Three Asian partners reshape their ties

Even as China, South Korea and Japan held the fourth round of talks in Seoul earlier this month for a trilateral trade treaty, some changes in the web of relationships linking the countries were developing under the radar.

One key change was that South Korea surpassed Japan last year to become China's biggest source of imports.

China's consumer boom and economic restructuring mean it needs mechanical and electronic goods, which are South Korea's major products. And China-Japan trade continues to be affected by prolonged territorial disputes and political tensions.

Both countries, which offer similar products and technologies, are battling for their share of the world's largest market.

In early March, South Korea reported that it had posted a trade surplus for 25 consecutive months as exports continued to grow.

Exports to China, South Korea's largest trading partner, increased 8.6 percent last year to $183.07 billion (132 billion euros), according to the Ministry of Commerce.

South Korea supplied 9.24 percent of China's imports in 2013, up from 9.17 percent in 2012. The proportion for Japan slid from 9.78 percent to 8.19 percent, according to South Korean official data.

"Catering to China's economic growth, South Korea's exports of automobiles and petrochemicals, smartphones, and flat-screen TVs to China have witnessed a pickup in recent years," says Song Hong, an economist at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, a government think tank.

South Korea's automobile exports reached a new high of $48.7 billion in 2013, with exports to China up 13.2 percent, according to the South Korean Ministry of Trade, Industry and Energy. Exports of industrial components to China were up 5.8 percent last year.

South Korean companies clearly harbor ambitious of expanding abroad. South Korea has signed FTAs with the United States and Europe, which took effect in 2012 and 2011.

China and South Korea are trying to increase economic ties. They advanced their free trade negotiations at the ninth round of talks in Xi'an, Shaanxi province, in January. "China, as a neighbor and a major economy, is the first choice of companies in South Korea," Song says.

This is shown by South Korean business giants' performance in the Chinese market.

For example, Samsung Electronics Co Ltd saw an 80 percent increase in China sales last year, driven by the popularity of smartphones and wide-screen televisions. It established a second plant in China, its largest overseas project.

China-South Korea trade now exceeds $250 billion annually, according to the Ministry of Commerce. By the end of 2013, South Korea had invested in 56,224 projects in China, with paid-in investment of just under $56 billion.

"We hope to increase bilateral trade to more than $300 billion by 2015," Commerce Minister Gao Hucheng said.

Still, Song cautions that with China's development, South Korean businesses in China will face increasing competition from domestic producers in their industries.

"When computer giant Lenovo Group Ltd, telecommunications giant Huawei Technologies Co and ZTE Corp are grabbing market share, producers from South Korea may be forced to climb up the value chain in China," Song says.

The prospects for trade and economic ties between China and South Korea look good.

For Japan, however, it is a less optimistic picture, according to Shen Danyang, a spokesman for the Ministry of Commerce.

China-Japan trade contracted 5.1 percent last year to $312.55 billion, accounting for 7.5 percent of China's total trade value, according to Chinese customs figures.

China's exports to Japan dropped 0.9 percent to $150.28 billion, while its imports fell 8.7 percent to $162.28 billion.

Last year China's total outward direct investment in Japan fell 23.5 percent, and Japan's investment in China decreased 4.28 percent, according to the Ministry of Commerce.

"Political tensions aside, the outlook for Japanese investment in China depends on the size of the Chinese market" for particular industries or companies, says Yao Haitian, a researcher at the Institute of Japanese Studies, which is under the Chinese Academy of Social Sciences.

Trade between the two countries is strongly driven by investment. Most of the Japanese companies investing in China mainly sell their goods to the Japanese market.

Japan has kept its key technologies at home and just shifted "fringe" technology or some management functions to China, Yao says.

"To my knowledge, most Japanese companies are planning to maintain their production in China, not expanding at the moment. However, companies in retailing and logistics, such as (clothing retailer) Uniqlo, desire to expand in China," he says.

Japan's exports to China in auto parts, metal machinery and electronic components declined last year, according to the Japan External Trade Organization.

JETRO notes that with increasing consumption in China, many Japanese consumer goods are becoming more popular. Shipments of children's clothing and camping products to China, for example, more than doubled last year.

However, experts say that political disputes between China and Japan are opening new doors for South Korea.

"For some products, such as electronics, vehicles and chemical products, which can be bought from South Korea, Chinese producers and consumers will make their own choices," says Zhang Xiaoji, director-general of foreign economic relations at the Development Research Center of the State Council.

"Japan and South Korea are competing in many areas. For example, as South Korea has made great improvements in LCD screens, I think Chinese consumers are favoring them more at the cost of Japanese products," Zhang says.

Still, Yao says Japan has very advanced technology and does better than South Korea in mechanical products.

"Competition will be shaped by the two countries' competitiveness. This process will also help improve the core competitiveness of Chinese companies," Yao says.

That view is supported by a report from South Korea's Hyundai Economic Research Institute. The organization says that despite South Korea's increasing market share in China's auto parts industry, 63 percent of these producers are losing competitiveness in the market.

They have to invest more in research and development, and also take advantage of the China-South Korea FTA, says the report.