Let the Good Times Roll: China’s Growing Influence in South Korea

Xi Jinping’s recent visit to Seoul was remarkable for a number of reasons. It was the first in which a Chinese president visited the South before the North, no doubt a thread which the Kim regime took note. It also highlighted both leaders’ distaste and distrust for neighboring Japan. But, perhaps most importantly, it reinforced the strong economic relationship between China and South Korea.  Indeed, there are few countries in the world that have benefited more from China’s economic transformation than the ROK. China has been South Korea’s largest trading partner for years, and both countries are seeing myriad possibilities for deeper economic and financial ties, including the possible conclusion of their bilateral FTA this year.

In this post, we will try to quantify China’s present commercial relationship with Korea and lay out areas in which the two countries are forming closer ties in the face of a complex geopolitical environment. In many ways, South Korea’s drift further towards China’s economic center of gravity is a very real prospect and perhaps inevitable. However, the diplomatic tea leaves are much harder to read: general South Korean public sentiment towards China is warming, but remains discomforted by the increasing dependence on a partner that does not consider their country’s interest, supports the North Korean regime, and engages in less-than-benign territorial disputes with neighboring countries.

Trade and Investment

Bilateral trade between China and South Korea has increased markedly over the past decade. Since the early 2000’s China has been South Korea’s top partner in total merchandise trade, commanding a sizeable advantage over other major countries (Exhibit 1). In 2013, South Korea’s total trade with China – $83 billion in imports and $146 billion in exports – was more than its total combined trade with the United States and Japan.

China Korea CEW - Figure 1

Of course, the above picture is muddled by the fact that China and South Korea trade in a comparatively large amount of re-exported/imported intermediate products which are subject to double-counting. If we compare trade in value added goods, a statistical technique designed to strip out the intermediate inputs that are imported from other countries, South Korea’s trade relationships look somewhat different. As of 2009, ROK-US trade still appeared more important than that with China in purely value-creation terms according to the OECD-WTO (Exhibit 2). However, this is changing: value added trade between China-ROK expanded noticeably over the 2005 – 2009 period observed, while that with Japan and the United States remained static or declined. With a few years since release of the latest figures, it is not hard to surmise that further gains may already rival US-ROK levels.

China Korea CEW - Figure 2

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