Korea recorded a trade deficit with China last year for the first time since the two countries established diplomatic relations in 1992.

It continued to fall from a surplus of $55.6 billion in 2018 and dived into a deficit of $18 billion in 2023.

It is also 1.8 times as much as Korea's overall trade deficit last year. China was the country with which Korea had its largest trade deficit, except for Saudi Arabia, from which Korea imports crude oil.

Meanwhile, Korea had a trade surplus of $45.5 billion with the United States last year. That meant the US gave Korea its largest bilateral trading surplus for the first time since 2002.

Last year, China accounted for 19.7 percent of Korea's exports on an annual basis, outweighing the US’ 18.3 percent and maintaining its status as Korea's largest export market. But the gap between China and the US narrowed from 11.4 percentage points in 2020 to 1.4 percentage points in 2023. Last month, Korea’s exports to the US ($11.3 billion) exceeded those to China ($10.9 billion) for the first time in 20 years.

Changes to Korea's trading landscape have been influenced significantly by changes in the international trade environment such as conflicts between the US and China over supply chains.

Despite the US' Inflation Reduction Act, Korea's car exports to the US increased 44.2 percent year-over-year from January to November last year, as its carmakers secured a sales channel through commercial leases that gives EV buyers tax credits. However the act has put Korea in a disadvantageous position in its exports to China.

Rapidly changing trade relations are feared to leave an adverse aftermath. The Bank of Korea predicted in a recent report that if Korea's trade partners form two confrontational blocs around the US and China and the blocs build up trade barriers against each other and take protectionist measures, Korea’s exports to the two countries could decrease by up to 10 percent. Korea recorded a trade deficit of $9.97 billion last year, according to the Ministry of Trade, Industry and Energy. It is the second straight annual trade deficit. Exports fell 7.4 percent year-on-year last year. It is the first decrease in three years.

For Korea, a country that relies much on international trade for growth, its first trade deficit with China is particularly worrying. The deficit stemmed from China raising its competitiveness quickly in the field of intermediate goods that Korea has exported to the country. China greatly reduced the need to import intermediary goods from Korea by strengthening its domestic manufacturing sector. Now China is making inroads into Korea’s markets by exporting their own intermediate goods. It has striven to reduce the proportion of processing trade by strengthening local manufacturing. Processing trade refers to importing materials and exporting them as finished products after processing or assembly.

China has improved its ability to produce finished products without importing materials, according to a Korea International Trade Association study on the country‘s “export independence” from 2015 to 2022. China’s export independence got better in displays, batteries, car parts and machinery. China dominates the global display and car battery markets.

Korea's increasing dependence on China for materials is a factor that can perpetuate its trade deficit. China recently resumed export curbs on industrial urea to meet its domestic demand first. Korea urgently needs to diversify its trade partners in imports as well as exports.

Korea must face the reality of China's changing industrial structure. Korea is dwarfed by China in terms of natural resources and population. Innovation is the only way for Korea to stay competitive. Korea’s strategic export items such as semiconductors, secondary batteries and electric vehicles will decide the fate of its economy. The country must increase investment and R&D to raise its industrial competitiveness to a level no other country could possibly catch up with.