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By Park Jae-hyuk

Korea's reliance on intermediate goods imported from China is expected to make it more difficult for Asia's fourth-largest economy to overcome its trade deficit with the world's most populous country, according to the Korea Chamber of Commerce and Industry (KCCI), Tuesday.

In its latest report, the KCCI mentioned the rising imports of intermediate goods, supply chain difficulties and the reduction in tariffs based on the Regional Comprehensive Economic Partnership (RCEP) as the three main reasons for Korea's trade deficit with China over the past three months.

In particular, the business association's analysis showed that Korea has been more dependent on China in terms of supplies of battery materials.

"The recent trade deficit has resulted from Korea's declining exports of intermediate goods to China and rising imports of such goods from China," Hyundai Research Institute researcher Han Jae-jin said.

The RCEP, which took effect on Feb. 1, has also worsened Korea's trade deficit with China, as preferential tariffs have prompted Korea to import significantly larger amount of battery materials from China. According to the KCCI, tariff rates on lithium oxide and lithium hydroxide dropped from 5.5 percent to 0 percent after the RCEP came into effect.

Against this backdrop, the KCCI expected that Korea's exports to China may recover, if the Chinese economy recovers slightly during the second half of this year, living up to the expectations of major investment banks and global economic institutions, such as the IMF, OECD and World Bank.

However, the business association did not rule out the possibility of a prolonged trade deficit with China, citing Korea's difficulties in diversifying the supply chain of intermediate goods.

"Due to the price competitiveness of Chinese products, it is difficult for Korean companies to diversify their suppliers of raw materials for semiconductors and batteries," KCCI international trade division head Lee Seong-woo said. "Korea should upgrade its free trade agreement with China or utilize the RCEP better, while making efforts to diversify importers and secure technologies."