Reality Check: South Korea and China Face More Complex Economic Dynamics – The Diplomat

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Domestic, bilateral, and global trends are combining to reshape China-South Korea trade for the long term. 
On May 27, Chinese Premier Li Qiang vowed a “new start” in a trilateral summit with South Korean and Japanese leaders, where they reached a general consensus on future cooperation in various areas. While this “refresh” could be a positive sign for South Korea and China to improve their economic ties, evolving bilateral dynamics, intensifying geopolitical tension, an uncertain Chinese economy, and a more competitive relationship in the global value chain pose serious challenges for two countries’ economic relations.
Evolving Economic Ties  
China has been South Korea’s most vital trade partner for the past decade. This remains true despite the THAAD controversy in 2017 – when Seoul agreed to deploy the U.S. missile defense system, and Beijing responded with economic coercion. The episode undermined China-South Korea ties, and several sectors including automotive, retail, tourism, and entertainment suffered, yet the two economies remain highly integrated.
Recently, however, South Korea’s economic ties with China have waned. Since the pandemic, this relationship has notably retracted. China’s share of South Korea’s total exports has fallen from 25.9 percent in 2020 to 19.7 percent in 2023, according to the Korea Customs Service, while exports to the U.S. increased from 14.5 percent to 18.3 percent during the same period.
At one point in 2023, South Korea’s export share to the U.S. surpassed the one to China, the first time in two decades (see Figure 1 below). In 2024, South Korea’s export share to the United States (19.3 percent) even surpassed China (18.8 percent) for the whole quarter.

In addition, South Korean foreign direct investment (FDI) in China in 2023 also dropped significantly, down to about one-fifth of its 2022 level, while the FDI in the U.S. surged by approximately 180 percent compared to 2020. In 2023, South Korean investment in the United States was nearly 15 times larger than its investment in China (see Figure 2). This was also the first time since 1992 that China was excluded from South Korea’s top five destinations for outbound FDI.

These shifts prompt three vital questions: What drives these changes? Are they long-term structural shifts or a short-term blip? What does this mean for the future of China-South Korea economic relations?
Key Driving Forces
In 2023, semiconductors accounted for 20.7 percent of South Korea’s total exports, the highest among its industries. System semiconductors and memory semiconductors constituted 33.8 percent and 29.2 percent, respectively, of the total semiconductor exports.
One major factor contributing to South Korea’s declining exports to China is the decreasing semiconductor exports in the past two years due to cyclical market demand and China’s increasing self-sufficiency in semiconductors (although the market has witnessed rebounds for the past seven months). In 2023, South Korea’s semiconductor exports to China hit their lowest level since 2016, and memory exports fell to their lowest since 2019 (see Figure 3).

Moreover, the 2017 THAAD controversy, China-U.S. trade war commencing in 2018, and supply chain disruption during the pandemic have reshaped the trade ties between South Korea and China. These events have underscored the increasing geopolitical risk and the vulnerabilities within the global supply chain, prompting Korean firms to pursue greater diversification from China, shifting focus toward the U.S., ASEAN, and Europe since 2013, offsetting the reduced share of exports to China (as shown in Figure 1).
China’s economic slowdown also contributed to South Korea’s decreasing exports to the country as its domestic demand has been weak, stemming from several factors such as limited government stimulus measures, a real estate crisis, high youth unemployment rates, and low market confidence.
This uncertain economic landscape has complicated the calculus for South Korean companies and led them to adopt a more cautious investment approach. In 2023, South Korea’s FDI into China plummeted by 78 percent. This aligned with broader international sentiment toward China, as previous data reported China’s record-low inflow FDI. On top of that, China’s volatile economic policy during the pandemic, coupled with perceived insufficient market support has further compounded the uncertainties among South Korean investors.
China’s evolving regulatory environment with a greater emphasis on national security has also raised concerns among South Korean investors. Although Chinese President Xi Jinping has advocated for a “pro-business China” to attract foreign investment and refine its global image, recent legislations and actions toward foreign business have cast more doubt on China’s business environment.
For South Korean firms, particularly high-tech FDI contributors in China like Samsung and SK Hynix, the most concerning but predictable factor is the sustaining tension on trade and technology between the two superpowers. As the geopolitical risk in strategic sectors increases and is expected to escalate, South Korean firms have re-evaluated and halted their investment in China. Instead, major tech companies are investing in the United States to reap the benefits of industrial incentives provided by the CHIPS and Science Act and Inflation Reduction Act, as well as sidestep geopolitical backlash.
This shift is evident in the growing investment in semiconductor and clean energy and the significant decline in South Korean high-tech investment in China. Specifically, South Korea’s semiconductor investment in China witnessed a 99.8 percent year-on-year decrease in 2023.
China’s Move Up in the Global Value Chain
Another major factor is China’s rise in the global value chain, which has shifted its economic relationship with South Korea from complementary to competitive. According to McKinsey, China’s share in the global manufacturing industry has increased from 19 percent in 2010 to 34 percent in 2023. China also recently claimed it has achieved 86 percent of the goals of “Made in China 2025.”
This change has led to increased competition in semiconductors – the most pivotal South Korean export and investment in China. Although South Korean chipmakers still lead in high-end logic and memory chips, China is gaining ground in the low-end market. Since 2015, China's share of South Korea’s logic and memory chip exports has diminished. China used to represent nearly 70 percent of South Korea’s integrated circuits (ICs) exports and close to 80 percent of its memory exports in 2015. However, these figures diminished to 57 percent and 73 percent in 2023, the lowest since 2015 (see Figure 4), amid the dwindling exports of DRAM and Flash memory over the past five years.

