenomenon caused by the Ukraine war and disruptions in global supply networks. As the United States and other major economies raised interest rates sharply, signs of recession are popping up. Exports to these countries are likely to slow down. If the trade deficit keeps growing, the likelihood is going up that current account, which includes service transactions, dividends and interest earnings will also turn into the red. A current account deficit may lead to downgraded international credit rating, a depreciation of the Korean won, an outflow of foreign capital and lack of foreign exchange. The government says countries who are very dependent on imports for their energy, such as Japan, Germany and France, also suffered trade deficits.
But this does little to dispel the unease about Korea’s own deficit. It is unusual for Korea to suffer trade deficits with China for three successive months. South Korea has maintained a trade surplus with China each year for nearly 30 years. Its trade deficit with China is largely attributable to China’s zeroCOVID policy, which locked down major cities. And yet the problem is worrying, considering that China is Korea’s largest trading partner. If its trade deficit with China continues, it will erode the foundations of the exportdriven Korean economy. About 90 percent of Korea’s exports to China are intermediate goods used to produce final products. However, as Chinese companies have developed their technologies in recent years, their demand for Korean-made intermediate goods is decreasing. Meanwhile, Korea’s dependence on Chinese raw materials is increasing.
Korea depends on imports from China for nearly 90 percent of its battery materials. Four consecutive months of trade deficit are a signal that Korea needs to check its export system and industrial structure. The country cannot find a solution simply by waiting for international prices of oil and raw materials to come down. Companies should do all they can to diversify their export markets while securing stable supply networks. The government must back them up in every possible way. Above all, it should figure out ways to turn trade with China into the black and reduce the country’s excessive dependence on Chinese raw materials, among others.