First Six Consecutive Months of Trade Deficit Since IMF... KITA Launches 'Trade Industry Forum'

Held at least once a month

Discovering 20 policy tasks across 6 major goals including labor, regulation, export, and climate change

Koo Ja-yeol, Chairman of the Korea International Trade Association. (Photo by Korea International Trade Association)

[Asia Economy Reporter Moon Chaeseok] As South Korea faces the risk of a trade deficit for six consecutive months for the first time in 25 years since May 1997, just before the International Monetary Fund (IMF) foreign exchange crisis, the Korea International Trade Association (KITA) has stepped up. By launching the Trade Industry Forum and holding regular monthly meetings, KITA plans to support national crisis response efforts by announcing six major goals and 20 policy tasks related to agendas such as labor, regulation, exports, and climate change. Even if the COVID-19 pandemic ends by the end of this year and the Russia-Ukraine war is resolved by the first half of next year, it is expected to take about 10 months for the real economy to normalize.

On the 17th, KITA announced the launch of the forum and unveiled six major goals and 20 policy tasks to overcome trade and investment crises at the Trade Tower in Samseong-dong, Seoul. The theme of the first forum held that day was "Policy Directions for Revitalizing Domestic Export Industries," focusing on analyzing the causes of the rapidly worsening trade deficit and preparing countermeasures.

In his inaugural speech, Koo Ja-yeol, Chairman of KITA, said, "We launched this forum to diagnose the rapidly changing global business environment and seek appropriate remedies," emphasizing, "We will develop this forum into the highest-level discussion platform in the trade and industry sectors and use it as a new gateway for economic policy proposals." He added, "To strengthen export competitiveness and revitalize the domestic economy, it is necessary to improve deeply rooted regulations and support export companies," and stressed, "In particular, due to the rapid interest rate hikes, precise policies and financial support from the government and financial institutions are needed to prevent sound export companies from falling into crisis."

The forum evaluated that despite this year's trade deficit, export performance was not bad. According to Cho Sang-hyun, Director of KITA's International Trade and Commerce Research Institute, exports reached $467.5 billion (approximately 674 trillion KRW) by August, up 13.5% compared to the same period last year. Despite external risks such as the global economic downturn caused by COVID-19 and the Russia-Ukraine war, South Korea performed better than competing countries. Limiting the comparison to July, when international statistics are comparable, South Korean exports increased by 14.6%, overwhelmingly surpassing Germany (1.4%) and Japan (0.2%). South Korea's global export ranking rose one notch from 7th last year to 6th this year. KITA stated, "Excluding the Netherlands (4th in exports), which is effectively a re-exporting country, South Korea has emerged as the world's fifth-largest export powerhouse after China, the United States, Germany, and Japan (5th)." They added, "Notably, the export gap with Japan has narrowed to a historic low of $26.6 billion (approximately 38 trillion KRW), which is significant."

The problem lies in the steep increase in imports. Imports reached $492.6 billion (approximately 710 trillion KRW) by August, up 25.8% compared to the same period last year, with the import growth rate exceeding the export growth rate (13.5%) by more than 10 percentage points, resulting in a trade deficit. An "energy overconsumption" structure has formed, where expensive energy sources such as liquefied natural gas (LNG) are used instead of nuclear power to generate electricity, while maintaining an electricity rate system below cost. Additionally, the surge in crude oil prices has contributed to the rise in import growth. The share of the four major energy imports?crude oil, natural gas, thermal coal, and naphtha?in total imports also surged from 20.3% last year to 27.2% this year.

However, KITA assessed that the trade deficit proportion relative to total trade is not large. The scale of the trade balance deterioration is also about half that of competing countries. Up to last month, South Korea's trade volume was $1.0787 trillion (approximately 1,555 trillion KRW). The trade deficit was $28.9 billion (approximately 42 trillion KRW), accounting for only 2.7%. The change in South Korea's trade balance in the first half of this year compared to the same period last year was -$27.9 billion (approximately -40 trillion KRW). The decrease was less than half of Japan (-$72.4 billion, approximately -104 trillion KRW) and Germany (-$72.2 billion, approximately -104 trillion KRW).

