It's imperative to encourage companies to invest more in R&D
South Korea's trade deficit with Japan amounted to $20.84 billion last year, up from the $19.16 billion recorded in 2019 when Seoul's trade shortfall with Tokyo fell below $20 billion for the first time since 2003. In 2020, South Korea posted its largest trade deficit with the Middle East owing to oil imports ― its deficit with Japan was the second-largest.
The upward curve in Seoul's trade deficit with Tokyo was attributed to a sharp decline in exports of products such as petrochemicals and steel to Japan, affected by the COVID-19 pandemic, while the drop in imports from the neighboring country was less severe. South Korea's exports to Japan totaled $25.07 billion last year, down 11.8 percent from a year ago. Its imports from Japan fell 3.5 percent to $45.92 billion.
The difference between the two percentages is due largely to Seoul's heavy dependence on Japanese materials, components and equipment in such key industries as semiconductors. Despite COVID-19, the country's semiconductor shipments increased 5.6 percent to $99.18 billion in 2020, a major improvement from the 25.9 percent drop recorded in 2019, which was caused by the U.S.-China trade dispute and decreases in the prices of semiconductors.
This shows that soaring demand for semiconductor equipment after COVID-19 that has accelerated contactless economic activities has not yet been met by domestic manufacturers. The structural problem in trade between Seoul and Tokyo ― Japan gains a lot from South Korea's exports to other countries ― remains the same despite the former's efforts to ease the imbalance.
But there is no need to be optimistic or pessimistic about the ups and downs in the trade balance. Certainly, it's impossible to improve the quality of materials, components and equipment overnight. The most important thing is to create an environment in which companies can invest in research and development more boldly under a long-term plan to overtake Japan. The key is how to overcome this contradiction ― the more third-party exports increase, the bigger our trade deficit with Japan becomes.