[Asia Exclusive] 'In the Dark' Global Economy Must Prepare for the 'Post-Corona' Era

Shin Seung-gwan, Director of the International Trade and Commerce Research Institute

[Asia Economy Reporter Park So-yeon] "It is difficult to expect an economic rebound until the first half of this year, but opportunities will definitely come again afterward. Although the novel coronavirus disease (COVID-19) situation is worsening, now is the time for 'searching in the dark' rather than despair. Instead of shrinking in excessive fear, we must prepare for the 'post-COVID-19' era."

The COVID-19 pandemic has caused turmoil worldwide, including in Korea. Just as the U.S. and China temporarily reached a Phase 1 trade agreement and global economic recovery seemed imminent, stock prices of companies worldwide plummeted. Air routes connecting countries were blocked, and even civilian entry was restricted, locking the doors tightly. COVID-19 has spread across the six continents globally. In particular, Korea alone reported 4,212 confirmed cases (as of the morning of the 2nd). Public anxiety about COVID-19 has also reached its peak.

However, Shin Seung-kwan, Director of the International Trade and Commerce Research Institute at the Korea International Trade Association (KITA) and Head of the Trade Support Center, emphasized that instead of shrinking in excessive anxiety, it is time to prepare for what comes next. Director Shin said, "Based on past experiences with Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS), I believe economic recovery will be difficult until June this year," and predicted, "The first half of the year will see significant damage to production, consumption, and exports."

However, he stressed, "Although it may be a bit early to say, especially at times like this, business leaders and strategists must prepare for the post-COVID-19 era." Director Shin advised, "When difficult times pass, there will definitely be a period when delayed activities surge actively all at once. Companies that plan now and prepare well will be able to seize opportunities for a new leap forward."

- There is concern about the significant damage to the global economy caused by the spread of 'COVID-19.'

▲ That is correct. Since February, due to extended factory shutdowns in China and logistics disruptions caused by the COVID-19 situation, exports to China have been sluggish, reversing the export recovery trend into a decline. If the situation prolongs, from March when new contracts are usually made, export disruptions may occur due to decreased demand in China. Strengthened quarantine measures in trading partner countries could shrink both the Chinese and global economies. Last year, China's per capita Gross Domestic Product (GDP) surpassed $10,000, and the size of China's domestic market accounted for 16.3% of the world's GDP, four times larger than during the SARS outbreak in 2003. If the current spread continues, a significant shock to the global economy is feared. Considering China's elevated status in the world economy and Korea's trade dependence on China exceeding 20%, the negative impact on our economy is expected to be greater than during SARS. In the case of SARS, there was only a limited impact for about one quarter after the virus spread.

- Korea has been in a constant state of tension due to the U.S.-China trade dispute and global protectionism, and now faces the COVID-19 crisis. How should Korean companies respond?

▲ Since the inauguration of the Trump administration in 2017, measures under Section 232 of the Trade Expansion Act, the U.S.-China trade dispute, and import restrictions such as anti-dumping, countervailing duties, and safeguards have intensified, leading to a full-scale spread of protectionism from 2019. President Trump has implemented unilateral protectionist policies under the slogan "America First," directly and indirectly affecting exporters worldwide. Import restrictions initiated by the U.S. are expanding to the European Union (EU), Canada, and others. Particularly, Asian countries such as India, Taiwan, and China are increasingly using countervailing duty systems, and developing countries are imposing more safeguard measures. Since the U.S.-China trade dispute and protectionism are likely to continue and intensify, Korean companies must establish mid- to long-term strategies to thoroughly manage trade risks in advance, beyond merely responding to arising trade issues. It is necessary to continuously monitor import restrictions and trade issues worldwide to prepare for risks and to check trade risks when exporting, importing, investing, or entering new markets.

