Seizing the Opportunity to Promote Economic and Trade Cooperation between China and South Korea

Seizing the Opportunity to Promote Economic and Trade Cooperation between China and South Korea 

Xu Hongcai

Deputy Chief Economist of China Center for International Economic Exchanges

Seoul, 2018-12-05

Since last year, China and South Korea have begun to move out of the shadow of continuing trade shrinkage, showing signs of obvious growth. Will this good momentum continue? What are the negative factors in the economic and trade cooperation between the two countries? How can the two countries speed up economic and trade cooperation under the current complex and changeable international political and economic situation?

I. History and current status of economic and trade cooperation between China and South Korea

China and South Korea formally established diplomatic relations in 1992. However, little economic and trade cooperation were present in the early period. The bilateral trade value was only 5 billion dollars in 1992, while it increased by more than 50 times and reached 280.3 billion dollars in 2017. China was South Korea's sixth largest trade partner at the time of establishment of diplomatic relations but became its largest trade partner by 2004, with the most import and export trade coming from and going to China. In 2008, China and South Korea established “strategic partnership”, fully reflecting the strategic importance of economic and trade cooperation between the two countries.

According to South Korea's customs statistics, the import and export of bilateral commodities between South Korea and China in 2017 were 239.97 billion dollars, an increase by 13.5%. Wherein, Korea's export to China was 142.12 billion dollars, an increase by 14.2%, and the import from China was 97.86 billion dollars, an increase by 12.5%. South Korea's trade surplus to China was 44.26 billion dollars. Electromechanical products, chemical products and optical medical equipment were the main products exported by South Korea to China. In 2017, the export values of the above-mentioned products were 73.84 billion dollars, 19.34 million dollars and 14.54 million dollars respectively. The export values of electromechanical products and chemical products were increased by 24.7% and 21.5% respectively, and the export value of optical medical equipment were decreased by 12.6%. The three categories of products jointly accounted for 75.8% of the total export of South Korea to China. South Korea's top three commodities imported from China were electromechanical products, base metals and products, and chemical products. In 2017, the import values of the above-mentioned products were 45.7 million dollars, 12.96 billion dollars and 8.86 billion dollars respectively, accounting for 46.7%, 13.2% and 9.1% of the total import of South Korea from China. Of which increased by 14.7%, 9.3% and 30.3% respectively. China continues to maintain its advantages in labor-intensive product markets in South Korea such as textiles and textile raw materials, and furniture. China's main rivals are Vietnam, Indonesia, Japan and other countries in terms of these products. This year, Sino-South Korean relations continued to improve. According to Chinese statistics, bilateral trade value between China and South Korea reached 126.26 billion dollars for January to May 2018, an increase of 17.4% from the previous year. South Korea is the third largest trade partner of China, and China continue to be the largest trade partner of South Korea.

However, in recent years, the growth of direct investment of both countries has slowed down, which should be drawn to attention. South Korea is the fourth largest source of foreign investment for China, and China is the second largest investment destination for South Korea. In 2017, South Korea invested in 1,627 projects in China, a decrease of 19.4% on a year-on-year basis, and China’s actual spending of South Korea investment was 3.67 billion dollars, a decrease of 22.7% on a year-on-year basis. By the end of 2017, South Korea has a cumulative total of 63,385 investment projects in China, with an actual investment amount of 72.37 billion dollars. In 2017, China’s non-financial direct investment in South Korea was 420 million yuan, a decrease of 46.3% on a year-on-year basis. As of 2017, China has a cumulative total of 4.66 billion dollars in non-financial direct investment in South Korea. As of the end of May 2018, South Korea has an accumulated investment of 74.1 billion dollars in China and has been China’s fourth largest source of foreign direct investment. The two parties have carried out four rounds of tax cuts in accordance with the Sino-South Korean Free Trade Agreement, which played an active role in stabilizing bilateral economic and trade exchanges and promoting economic growth of the two countries. Thus, industries and consumers of the two countries have benefited significantly.

Nonetheless, it should be noted that complementarity and competition of economic and trade cooperation between China and South Korea coexist. With the adjustment of China's trade structure, Sino-South Korean trade structure adjustment tends to a balance. In the early stage of reform and opening-up, China was in the "Geese Tail" position in the traditional Flying Geese Model of ladder-type industrial division system, that is, "technology-intensive and high value-added industry - capital and technology-intensive industry - labor-intensive industry" due to China's low economic level and industrial structure level, while South Korea was in the “Geese Top” position. The industrial division between China and South Korea was based on the vertical division of labor. China and South Korea were strongly complementary in labor-intensive products such as finished products classified by raw materials, machinery and transport equipment, as well as technology and capital-intensive products such as miscellaneous products. Sino-South Korean trade has strong complementarity in resource-intensive products such as non-edible raw materials excluding fuel, chemicals and related products not otherwise specified, technology and capital-intensive products such as machinery and transport equipment. With the upgrading of China's economic level and the transformation of industrial structure, the industrial structures of China and South Korea are showing obvious conversion in several areas. The vertical division of labor shifts to a horizontal division of labor. Thus, complementarity and competition coexist in Sino-South Korean economic and trade cooperation.

