SEOUL/BEIJING -- The tides of trade in Northeast Asia are swiftly changing. China and Japan are one another's top trading partners within the region, but the flow between them is shrinking. At the same time, more materials and goods are moving between China and South Korea.
Some observers predict that in value terms, South Korea will overtake Japan in trade with China in three years. One factor working in South Korea's favor is that unlike Japan, it has little diplomatic friction with Beijing.
Closing the gap
Sino-Korean trade swelled 7.4% on the year from January through November in 2013, totaling around $250 billion, data from China's General Administration of Customs shows. Meanwhile, Sino-Japanese trade shrank 6.2% to around $284 billion, narrowing the gap to about $34 billion.
For the first time, China took in more than a quarter of the value of South Korean exports last year, according to the trade ministry in Seoul. Samsung and LG are shipping ever greater numbers of smartphones and other consumer electronics to China. Steelmaker Posco is doing brisk business there as well, cranking up shipments of automotive steel sheet, plating and other items.
Overall, China and South Korea are engaged in heavy trading of intermediate goods, a category that covers parts and materials. There is plenty of room for growth.
Meanwhile, corporate Japan's offshoring in China, and to a lesser degree South Korea, is largely responsible for the decline in trade with both countries. Japanese companies operating in China sourced 64% of their supplies locally last year, up from 58% in 2010, according to the Japan External Trade Organization.
At the same time, historical and territorial grievances are holding back Japan's commerce with the two neighboring economies. Some Chinese consumers are showing their anger over Japan's control of the Senkaku Islands, which China claims and calls the Diaoyu, by shunning Japanese goods.
In Japan, sales of South Korean-made smartphones and other products have slowed amid a chill in bilateral relations. South Korean trade with Japan plummeted 10.4% in 2013, preliminary data from Seoul shows.
Japan, you'll have to wait
All of this has implications for efforts to open up markets in Northeast Asia.
Chinese and South Korean officials on Jan. 6 met in Xian, in China's Shaanxi Province, to launch a ninth round of talks concerning a bilateral free trade agreement. The South Korean side, giving the issue "top priority," hopes to seal a deal even within the year.
There is also a plan to forge a three-way trade pact with Japan, potentially by the end of the year. But given Japan's waning significance as a trade partner, a former high-ranking Chinese commerce ministry official stressed "the Sino-Korean FTA comes first."