Export 'Dark Clouds' in the Second Half... "Expansion of External Risks from China, Ukraine, US, Japan, etc."

KCCI SGI, Report on 'Export Business Conditions and Major Risk Factors'
Growth Slowdown in China, 'Russo-Ukrainian War', US Monetary Tightening, Prolonged Japanese Yen Weakness, etc.

On the afternoon of the 23rd of last month, container unloading operations were underway at Busan Port's Sinsundae and Gammam Pier. (Image source=Yonhap News)

[Asia Economy Reporter Moon Chaeseok] It has been argued that export performance in the second half of the year may be shaken due to the impact of China's economic slowdown, the Russia-Ukraine war, U.S. monetary tightening, and prolonged Japanese yen depreciation.

The Korea Chamber of Commerce and Industry's SGI (Sustainable Growth Initiative) forecasted this in its report titled "Current Status of Export Economy and Major Risk Factors" released on the 3rd. The KCCI SGI stated, "There is a possibility of an export cycle shift due to the expansion of external risk factors in the second half of the year." The organization diagnosed, "In a situation where the momentum for domestic demand recovery is limited due to weakened real purchasing power caused by rising prices and the impact of base interest rate hikes, it is necessary to maintain export performance to achieve an economic growth rate in the high 2% range."

South Korea's export dependence on China reached 25.3% as of last year. The International Monetary Fund (IMF) lowered its forecast for China's economic growth rate this year from 4.8% to 4.4% in April. SGI projected, "With the U.S. government's diplomatic pressure on China intensifying, China's growth rate this year could fall to the 3% range." It added, "Since about one-quarter of South Korea's exports depend on China, a contraction in the Chinese economy is highly likely to lead to a domestic growth slowdown. If South Korea's exports to China decrease by 10%, the domestic economic growth rate will drop by -0.56 percentage points, and if it decreases by 20%, it will fall by -1.13 percentage points."

The prolonged Ukraine war is also a burden. Although South Korea's export share to Russia is 1.5% and to Ukraine only 0.1%, it is analyzed that the prolonged conflict cannot be ignored. SGI stated, "If the war prolongs, it will affect domestic exports in the form of economic contraction in the European Union (EU), which has a large trade share with Russia, disruptions in the supply of essential raw materials, and a decrease in the supply of Russian intermediate goods."

It also mentioned the possibility of financial instability in emerging markets following U.S. monetary tightening. The average forecast for the U.S. base interest rate by 10 major investment banks as of the 31st of last month is 1.5% in Q2, 2.3% in Q3, and 2.8% in Q4. This means the rate could rise to the high 2% range. The U.S. is accelerating the pace of rate hikes due to favorable labor market conditions and the need to respond to inflation. The problem is that after the global financial crisis, raising the base interest rate in the U.S. could reproduce financial instability and demand contraction in fiscally vulnerable countries such as India, Brazil, and Indonesia. SGI explained, "In 2015, when the U.S. base interest rate hike began in earnest, South Korea's export growth rate to emerging markets was -9.3%, and in 2016 it was -6.3%."

The prolonged yen depreciation is also a concern. The won/yen exchange rate stood at 977 won per 100 yen in April and 985 won last month. It fell below 1,000 won for the first time since December 2018. If the yen is evaluated as cheaper than the won in the market, the competitiveness of South Korean export companies could decline. SGI pointed out, "Although it is true that the impact of yen depreciation on exports has weakened compared to the past due to increased domestic product brand and quality competitiveness, some key items such as automobiles, machinery, and electrical/electronic products still compete closely with Japan in major markets." SGI expects the relationship between yen weakness and domestic exports to be influenced by the global economic situation. SGI said, "During 1988-90 and 2012-15, when the global economy slowed and yen depreciation occurred simultaneously, domestic exports significantly decreased," and added, "It is necessary to closely monitor yen trends and macroeconomic variable movements."

As countermeasures against complex external risks, SGI proposed ▲establishing a public-private cooperation system ▲alleviating exchange rate fluctuation burdens ▲improving export structure ▲preparing for China's growth slowdown. Regarding public-private cooperation, SGI said, "Current export risks are complex, including decreased external demand, supply chain instability, and intensified price competition for competing products, making it difficult for individual companies to respond," and emphasized, "It is necessary to institutionalize an export emergency meeting chaired by the president to devise measures for supply chain management and resolving essential raw material supply disruptions." It predicted that prolonged yen depreciation would harm small and medium-sized enterprises lacking exchange risk management capabilities. SGI advised, "Measures for micro-adjustment and market stabilization against foreign exchange market fluctuations, such as supporting companies vulnerable to yen weakness and enhancing exchange risk management capabilities, should also be implemented."

Improving the export structure was also mentioned. SGI believes that all three elements?product diversification, differentiation, and advancement?must be met for overseas buyers to purchase South Korean products even in unfavorable external environments. SGI stated, "To achieve the three elements, it is necessary to pioneer new industries emerging from the energy transition process," and argued, "Among key export items, industrial structural changes should focus on high value-added products such as system semiconductors and organic light-emitting diodes (OLED)." To prepare for China's growth slowdown, it advised diversifying overseas market channels to ASEAN and advanced countries. SGI said, "The export strategy toward China also needs to shift from a structure centered on intermediate goods to strengthening South Korea's supply capacity in consumer goods such as bio, life sciences, beauty, and food."

Kim Cheongu, SGI research fellow, said, "With South Korea's exports achieving remarkable results last year, including record-high performance and the shortest time to reach 1 trillion dollars (about 1,248 trillion won) in trade, the importance of exports has become greater than ever," and emphasized, "To stimulate the domestic economy, it is necessary to appropriately respond to risk factors in the second half such as China's growth slowdown and U.S. monetary tightening, and to establish detailed policies so that the recently launched Indo-Pacific Economic Framework (IPEF) can contribute to national interests such as trade promotion and supply chain stabilization."

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