In recent years, China's trade structure adjustments have driven the export growth of some high value-added electromechanical products and labor-intensive products, thus trade structure adjustment between China and South Korea tends to a balance. According to the data of Global Trade Atlas, the global export value of electromechanical products was about 7.87 trillion dollars in 2017, an increase of about 8.0% on a year-on-year basis. The export value of China's electromechanical products was 1.33 trillion dollars, an increase by 8.2%, and accounted for about 17.0% of the international market share, which kept balance and showed the trend of recovery compared to 2017. South Korea's export growth was 14.9%, accounting for 4.9% of the international market share, an increase of 0.3%. In recent years, South Korea's international market share has fluctuated from 4.6% to 5.0%. According to the data of the General Administration of Customs of China, the export value of China’s electromechanical products was 6.01 trillion yuan from January to August 2018, an increase of 7% on a year-on-year basis and accounted for 58.2% of the total export value. Wherein, the export value of electric appliances and electronic products was 2.64 trillion yuan, an increase by 7.8% on a year-on-year basis; the export value of mechanical equipment was 1.82 trillion yuan, an increase by 8.5% on a year-on-year basis. During the same period, the export value of garment was 662.78 billion yuan, a decrease of 6.2% on a year-on-year basis; the export value of textiles was 507.18 billion yuan, an increase of 2.8% on a year-on-year basis; the export value of furniture was 222.38 billion yuan, an increase of 0.1%; the export value of footwear was 203.15 billion yuan, a decrease of 9.6%; the export value of plastic products was 179.51 billion yuan, an increase of 5.1%; the export value of bags and suitcases was 114.78 billion yuan, an increase of 4.7%; the export value of toys was 97.24 billion yuan, a decrease of 3.5%. The total export value of the above seven categories of labor-intensive products was 1.99 trillion yuan, a decrease of 2.5%, accounting for 19.2% of the total export value. In addition, the export volume of steel was 47.18 million tons, a decrease of 13.1%, and the export volume of automobile was 760 thousand units, an increase of 22.3%. China has taken the initiative to expand its import by optimizing the import structure, and thus the import of advance technology, key parts and important equipment increased rapidly.

Over the past decade, Sino-South Korean trade has continuously accounted for about 7% of China's foreign trade. China is Korea's largest trade partner, and the largest export and import market, while South Korea is China's third largest trade partner. Recently, Sino-South Korean economic relations have improved significantly by virtue of the willingness to improve expressed by the leadership of China and South Korea.

II. Negative factors influencing economic and trade cooperation between China and South Korea

At present, the economic and trade relation between China and South Korea has shown improvement, however it is still unstable, facing the nuclear crisis on the Korean Peninsula and the negative impact of US Asia-Pacific Policy.

Firstly, the vulnerability of political security between China and South Korea still exists. The THAAD issue worsened the political relations between the two countries, resulting in a significant decline in the economic and trade relations between the two countries and greater influence on the public opinion of the two sides.

Secondly, the unstable situation on the Korean Peninsula threatens the stability of the region. On the North Korean nuclear issue, China and the United States insist on the denuclearization of the peninsula, while South Korea regards the unification of the North and the South as a priority and even sees the North Korean nuclear as the common asset of Korean people. At present, the North Korean nuclear issue has eased, and the United States and North Korea are willing to communicate, however North Korea intends to negotiate as a nuclear state. Thus, there may still be local conflicts and wars.

Thirdly, the United States is an important factor affecting the cooperation between China and South Korea. The United States and South Korea are allies, thus may hold aligned positions on many issues. South Korea’s China Policies are usually influenced by the United States, and thus the Sino-USA relations will also affect Korea. In dealing with USA’s trade protection policy, China and South Korea have common interests but also have different political demands.

So far, Trump’s protectionism has affected the global economy as well as the economic and trade cooperation between China and South Korea, but at the same time bring the possibility for China and South Korea to promote a regional free-trade arrangement. China and South Korea can play active roles in promoting regional comprehensive economic partnership (RCEP) negotiations.