While South Korean firms remain dominant in cutting-edge memories globally and ahead of Chinese memory makers, Chinese companies like Yangtze Memory Technologies Co. (YMTC) and ChangXin Memory Technologies (CXMT) are gradually improving their memory technologies and production, albeit slowly, to compete for market share against Korean firms in China
Emerging competitors like Semiconductor Manufacturing International Corporation (SMIC), CXMT, and YMTC have continually expanded their production and refining technologies despite increasing restrictions from the United States. Coupled with the Chinese government’s push for domestic firms to acquire more Chinese chips, these companies are poised to gradually capture more market share in logic and memory semiconductors, challenging South Korean firms.
Beyond the semiconductor industry, Chinese tech firms have intensified competition with South Korean firms in the mobile phone, EVs, and battery sectors. A 2023 report has suggested that the sales of 113 big Korean companies have dropped by 13.1 percent since 2016.
Considering these developments, it is hardly surprising that South Korean companies are becoming reluctant to invest in China, especially those in high-tech sectors, due to concerns about market potential, increasing competition, existing and potential U.S. restrictions, rising operation costs, commonly cited intellectual property, and technology leakage. There might also be concerns that high-tech FDI could inadvertently strengthen China’s high-tech sector, enhancing its future competitiveness.
A Structural Shift Rather Than a Short Blip
These changes indicate a structural shift rather than a short-term blip in China-South Korea trade for two main reasons.
First, the competitive economic ties between China and South Korea are set to intensify. China is expected to ascend further in the global value chain, driven by a Chinese government that has increasingly emphasized technology's role in the country’s national strategy and is likely to place it as top priority after the Third Plenum in July.
Second, South Korean firms are expected to continue diversification efforts to manage the increasing risks in geopolitics and supply chain in years to come, especially amid the sustained China-U.S. tensions with the risk of further escalation. Admittedly, one factor that remains unknown and debatable in the equation of this relationship is the prospect of the Chinese economy – a pivotal factor that impacts the two countries’ economic cooperation.
While this economic relationship has entered a more difficult phase, it remains vital to both countries. For instance, a May survey revealed that most Chinese and South Korean business leaders consider economic cooperation necessary.
Policymakers in Beijing and Seoul clearly understand the importance of managing this bilateral economic tie and have taken some initial steps seeking to navigate the current dilemma. Two countries have recently resumed the second phase of negotiation for the ROK-China FTA which has been halted since 2015, and the Korea-China Investment Cooperation Committee after its suspension in 2011. Beyond resuming existing dialogue, two sides also established the “Korea-China 2+2 Diplomatic and Security Dialogue” and the “Korea-China Export Control Dialogue.” Yet, it remains unclear how effective these dialogues can be in improving bilateral ties.
In the end, though it is unrealistic to expect China-South Korea economic ties to be as vibrant as they were in the 2010s, the two economies are likely to remain fairly integrated.
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On May 27, Chinese Premier Li Qiang vowed a “new start” in a trilateral summit with South Korean and Japanese leaders, where they reached a general consensus on future cooperation in various areas. While this “refresh” could be a positive sign for South Korea and China to improve their economic ties, evolving bilateral dynamics, intensifying geopolitical tension, an uncertain Chinese economy, and a more competitive relationship in the global value chain pose serious challenges for two countries’ economic relations.
Evolving Economic Ties  
China has been South Korea’s most vital trade partner for the past decade. This remains true despite the THAAD controversy in 2017 – when Seoul agreed to deploy the U.S. missile defense system, and Beijing responded with economic coercion. The episode undermined China-South Korea ties, and several sectors including automotive, retail, tourism, and entertainment suffered, yet the two economies remain highly integrated.
Recently, however, South Korea’s economic ties with China have waned. Since the pandemic, this relationship has notably retracted. China’s share of South Korea’s total exports has fallen from 25.9 percent in 2020 to 19.7 percent in 2023, according to the Korea Customs Service, while exports to the U.S. increased from 14.5 percent to 18.3 percent during the same period.
At one point in 2023, South Korea’s export share to the U.S. surpassed the one to China, the first time in two decades (see Figure 1 below). In 2024, South Korea’s export share to the United States (19.3 percent) even surpassed China (18.8 percent) for the whole quarter.