Jung Manki, Vice Chairman of KITA, diagnosed, "This year's trade is mainly affected by short-term factors such as supply chain disruptions after COVID-19 and the Russia-Ukraine conflict." He added, "Even if COVID-19 ends by the end of this year and the Russia-Ukraine war is resolved by the first half of next year at the latest, it should be considered that it will take about 10 months for the resolution of short-term factors to lead to the normalization of the real economy." He emphasized, "During this period, special measures by financial institutions and the government, such as extending loan repayments for export companies, expanding credit guarantees, and applying low interest rates, are necessary to prevent excellent export companies from going bankrupt due to the impact of high interest rates."

Seoul, Samseong-dong, Korea International Trade Association Trade Tower exterior view. (Photo by Korea International Trade Association)

KITA believes that to continuously expand exports and establish a trade surplus foundation, short-term improvements are needed in the energy overconsumption structure and labor rigidity. In the mid-to-long term, a strong export industry base should be built through regulatory reforms, fostering new industries, and tax reforms to promote corporate investment. As countermeasures, they proposed six major goals and 20 policy tasks, including ▲ enhancing labor flexibility ▲ abolishing regulations and reverse discrimination ▲ strengthening the export industry base ▲ supporting overseas market development ▲ improving various policies and systems that induce excessive imports ▲ strengthening climate change and trade response.

Detailed policy tasks include securing labor flexibility through supplements to the 52-hour workweek system and allowing dispatch and substitute labor, improving the foreign workforce supply system in manufacturing, easing regulations on metropolitan area locations, supplementing the safe freight rate system, and improving the investment tax credit system. They also emphasized the need to proactively prepare for the Eastern European market, which requires post-war reconstruction projects, as well as industrialization strategy cooperation with Middle Eastern oil-producing countries that have secured abundant "oil money" through large trade surpluses, and third-generation emerging industrial countries such as Vietnam, India, and Indonesia.

In the subsequent policy discussion, Yang Jun-seok, President of the Korea Regulation Society, argued for regulatory reform. According to this year's survey by the International Institute for Management Development (IMD) in Switzerland, South Korea ranks 49th in prices, 48th in business legislation, 42nd in the labor market, and 32nd in institutional framework. He stated, "South Korea's low productivity stems from institutions, laws, and regulations," and pointed out, "According to the annual international competitiveness reports by the World Economic Forum (WEF) and IMD, South Korea ranks lowest in areas related to laws, regulations, and institutions." He added, "Since inefficient laws and regulations, overlapping regulations, and bundled regulations are piled up, simple deregulation or removal is insufficient for reform, so a strong government infrastructure to vigorously promote regulatory reform is necessary."

Lee Jun, Director of the Korea Institute for Industrial Economics and Trade, warned about the rise of China. He diagnosed, "One of the structural reasons for the recent trade imbalance is the reversal of the Korea-China division of labor structure, which has caused a trade deficit with China," adding, "As China's industrial development progresses, the mutual industrial division of labor between Korea and China has reversed, posing a threat to our industries." He continued, "In the past, China was the largest demand market for our intermediate goods and served as a bridgehead to North American and European markets, but recently China has become an intermediate goods exporting country," pointing out, "Both strategies to ride the current trend and to reverse the trend are necessary by industry." According to him, the "riding strategy" means preparing a customized high value-added intermediate goods export strategy considering China's industrial upgrading trend. The "reversal strategy" refers to securing strategic items that can reverse the reversed Korea-China division of labor relationship.

Other opinions raised during the discussion included the need for ▲ improving the carbon emissions trading system and introducing support systems (Lee Sang-jun, Research Fellow at the Korea Energy Economics Institute) and ▲ improving the dual structure of the labor market and changing the "Labor Standards Act" to the "Labor Contract Act" (Oh Ho-young, Ph.D., Korea Research Institute for Vocational Education and Training).

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