Additionally, companies with high export shares to the U.S. and China should re-examine their production and procurement networks and market entry strategies to diversify their export market portfolios in preparation for the prolonged U.S.-China trade dispute. Companies should enhance their understanding of the trade environment company-wide, systematically manage trade risks, and secure dedicated trade response organizations or personnel to build expertise. When investing overseas, companies should pursue global supply chain diversification strategies considering not only cost reduction and market acquisition but also factors such as epidemics, export regulations, and protectionism.

At the same time, the need to strengthen the domestic production base for parts, materials, and industries with high added value and technological innovation is increasing. While Korea's manufacturing overseas production ratio continues to rise, countries like the U.S., Germany, and Japan are seeing reshoring centered on high-tech industries. To strengthen the domestic production base, more companies need to return, but the selection criteria for support are stringent and unrealistic, causing slow reshoring progress. Therefore, expanding incentives such as regulatory improvements, corporate tax reductions, tax benefits, and R&D support, as well as improving the business environment, is necessary to enhance the tangible benefits for reshoring companies.

- The outlook for export industries this year seems to need revision due to the COVID-19 crisis.

▲ Initially, the global economy was expected to pass the bottom and rebound within this year, but it is anticipated that it will take considerable time for the COVID-19 situation to subside. Negative outlooks for the global economy are expanding. Early signals of manufacturing recovery, the spread of accommodative monetary policies, and progress in U.S.-China trade negotiations had raised expectations for global economic recovery. However, due to the recent spread of COVID-19, China's economy, which showed recovery in the fourth quarter of last year, is rapidly slowing. Although the Phase 1 agreement between the U.S. and China had raised hopes for recovery in China's manufacturing sector, the impact of this situation may cause China's GDP growth rate in the first quarter to fall to the 3-4% range and possibly to the low 5% range annually. The longer the COVID-19 crisis prolongs, the more uncertainty increases regarding achieving the initial export forecasts due to expected declines in semiconductor prices, disruptions in supply chains for smartphones and automobiles, and falling prices of petroleum-related products. Semiconductor prices were expected to recover in the second quarter of this year, but the recovery may be delayed due to weakened IT demand in China. Smartphone sales and production are feared to sharply decline due to supply chain disruptions such as Apple store closures and Foxconn factory operation delays. Automobile manufacturers procure about 15% of parts from China, so the automotive supply chain is also being impacted.

- As Korea has a high trade dependence, what policies are needed to flexibly respond to changes in the global trade paradigm?

▲ Korea's trade dependence is higher than major countries, so it must recognize the rapid changes in the global trade environment, such as stagnation in global merchandise trade growth, emergence of new business models combining manufacturing and services, and strengthening protectionism, and prepare policies accordingly. In particular, fostering key promising service industries such as healthcare, tourism, content, and logistics, and expanding new growth engines through service industry innovation should be prioritized. The added value and job creation effects of the service industry greatly exceed those of manufacturing and construction. Given the current difficulties faced by the Korean economy, including sluggish merchandise exports and slowing growth, developing the service industry to expand service exports, boost domestic demand, and create jobs is urgent. It is necessary to eliminate remaining disparities between services and manufacturing in finance, taxation, and fiscal policies, and support qualitative improvements in the service industry through activation of service R&D, training of specialized personnel, and regulatory innovation. Strengthening strategic economic cooperation with major trading partners such as China, the U.S., and Japan and striving to diversify export markets are also essential.

◇Career ▶1988 Joined Korea International Trade Association ▶2002 Research Fellow, Trade Research Office, Korea International Trade Association ▶2007 Head of Regional Research Team, International Trade Research Institute, Korea International Trade Association ▶2009 Head of Brussels Office, Korea International Trade Association ▶2012 Head of Trend Analysis Office, International Trade Research Institute, Korea International Trade Association ▶2015 Economic Expert Advisory Member, Korea Development Institute ▶2016 Head of Trade Policy Support Headquarters, Korea International Trade Association ▶2017 Director, International Trade Research Institute, Korea International Trade Association

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