In addition, South Korean foreign direct investment (FDI) in China in 2023 also dropped significantly, down to about one-fifth of its 2022 level, while the FDI in the U.S. surged by approximately 180 percent compared to 2020. In 2023, South Korean investment in the United States was nearly 15 times larger than its investment in China (see Figure 2). This was also the first time since 1992 that China was excluded from South Korea’s top five destinations for outbound FDI.

These shifts prompt three vital questions: What drives these changes? Are they long-term structural shifts or a short-term blip? What does this mean for the future of China-South Korea economic relations?
Key Driving Forces
In 2023, semiconductors accounted for 20.7 percent of South Korea’s total exports, the highest among its industries. System semiconductors and memory semiconductors constituted 33.8 percent and 29.2 percent, respectively, of the total semiconductor exports.
One major factor contributing to South Korea’s declining exports to China is the decreasing semiconductor exports in the past two years due to cyclical market demand and China’s increasing self-sufficiency in semiconductors (although the market has witnessed rebounds for the past seven months). In 2023, South Korea’s semiconductor exports to China hit their lowest level since 2016, and memory exports fell to their lowest since 2019 (see Figure 3).

Moreover, the 2017 THAAD controversy, China-U.S. trade war commencing in 2018, and supply chain disruption during the pandemic have reshaped the trade ties between South Korea and China. These events have underscored the increasing geopolitical risk and the vulnerabilities within the global supply chain, prompting Korean firms to pursue greater diversification from China, shifting focus toward the U.S., ASEAN, and Europe since 2013, offsetting the reduced share of exports to China (as shown in Figure 1).
China’s economic slowdown also contributed to South Korea’s decreasing exports to the country as its domestic demand has been weak, stemming from several factors such as limited government stimulus measures, a real estate crisis, high youth unemployment rates, and low market confidence.
This uncertain economic landscape has complicated the calculus for South Korean companies and led them to adopt a more cautious investment approach. In 2023, South Korea’s FDI into China plummeted by 78 percent. This aligned with broader international sentiment toward China, as previous data reported China’s record-low inflow FDI. On top of that, China’s volatile economic policy during the pandemic, coupled with perceived insufficient market support has further compounded the uncertainties among South Korean investors.
China’s evolving regulatory environment with a greater emphasis on national security has also raised concerns among South Korean investors. Although Chinese President Xi Jinping has advocated for a “pro-business China” to attract foreign investment and refine its global image, recent legislations and actions toward foreign business have cast more doubt on China’s business environment.
For South Korean firms, particularly high-tech FDI contributors in China like Samsung and SK Hynix, the most concerning but predictable factor is the sustaining tension on trade and technology between the two superpowers. As the geopolitical risk in strategic sectors increases and is expected to escalate, South Korean firms have re-evaluated and halted their investment in China. Instead, major tech companies are investing in the United States to reap the benefits of industrial incentives provided by the CHIPS and Science Act and Inflation Reduction Act, as well as sidestep geopolitical backlash.
This shift is evident in the growing investment in semiconductor and clean energy and the significant decline in South Korean high-tech investment in China. Specifically, South Korea’s semiconductor investment in China witnessed a 99.8 percent year-on-year decrease in 2023.
China’s Move Up in the Global Value Chain
Another major factor is China’s rise in the global value chain, which has shifted its economic relationship with South Korea from complementary to competitive. According to McKinsey, China’s share in the global manufacturing industry has increased from 19 percent in 2010 to 34 percent in 2023. China also recently claimed it has achieved 86 percent of the goals of “Made in China 2025.”
This change has led to increased competition in semiconductors – the most pivotal South Korean export and investment in China. Although South Korean chipmakers still lead in high-end logic and memory chips, China is gaining ground in the low-end market. Since 2015, China's share of South Korea’s logic and memory chip exports has diminished. China used to represent nearly 70 percent of South Korea’s integrated circuits (ICs) exports and close to 80 percent of its memory exports in 2015. However, these figures diminished to 57 percent and 73 percent in 2023, the lowest since 2015 (see Figure 4), amid the dwindling exports of DRAM and Flash memory over the past five years.

