Trade Deficit of $3.7 Billion from May 1-10... Concerns over 'Twin Deficits' for the First Time in 25 Years

Exports from the 1st to 10th of this month reached $16.1 billion... Imports at $19.8 billion
Possibility of trade deficit for 3 consecutive months... Impact of high oil prices and exchange rates
Prolonged China lockdown... Will 'twin deficits' materialize for the first time in 25 years?

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Lee Jun-hyung] The trade balance is likely to continue its deficit streak for three consecutive months. This is due to a sharp increase in energy import costs caused by high oil prices, coupled with a decline in the value of the Korean won, which has driven up the prices of goods purchased from abroad. Concerns are rising that the trade balance could fall into a 'deficit swamp' as the Ukraine crisis and China’s prolonged large-scale lockdown policies due to COVID-19 continue.

According to the Korea Customs Service on the 11th, the trade balance from the 1st to the 10th of this month was preliminarily estimated at a deficit of $3.7 billion. Imports increased by 34.7% year-on-year to $19.8 billion, while exports rose by only 28.7% to $16.1 billion. The cumulative trade deficit from January 1 to the 10th of this month reached $9.9 billion, approaching $10 billion.

Looking at exports alone, the performance is not bad. Key export items such as semiconductors (10.8%), petroleum products (256.3%), and automobile parts (13.8%) showed strong growth. Exports to major countries including the United States (30.1%), China (9.6%), the European Union (27.1%), and Vietnam (30%) also increased compared to last year.

The problem lies in the soaring energy import costs. Among major import items, crude oil (53.7%), gas (52.7%), and coal (220%) showed remarkable increases in import value. This is due to the sharp rise in international energy prices caused by geopolitical conflicts such as the Ukraine crisis. In fact, as of last month, prices for major imported energy sources such as crude oil (63.4%), gas (516%), and coal (251%) surged significantly compared to a year ago.

On the 11th, dealers are working in the dealing room of Hana Bank in Euljiro, Seoul. The KOSPI index opened at 2,586.52, down 10.04 points (0.39%) from the previous trading day. The won-dollar exchange rate opened at 1,277.7 won, up 1.3 won. Photo by Moon Honam munonam@

High exchange rates are also acting as a negative factor for the trade balance. The weaker the won, the more the amount spent on imports increases accordingly. The won-dollar exchange rate closed at 1,276.4 won in the Seoul foreign exchange market the previous day, up 2.4 won from the previous trading day (1,274 won). This is the highest closing rate since March 2020.

To make matters worse, China’s lockdown policies are also prolonging. China is implementing a 'Zero COVID' policy that locks down entire regions upon detection of confirmed cases to prevent the spread of COVID-19. China’s large-scale lockdown policies, as South Korea’s largest trading partner, inevitably lead to export damages as well as a surge in raw material prices due to supply chain instability. The Korea Institute for International Economic Policy (KIEP) forecasted in a report published yesterday that China will maintain the Zero COVID policy until the end of this year.

Given this situation, there is an analysis that the trade deficit could become chronic. The trade balance has already been in deficit for two consecutive months. The trade balance turned to surplus in February this year but reverted to deficit after one month and recorded a deficit of $2.66 billion last month.

There is also an opinion that the 'twin deficits'?deficits in both fiscal balance and current account balance?could materialize for the first time in 25 years since the 1997 foreign exchange crisis. The trade balance accounts for the largest portion of the current account balance. If the trade deficit widens, the current account balance, which had recorded a surplus for 23 consecutive months since May 2020, could also turn to deficit. The consolidated fiscal balance, which indicates the soundness of the national finances, has already recorded deficits for three consecutive years from 2019 to last year.

This content was produced with the assistance of AI translation services.