The country’s exports and trade surpluses reached all-time highs in 2014, with overall trade volume also climbing to a new record.
Korea’s exports and imports rose by 2.4 percent and 2 percent from the previous year to $573.1 billion and $525.7 billion, respectively, last year for a trade surplus of $47.4 billion, according to figures released last week by the Trade Ministry. Its annual trade volume also surpassed the $1 trillion mark for the fourth consecutive year in 2014.
The growth in exports, which came despite an economic slowdown in China and the European Union, was partly attributed to free trade agreements Korea has signed with an increasing number of countries. FTAs are likely to make a greater contribution to boosting Korea’s exports this year, especially if its free trade accord with China goes into effect within the year as planned.
The country’s exports are forecast to rise by 3.7 percent from last year to $594 billion in 2015, with its trade surplus expected to reach $52 billion, according to Trade Ministry officials.
On the back of the increasing exports, Korea’s current account surplus ― a net measure of its overall transactions with the rest of the world, which covers goods, services, income and current transfers ― is estimated to have reached $90 billion last year. Local research institutes predict that the figure will rise to more than $100 billion this year.
This is a remarkable achievement for a country that suffered chronic trade and current account deficits in the 1980s and 1990s. So far, only four nations ― China, Germany, Saudi Arabia and Switzerland ― have seen their current account surpluses surpass the $100 billion mark.
A large surplus is welcome, as it can serve to prevent capital flight from the country when international financial markets become unstable. As with all other economic phenomena, however, it has some negative consequences along with its positive effects.
What is especially worrisome is that the increase in the current account surplus may make it difficult to keep the value of the Korean currency at a reasonable level. In recent months, the won has sharply appreciated against the yen, weakening Korean exporters’ competitiveness against their Japanese rivals. But its value has continued to fall against the dollar, reflecting concerns over a planned interest rate hike in the U.S. and the sign of a financial crisis being rekindled in some peripheral EU members. The won-dollar exchange rate remained at around 1,100 won per dollar in November when Korea’s monthly trade surplus amounted to $11.4 billion.
But it is hard to expect the currency value to continue to be detached from the increasing trade and current account surpluses for a longer period. It is likely that the won will rise steeply against the dollar and other major currencies besides the yen, once uncertain external conditions are settled. In this case, large surpluses would do the Korean economy more harm than good.
Government policymakers and corporate executives need to exert more efforts to prevent a sharp rise in the value of the won rather than remaining complacent with the piled-up trade and current account surpluses. It may be necessary to make more investments abroad and offer more incentives to corporations to encourage them to import more equipment to upgrade or expand their facilities.
