China in Transition

Why South Korea Does Not Perceive China to be a Threat

Chi Hung KWAN
Consulting Fellow, RIETI

Quite some time has passed since China's economic development was first deemed to be a threat to Japan - a phenomenon I call the China Syndrome - as heard in the argument that China is the main cause of deflation in Japan. In contrast, neighboring South Korea has actively pursued economic exchange with China, viewing the latter's rise as a business opportunity. The industrial structures of Japan and South Korea are similar, and they are both geographically close to China, so why are their reactions so different?

Ever since China and South Korea normalized ties in 1992, trade and direct investment between the two countries have expanded rapidly. According to South Korean statistics, South Korea's trade with China came to $41.2 billion in 2002, making China South Korea's third largest trading partner after the United States and Japan. Meanwhile, direct investment in China, as reported by the Korean government, totaled $1.72 billion during the same year. This constitutes 34 percent of South Korea's total outward foreign direct investment, and has overtaken the U.S. to the No. 1 spot. According to Chinese statistics, which include local reinvestment, South Korea's investment in China came to an even larger $2.7 billion in 2002. Although South Korea's trade and investment vis-a-vis China is a far cry from Japan's in absolute terms, it is much higher in relation to gross domestic product, and it is clear that South Korea is more closely linked to the Chinese economy than is Japan. ( table )

Table : Comparison of South Korea's and Japan's trade and direct investment in China (2002)

Table: Comparison of South Korea's and Japan's trade and direct investment in China   (2002)

(Source)Trade and GDP figures are official South Korean and Japanese statistics, and direct investment figures are Chinese statistics on an implementation basis.

South Korean firms have entered the Chinese market through direct investment. In fact, much of South Korea's exports to China are raw materials, parts and materials supplied to South Korean firms that have set up operations in China. Although it was mostly South Korean small and medium-sized enterprises in labor-intensive industries that initially entered the Chinese market, such major corporate groups such as Hyundai, Samsung and LG made their own advances beginning in the latter half of the 1990s. In line with such moves, South Korea's working population is shifting from the industrial sector to the service sector, such as the information sector. In this way, South Korea is advancing its economy by transferring declining industries to China while focusing on nurturing new industries.

But despite the fact that the Chinese economy has stronger ties with South Korea than with Japan, few people in South Korea perceive China as a threat - on the contrary, South Korea perceives China's growth as an opportunity. One reason for this is said to be because South Korea has consistently logged a trade surplus with China, while Japan has a trade deficit. However, when we consider the fact that there is absolutely no criticism in the U.S. that China's rise is leading to a hollowing out of U.S. industry, despite an annual trade deficit of some $100 billion with China, this explanation is not convincing.

Rather, it is more likely that the China Syndrome in Japan and the optimism seen in South Korea merely reflect the difference in the economic situations of the two countries. While the prospects for Japan's recovery from the lost decade following collapse of the bubble economy remain uncertain, South Korea is still in good shape after overcoming the currency crisis through comprehensive structural reforms, thanks to such factors as growth in the information technology sector. South Korea saw economic growth of 6.4 percent in 2002, and although this could not match China's 8.0 percent, it was much better than Japan's 0.3 percent. A return of economic growth may therefore be a prerequisite for Japan to overcome its China Syndrome.

April 18, 2003

April 18, 2003