According to conventional wisdom, South Korea is caught between its long-term ally, the United States, and its largest trading partner, China. Though South Korea cooperates with the United States for a great deal of its security, including its extended nuclear deterrence, China and Hong Kong accounted for 23.7 percent of South Korean exports in 2023.
Because of this, South Korea is often portrayed as hopelessly and dangerously dependent on China for its trade and even its economic survival. Though this view of the South Korean economy and trade position is compelling, it is wrong.
According to conventional wisdom, South Korea is caught between its long-term ally, the United States, and its largest trading partner, China. Though South Korea cooperates with the United States for a great deal of its security, including its extended nuclear deterrence, China and Hong Kong accounted for 23.7 percent of South Korean exports in 2023.
Because of this, South Korea is often portrayed as hopelessly and dangerously dependent on China for its trade and even its economic survival. Though this view of the South Korean economy and trade position is compelling, it is wrong.
The economic relationship between South Korea and China is better characterized as one of asymmetric interdependence: The two countries are dependent on each other, even if the sheer size of the Chinese economy means that South Korea relies more on its trade partner than vice versa.
This matters profoundly for South Korean foreign policy because it means that Seoul does not have to hedge between Beijing and Washington in a bid to preserve economic relations with China, as some analysts posit.
The idea is catching on in South Korea, where a growing number of policymakers and businesspeople have quietly moved away from the view that their country or their firms are irremediably dependent on China. The result is that Seoul has become bolder in siding with Western countries and challenging China when its interests are at stake.
The situation looked different not long ago. In 2015, under President Park Geun-hye, South Korea signed a free trade agreement with Beijing. By 2018, exports to China and Hong Kong peaked at 34.4 percent of South Korea’s total. South Korean investment in China had declined from the record numbers registered in the 2000s, but flows remained steady as South Korean firms continued to outsource manufacturing to their lower-cost neighbor.
Meanwhile, the number of Chinese tourists in South Korea hit a high mark in 2016, when roughly half of the 16 million foreign visitors to the country came from China. In short, China was providing both the growing market and the cheaper production base for South Korean firms, as well as a significant boost to tourism, which is an increasingly important sector for the South Korean economy.
Today, not only has South Korea’s share of exports to China declined, but South Korean investment in its neighbor has also plummeted as firms look for less politically charged manufacturing locations. In fact, the United States became South Korea’s top foreign investment destination in 2023, attracting a record 43.7 percent of the country’s total overseas investment, as South Korean firms sought to take advantage of the U.S. Inflation Reduction Act and CHIPS and Science Act. And while China remains the largest source of foreign tourists in South Korea, they now account for fewer than 30 percent of the country’s visitors.
Ultimately, the economic relationship between South Korea and China is becoming more balanced, and Seoul cannot simply be described as dependent on its neighbor.
Why has this relationship shifted? At the risk of oversimplifying, the answer lies in chips. In the 1960s, South Korea began assembling semiconductors for foreign firms. Buoyed by huge investment from the public and private sectors, in the 1980s South Korea started to manufacture its own DRAM chips. It became one of the few countries with firms able to develop and manufacture NAND flash memory chips in the 2010s. Today, Samsung and SK Hynix compete at the cutting edge of an industry upended by the artificial intelligence boom.
In recent years, semiconductor shipments—including chips themselves, as well as manufacturing equipment, materials and parts, and silicon wafers—have accounted for between 20 and 25 percent of South Korean exports by value annually. In 2024, China and Hong Kong accounted for over 51 percent of South Korea’s semiconductor exports, an indicator that might seem to suggest that South Korea could be dependent on the Chinese market.
The reality is that Chinese firms buy South Korean semiconductors not because of U.S-China competition, to gain leverage over Seoul, or out of the goodness of their hearts. They buy South Korean semiconductors because they need them. This is not going to change anytime soon: Chinese chipmakers are at least two or three generations behind their South Korean, Taiwanese, and U.S. competitors. And due to U.S. sanctions that prevent the export of the most advanced chips to China or their manufacturing there, Chinese firms are unlikely to catch up with South Korean firms anytime soon. China also relies on South Korea in other sectors where the latter has a technological edge, such as hydrogen-fueled ships, humanoid robots, and electronic displays.
