[Opinion] Enhancing Logistics Competitiveness to Address Small Open Economies

Published 20 Jun.2022 13:00(KST)

South Korea is classified as a small open economy with a high degree of external dependence. The scale of exports and imports relative to Gross Domestic Product (GDP) reaches about 70%, making international trade extremely important. From 2000 to 2019, South Korea's average trade dependence on the United States, China, and Japan was 20%, 47%, and 25%, respectively, with trade dependence on China showing an increasing trend.

In addition to the high external dependence of the domestic economy, since the IMF foreign exchange crisis, the capital market has been opened, and the inflow and outflow of foreign capital have become free, making stable exchange rate management an even more important task. Extreme fluctuations in exchange rates can undermine the stability of trade. The continued interest in the scale of national foreign exchange reserves politically and economically also aims to stabilize international trade.

In particular, South Korea faces the problem of having limited means to manage exchange rates during international liquidity crises. Countries that use currencies generally recognized as safe assets, such as the dollar, pound, yuan, yen, and euro, can inject liquidity by lowering interest rates during international liquidity crises. In contrast, South Korea finds it difficult to inject liquidity through interest rate cuts because such cuts could accelerate the outflow of foreign capital. This means that domestic companies are exposed to risks that make it difficult to secure foreign currency funds necessary for international transactions and that domestic liquidity crises could spread to economic crises. The available responses include expanding the scale of net external assets through current account surpluses and managing the maturity of foreign debt. Therefore, an industrial structure and policy efforts that can sustain current account surpluses to absorb external shocks are important.

However, as the domestic shipping industry began to lose competitiveness, difficulties arose in maintaining an industrial ecosystem capable of sustaining current account surpluses. From 2006 to 2015, before Hanjin Shipping's bankruptcy, the cumulative shipping balance was $47 billion, classifying the domestic shipping industry as a foreign currency-earning industry. Moreover, 70-80% of the transportation sector, which ranked first in domestic service exports, was achieved through maritime transport.

Domestic shippers were able to broaden their choice of shipowners and suppress excessive freight demands from foreign shipping companies. The reduction in the surplus size of the merchandise balance also began after Hanjin Shipping's bankruptcy in 2015. In other words, the shipping industry was an industry that could mitigate the problems of a small open economy by leading both service and merchandise balances to surpluses. However, since losing competitiveness, the contribution of the shipping industry to the national economy has sharply declined.

Under these circumstances, countermeasures are needed to secure national competitiveness as a small open economy. Therefore, discussions need to focus on ways to proactively secure competitiveness in the Regional Comprehensive Economic Partnership (RCEP), which eliminates tariffs on 80-90% of traded services and products, and in the newly reorganized value chains.

Key countermeasures include enhancing the competitiveness of logistics systems and increasing industrial added value. Strategic tasks such as improving logistics system competitiveness can be supported through securing the competitiveness of the domestic shipping industry, which forms the backbone of international trade, industrial efforts to combine technological advances like the Fourth Industrial Revolution with existing industrial systems, and national policy support and legal system establishment.