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Reality of the deficit (KOR)

Nov 21,2019
CHANG CHUNG-HOON
The author is a deputy editor of the industry 2 team of the JoongAng Ilbo.

Trade deficit with Japan fell by 20.6 percent through October compared to the same period last year. The trade deficit from January to October last year was $20.6 billion, but this year, it was $16.3 billion. At this rate, the trade deficit with Japan will be under $20 billion for the first time in 16 years. Among many factors for the decrease in trade deficit with Japan, semiconductor materials, parts and equipment imports have dramatically decreased. The government knows it well and hopes that successfully lowering dependency on Japan would completely change the trade trend.

While I welcome the relief of the trade deficit with Japan, the problem is that the value chain in which Korea, China and Japan are tangled is not simple. Trying to decrease the trade deficit with Japan without changing the industrial structure built over the last 50 years could lead to adverse side effects. Korea has an industrial structure of buying material, parts and equipment from Japan to process and assemble with intermediary materials and sell them to China. So Korea has a $24 billion loss from trade with Japan and makes a $55.7 billion surplus in trade with China, as of 2018.

If imports from Japan decease, exports would decrease as well. Materials, parts and equipment from Japan includes semiconductor, smartphone and 5G equipment.

Korea’s reality is that semiconductors or 5G smartphones cannot be made without importing wafers or antennas for 5G.

If you look deep into the government’s trade statistics, you’ll see some of the complexities. The semiconductor industry purchases photoresists, fluoride gas and fluorine polyimide from China, Taiwan and Belgium instead of Japan. But many in the semiconductor industry know that Japanese companies are hidden behind the materials, parts and equipment coming from China, Taiwan and Belgium. Because of the 2011 East Japan earthquake, some Japanese companies moved their factories abroad to avoid risk. It is no exaggeration that the Korean semiconductor industry is taking advantage of it.

Swept up in the cause of reducing the trade deficit with Japan and pursuing domestic production is half of the effort. The government’s priority is localizing 100 items by investing 2 trillion won ($1.7 billion) a year through 2024. While the localization of materials, parts and equipment is strongly pushed, what’s more important is to be better at processing and assembling semiconductors, smartphones, 5G equipment and machinery, which Korea is good at.

After all, not all parts, material and equipment can be localized anyway. I fear the situation after we miss what we are good at after wasting time reducing the trade deficit with Japan or localizing parts, materials and equipment. The processing and assembly technology that Korea takes pride in is being chased by China.

JoongAng Ilbo, Nov. 20, Page 32