Squeezed by China and Japan, Korea Is Rethinking Export Policy

Shipments from export powerhouse South Korea have been falling all year, and it may have as much to do with the increasing sophistication of Chinese companies as it does to Japanese rivals exploiting the weaker yen.

As Chinese manufacturers move up the value chain, they compete more with Korean companies in global markets, and import fewer of the components and intermediate goods that account for two-thirds of Korea’s sales to its larger neighbor. That’s a big concern for policy makers in Seoul, given that China is the country’s largest export market and sales abroad account for about half of Korea’s gross domestic product.

The government unveiled an export-support package Thursday that aims to help businesses open channels to sell more consumer products in China, while also offering financial aid to firms hurt by currency movements in global markets. The package builds on earlier measures announced in April that provide trade insurance, marketing assistance and help small companies to link with Chinese e-commerce firms.

“We’re in a situation where companies in developed countries are gaining price competitiveness because of cheaper currencies, while Chinese firms have caught up with our technologies,” said Park Il Jun, assistant minister for industrial policy at the trade ministry. “China’s gone from being just a factory for the world to also being a market, and this has implications to South Korea exporters.”

Cosmetics Exports

The Korea Trade-Investment Promotion Agency, known as Kotra, estimates that 68 percent of sales to China were intermediate goods in 2014, while consumer products accounted for just 4 percent. Most of the remainder was capital goods.

The success of Korean cosmetics sales in China demonstrates the potential for growth in some products, said Chung Hwan Woo, a researcher at Kotra. Cosmetics sales to China jumped 94 percent last year to $494 million, data compiled by Kotra show.

The government will offer certificates of authenticity targeting Chinese consumers that show products are “made in Korea,” according to a statement Thursday.

The government and private industry will together invest 6.8 trillion won by 2018 to support sectors such as organic light emitting diodes and manufacturing robots, the statement showed.

In April, the trade ministry released a list of promising items to sell to China, ranging from air purifiers to robot vacuum cleaners.

Korean exports shrank 1.8 percent in June from a year earlier, following a near 11 percent drop in May. The government forecasts shipments to fall 1.5 percent this year, while imports drop 7 percent.

Technology Gap

The level of technology in 120 key areas across the Korean economy was 78.4 percent that of the U.S. in 2014, while China was 69.7 percent, according to the Korea Institute of S&T Evaluation and Planning. The gap between Korea and China in information technology narrowed to 1.8 years in 2014, from 2.4 years in 2012, a report from the institute showed.

Xiaomi Corp. overtook Samsung Electronics Co. as China’s top smartphone vendor last year, and plans to start selling this month in Brazil, a market where the Korean company also competes.

On top of changes in China and currency movements, slower global growth is also crimping Korean exports. The World Bank in June cut its forecast for global expansion to 2.8 percent, from 3 percent estimated in January.

“The currency is only one of a number of factors that affect South Korean exports,” said Chang Jae Chul, a Seoul-based economist for Citigroup Inc. “With China trying to reduce processing trade, produce more goods it used to import, and slower global growth being the new paradigm, we may no longer experience the level of export growth we saw in the past.”

Related News and Information: South Korean Exports Fall for 6th Month as Global Demand Slows

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