III. Seizing the opportunity to promote economic and trade cooperation between China and South Korea

Firstly, transforming cooperation from the traditional fields to the emerging fields. China's economic transformation creates new opportunities for Sino-South Korean cooperation. With the transformation and upgrading of China's economy, China has gradually formed a new pattern of economic structure characterized by simultaneous development of strategic emerging industry and traditional manufacturing industry, mutual promotion of modern service industry and traditional service industry, deep integration of informatization and industrialization. The integrated development of manufacturing and service industries has become the engine of China's economic development. Made in China 2025 emphasizes the development of the top ten key industries: the new information technology industry including integrated circuit and special equipment, information communication equipment, operating system and industrial software; high-end numerical control machines and robots; aerospace equipment; ocean engineering equipment and high-tech ships; advanced rail transit equipment; energy-saving and new energy automobiles; power equipment; agricultural machinery; new materials; biological medicine and high-performance medical apparatus and instruments. South Korea plans to focus on the development of auto-driving, renewable energy, IOT household appliances, semiconductor display screens, bio-health and other emerging industries in the next five years, and thus China and South Korea can expand cooperation in these relevant fields. Sino-South Korean economic cooperation should be shifted from traditional manufacturing to high-end manufacturing, manufacturing service industry and modern service industry. At present, the digital economy is becoming the main way for a new round of industrial cooperation in the world. China and South Korea can enhance industrial cooperation on digital economy and continue to promote cooperation in energy conservation, emission reduction, environmental protection, low-carbon technology and circular economy.

Secondly, exploring the Chinese service market. China's economic transformation and upgrading contain huge demands for service trade. It is estimated that China's total service trade value will reach more than 1 trillion dollars by 2020, accounting for about 10% of global service trade. By 2030, China will become the world's largest importer of services. With the rapid increase of China’s demands for personalized and high-quality services, the two parties can enhance cooperation in modern service industry, promote mutual references in the design of policies and systems, and carry out practical and pragmatic cooperation in specific projects. China should learn from South Korea's well developed operating model of health care, pension, retail and circulation industries.

Thirdly, promoting regional economic integration and maintaining financial stability in Asia. China and South Korea should coordinate the arrangement of multilateral economic and trade agreements in the Asia-Pacific region, consider the actual situation of development stages of different countries, explore pragmatic transitional plans, and gradually move towards high-level economic and trade rules. The China-Japan-South Korea FTA negotiations should be initiated as soon as possible to promote the progress of China-Japan-South Korea FTA, RCEP, CPTPP and FTAAP. At present, influenced by the Fed's increased interest rate and the US dollar appreciation, the global financial market is volatile. Under this context, it is essential to strengthen the financial cooperation among China, Japan and South Korea and improve the Asian financial safety net under the “Chiang Mai Initiative” so as to prevent the financial crisis from staging a comeback.

Fourthly, jointly developing third-party market. China has proposed the “The Belt and Road” initiative and further expanded its openness. China welcomes the participation of South Korea in the construction of the “The Belt and Road” so that China and South Korea can jointly promote the docking of China’s "The Belt and Road" initiative and South Korea’s "New South" and "New North" policy. Actively explore cooperation models for mutual benefit, win-win and common development. In recent years, Chinese enterprises have competed with South Korean enterprises in the international market. Exploring the international market requires not only competition but also cooperation. Market competition brings efficiency improvement, while cooperation can enlarge the market size. At present, complementarity still exists in the industries of China and South Korea. Thus, we should exert comparative advantages to develop third-party market. This will produce the effect of “1 plus 1 plus 1 is more than 3”.

Fifthly, strengthening cooperation between the local governments of China and South Korea. In accordance with the characteristics and needs of each region of the two countries, cooperate in agriculture, industry, science and technology innovation, urban management and other fields. At present, there are hundreds of pairs of friendly cities between China and South Korea, China and Japan and Japan and South Korea, but the overall cooperation level is low, and it remains to be expanded from bilateral cooperation to trilateral cooperation. Mayor's Meeting Mechanism of South Korea’s Busan and Japan’s Fukuoka has been carried out for 13 years, and it is recommended to include appropriate cities of China such as Shanghai to hold regular tripartite mayors' meetings. Industrial cooperation between China and South Korea should rise to city or provincial level compared with the cooperation of industrial parks. Three provinces of Northeast China have a strong willingness to cooperate with South Korea, and South Korea also attaches great importance to this. Thus, it is recommended to strengthen economic and trade cooperation between the three provinces of Northeast China and South Korea.

Sixthly, strengthening Sino-South Korean financial cooperation. Strategic cooperation between the two financial centers, Seoul and Shanghai, should be strengthened. We should strengthen the cooperation of the financial regulators of the two countries, accelerate the formulation of relevant policies and expand the use of local currencies in bilateral trade and investment. For many years, South Korea has maintained a relatively large surplus in its trade with China, which is a very favorable condition to make Seoul an offshore market of Renminbi. It is suggested to give priority to the development of the Renminbi bond business, establish mechanism for Renminbi to return inflow to China, and jointly guard against the risks of violent fluctuation of the US dollar.

Seventhly, expanding folk exchange and giving full play to the role of Chinese and South Korean think tanks. The exchange between the two parties can be expanded through overseas study, tourism, training and so on. Improve the “track two dialogue” mechanism for Chinese and South Korean think tanks. The think tanks of the two countries may jointly hold thematic seminars, economic forums, etc., undertake joint research and strengthen policy communication to reach more consensus and create a good cooperative atmosphere.