Economists warn of increasing downside risks facing Korea’s exports

A protracted slump in South Korea’s exports might set in next year and jolt the country’s economy, which has relied on outbound shipments for growth amid sluggish domestic demand, economists say.

Reports released last week by the Ministry of Economy and Finance and the state-run Korea Development Institute cited robust exports as a key factor in keeping the economy on the path to recovery and preventing it from taking a sharp downturn.

In the first eight months of this year, Korea’s exports rose 6.6 percent from a year earlier to a record high of $399.8 billion on the back of growing overseas demand for Korean products, especially memory chips, amid robust global economic growth. In August, the country’s outbound shipments increased 8.7 percent on-year to $51.2 billion, the highest figure for the month, according to data from the Ministry of Trade, Industry and Energy.

“Robust export growth has been sustained this year, implying that the economy as a whole is unlikely to slow down quickly,” the KDI report said.

Trade officials predict that if the upward trend continues, the country’s annual exports may surpass $600 billion for the first time this year, up from the $574 billion recorded last year.

A rise in exports has propped up Asia’s fourth-largest economy, although it is struggling with sluggish investment and consumption.

Korea saw facility investment contract on-month for five consecutive months in July, marking the longest downward streak in nearly two decades, according to figures from the state statistics office.

Retail sales rebounded slightly in July, partly due to cuts in the special excise tax levied on car purchases. But consumer sentiment has continued to decline, suggesting consumption will slump in the coming months.

An indicator used to forecast economic conditions after six months dropped 0.2 percentage point from the previous month to 99.8 in July, the 2015 figure having recorded 100. The July figure was the lowest recorded since the late 1990s, when the country was hit by a devastating foreign exchange crisis.

There are concerns that a downturn in exports coupled with slumping domestic demand would plunge the country’s economy into a steep recession.

Posing immediate downside risks to the country’s exporters are an escalating trade war between the US and China and the rising financial volatility in emerging economies ahead of planned US interest rate hikes.

US President Donald Trump intensified the trade conflict with China on Monday by slapping tariffs on another $200 billion worth of Chinese goods and threatening to target even more if Beijing retaliated. China immediately struck back, imposing duties on an additional $60 billion worth of imports from the US. Washington and Beijing exchanged tariffs on $50 billion worth of each other’s goods in July and August.

The trade tension between the world’s two biggest economies, on which Korea depends for nearly 40 percent of its outbound shipments, is unlikely to subside in the near term, as the US is trying to contain China as its “strategic competitor.”

In a press conference last week, Kwon Pyung-oh, president of the Korea Trade-Investment Promotion Agency, expressed concerns that the country’s exports could slow down next year due to growing uncertainties in the global trade environment.

There are growing signs that the world trade boom is almost over.

The latest World Trade Outlook Indicator, announced in August by the World Trade Organization, signaled “an easing of trade growth in the coming months in line with medium-term trends.”

The most recent reading on the indicator, 100.3, is barely higher than the baseline value and is below the previous level, 101.8 recorded in May. This loss of momentum reflects weakness in component indices, including export orders and auto production and sales, which may be responding to the ratcheting up of trade tensions across the globe, the WTO report said.

What is worrisome about the structure of Korea’s exports is an excessive proportion of semiconductors.

Overseas shipments of chips jumped 31.5 percent on-year to $11.5 billion in August, accounting for 22.5 percent of the country’s total exports for the month, up from 17.6 percent in September last year.

Concerns have grown that Korea’s exports will take a sharp downturn if global demand for semiconductors begins to weaken next year, with China building factories to mass-produce memory chips to reduce reliance on imports. Recent data from the Korea International Trade Association showed Korean chipmakers accounted for 52.3 percent of China’s semiconductor imports last year, which totaled $88.6 billion.

“The rise in exports is attributable mainly to shipments of semiconductors and might slow down anytime soon,” said Shin Se-don, an economics professor at Sookmyung Women’s University. He cautioned against assuming the economy is improving solely on the basis of export records, when other economic indicators are heading downward.

Experts say Korea needs to pursue a two-track strategy, working to diversify export items and markets while also taking further steps to enhance the competitiveness of its semiconductor industry.

It is important to encourage more small and midsized enterprises and startups to sell their goods abroad by expanding loan guarantees and insurance and by assisting their overseas marketing efforts, they say.

By Kim Kyung-ho 
(khkim@heraldcorp.com)