The Impact of Chinese Economic Structural Changes on Korea’s Exports to China*

Abstract

We examine the structural changes of the Chinese economy and analyse how those changes have affected Korea’s exports to China. Focusing on the evolution of Chinese development strategy and the changing role of China in global value chain during 2000s, we separate the role of Chinese external demand and domestic demand in Korea’s exports to China. We also shed light on the driving force among Chinese GDP expenditure components in Korea’s exports to China for different periods of time. The subsample analysis shows that Chinese external demand had a significant impact on Korea’s exports to China before 2008, while Chinese domestic demand became important afterwards. More specifically, we find that Chinese investment is the most dominant expenditure component in determining Korea’s exports to China in recent times.

KEYWORDS:

• Chinese structural changes
• Korea’s exports to China
• VAR

Subject classifications:

• F10
• F14

Acknowledgments

We would like to thank the two anonymous reviewers for their suggestions and comments. All remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Choi and Xu (2020) find that China trade shock on Korea led to a net increase in 0.52 million jobs. They identify that the increase was mainly driven by China’s rising demand for intermediate inputs and capital goods from Korea.

2 Chinese real GDP growth fell from 14.2% in 2007 to 9.8% in 2008 and reached 5.9% in 2019

3 Examining the three components of expenditure from 2004 to 2009, Knight and Wang (2011) point out China’s “expenditure imbalance.” Chinese consumption is close to 50% and investment is over 40% of GDP, while consumption generally comprises two-thirds or more and investment one-third or less of GDP in other countries.

4 Yu and Tian (2012) find that Korea ranks first, with a 14.97% share of China’s processing imports, followed by Hong Kong, Macao, Japan, and Taiwan in 2010.

5 Haltmaier et al. (2007) define “parts and components” by comprehensively extending and modifying the classification suggested by Athukorala (2005).

6 Kim and Choi (2010) estimate a VAR model with Chinese GDP, real exchange rates, and Korean exports to China. They extend the model by considering Chinese real exchange rates and Korean real exchange rates separately so that the price effect of Chinese real exchange rates on Chinese GDP may be reflected indirectly.

7 For a robustness check, PPP indices to construct the real exchange rates are used; the empirical results are qualitatively the same.

8 The response of variables are short-spanned in figure 6–11 since VAR model are estimated with first-differenced variables for stationarity. The impact on the level of Korea’s exports to China persists for prolonged period. (Shown in Appendix)

9 Ianchovichina and Walmsley (2005) and Eichengreen et al. (2007) find that Japan and newly industrialized economies (Korea, Singapore, Taiwan, and Hong Kong) benefited from China’s WTO accession by positioning themselves well as important intermediate goods suppliers for China’s increasing exports.

10 Han and Lee (2012) find that the increase in Korean firms’ investments in China intensifies vertical intra-industry trade between the two countries, as it is associated with production fragmentation.

11 Cui and Syed (2007) document the delinking of Chinese imports from exports, using disaggregated trade data.

12 MTI is the system of classification which Ministry of Trade and Industry bundles several HS codes of similar types and give codes and item names

Additional information

Notes on contributors

Kotbee Shin

Kotbee Shin is a lecturer at the department of Economics of Chungnam National University. Her research interest lies in empirical macroeconomics and Bayesian estimation. Her recent works focus on the role of adaptive expectations on exchange rate dynamics in New Open Economic Model and US–China/China–Korea trade relationship from the macroeconomic perspectives.

Bo-Young Choi

Bo-Young Choi is an assistant professor at the School of Economics & International Trade of Kyungpook National University. Her fields of research are international trade and industrial organization. Her recent publication includes ‘Does Real Exchange Rate Depreciation Increase Firm Productivity?: Analysis using Korean Firm-Level Data’ with Ju Hyun Pyun (World Economy, 2017).