While South Korean firms remain dominant in cutting-edge memories globally and ahead of Chinese memory makers, Chinese companies like Yangtze Memory Technologies Co. (YMTC) and ChangXin Memory Technologies (CXMT) are gradually improving their memory technologies and production, albeit slowly, to compete for market share against Korean firms in China
Emerging competitors like Semiconductor Manufacturing International Corporation (SMIC), CXMT, and YMTC have continually expanded their production and refining technologies despite increasing restrictions from the United States. Coupled with the Chinese government’s push for domestic firms to acquire more Chinese chips, these companies are poised to gradually capture more market share in logic and memory semiconductors, challenging South Korean firms.
Beyond the semiconductor industry, Chinese tech firms have intensified competition with South Korean firms in the mobile phone, EVs, and battery sectors. A 2023 report has suggested that the sales of 113 big Korean companies have dropped by 13.1 percent since 2016.
Considering these developments, it is hardly surprising that South Korean companies are becoming reluctant to invest in China, especially those in high-tech sectors, due to concerns about market potential, increasing competition, existing and potential U.S. restrictions, rising operation costs, commonly cited intellectual property, and technology leakage. There might also be concerns that high-tech FDI could inadvertently strengthen China’s high-tech sector, enhancing its future competitiveness.
A Structural Shift Rather Than a Short Blip
These changes indicate a structural shift rather than a short-term blip in China-South Korea trade for two main reasons.
First, the competitive economic ties between China and South Korea are set to intensify. China is expected to ascend further in the global value chain, driven by a Chinese government that has increasingly emphasized technology's role in the country’s national strategy and is likely to place it as top priority after the Third Plenum in July.
Second, South Korean firms are expected to continue diversification efforts to manage the increasing risks in geopolitics and supply chain in years to come, especially amid the sustained China-U.S. tensions with the risk of further escalation. Admittedly, one factor that remains unknown and debatable in the equation of this relationship is the prospect of the Chinese economy – a pivotal factor that impacts the two countries’ economic cooperation.
While this economic relationship has entered a more difficult phase, it remains vital to both countries. For instance, a May survey revealed that most Chinese and South Korean business leaders consider economic cooperation necessary.
Policymakers in Beijing and Seoul clearly understand the importance of managing this bilateral economic tie and have taken some initial steps seeking to navigate the current dilemma. Two countries have recently resumed the second phase of negotiation for the ROK-China FTA which has been halted since 2015, and the Korea-China Investment Cooperation Committee after its suspension in 2011. Beyond resuming existing dialogue, two sides also established the “Korea-China 2+2 Diplomatic and Security Dialogue” and the “Korea-China Export Control Dialogue.” Yet, it remains unclear how effective these dialogues can be in improving bilateral ties.
In the end, though it is unrealistic to expect China-South Korea economic ties to be as vibrant as they were in the 2010s, the two economies are likely to remain fairly integrated.
Ray Wang is a DC-based analyst and foreign affairs analyst formerly based in Taipei and Seoul. His pieces have appeared in Nikkei Asia, The National Interest, The Diplomat, and The China Project, among others. Wang is a Master of Science in Foreign Service candidate at Georgetown University.  
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