In areas such as AI, hybrid vehicles, solid-state electric batteries, or 6G, in which South Korean firms compete against Chinese counterparts (among others), U.S. sanctions and export controls imposed on China could help Korean companies gain a competitive advantage, as is already happening with chips. This would exacerbate the interdependence of South Korea and China’s relationship, with Chinese firms seeking to acquire technologies from South Korean peers that they are unable to develop themselves.
This relationship of interdependence is also the result of South Korean firms dramatically decreasing their investment in China. For years, investment in China by South Korean conglomerates allowed Chinese manufacturers to rapidly acquire new technologies, especially in the semiconductor and display industries.
The tide turned in 2012, when China targeted Japanese carmakers in the wake of a dispute over the Senkaku Islands (which China calls the Diaoyu), triggering a boycott among Chinese consumers. This taught South Korea an important lesson: For China, politics trumped economic ties—even for a neighbor as important as Japan. South Korean firms began shifting investment away from China. Most notably, South Korea and Vietnam signed a free trade agreement in 2015, making Vietnam a preferred investment destination for South Korean firms. Seoul later went on to sign bilateral trade agreements with other Southeast Asian countries, such as Cambodia, Indonesia, and the Philippines.
Another crucial turning point came in 2016, when Park announced that South Korea would deploy the U.S. THAAD anti-missile system to strengthen its deterrence against North Korea. Beijing, however, complained that it could be used to spy on Chinese missile tests and retaliated with informal economic sanctions. These failed to influence the Seoul, which moved ahead with deployment; eventually, Beijing backed down and quietly removed the sanctions. Though China intended for its retaliation to be a display of its economic coercion abilities, it only helped accelerate South Korea’s shift away from trade and investment ties.
The realization that South Korea could pursue its preferred policy and withstand Chinese economic retaliation allowed Seoul to become bolder in its relationship with Beijing in recent years. In 2021, then-South Korean President Moon Jae-in joined the leaders of 13 other countries in asking for further investigation by the World Health Organization into the origins of the COVID-19 pandemic. The same year, he signed a joint statement with then-U.S. President Joe Biden in which South Korea, for the first time, called for “peace and stability in the Taiwan Strait.” Both moves displeased China.
In 2022, South Korea voted in favor of the U.N. Human Rights Council debating the human rights situation in Xinjiang. South Korean President Yoon Suk-yeol’s administration also publicly sparred with Xing Haiming, the provocative Chinese ambassador to South Korea, whom Beijing later removed from his posting in an attempt to improve relations with Seoul.
If this doesn’t sound like the policy of a country afraid of economic retaliation from China, it’s because South Korea doesn’t see itself as dependent on its neighbor. South Korea has cards to play in its relationship with China, and economic interdependence—even if asymmetric—is one of them.
South Korean policymakers understand that full-blown economic or diplomatic confrontation with China is not in their country’s interests. Shortly before Yoon’s impeachment last year, for example, his government sought to patch up strained relations with China, including a summit with Chinese President Xi Jinping on the sidelines of the November Asia-Pacific Economic Cooperation summit, where Yoon described China as an “important country” for cooperation. But as former South Korean Foreign Ministers Kang Kyung-wha and Park Jin have indicated, Seoul should be more assertive and mature in its foreign policy and not simply at the mercy of great powers—particularly Beijing.
In this respect, South Korea’s use of its economic strengths to withstand coercion from China could serve as a template for other middle powers worried about retaliation from the world’s second-largest economy. Australia, with its abundance of natural resources; Germany, with its manufacturing strengths; and Japan, with its technological prowess, all have leverage in their relationships with China. They, too, can counter Beijing’s economic actions and survive without bending the knee to the Chinese market.
The post South Korea Has More Leverage Over China Than You Think appeared first on Foreign Policy.
