S.Korean exporters face cyclical downturn

South Korean exporters face a cyclical downturn as China and other Asian economies slow. This cyclical slowdown is complicated by a structural challenge. China's "Made in China 2025" campaign aims to raise its self-sufficiency in high-quality industrial products by displacing traditional suppliers like Japan, Taiwan and Korea. 

Over time, this should foster a more competitive trade relationship between China and Korea, and, as the export-similarity index in above Figure shows, competition has already been increasing since 2011. Moreover, intra-industry trade across supply chains is also increasing, a sign that China is climbing the value chain. Therefore, the Chinese companies have yet to challenge Korean exporters in third markets such as the U.S. and the EU. 

"In other words, the threat to Korea is still centred on China's domestic market. Korean firms have responded by relocating more of their production to China, which helps offset some structural weakness. It may also take time for China to overtake Korea in the global market given Korea's strong commitment to R&D and its globalized production base", says Barclays.