"This Year, Global 'King Dollar' Causes South Korea's Trade Deficit to Increase by $6 Billion in Q2-Q3"

KDI Presents 'The Impact of Exchange Rate Fluctuations on Exports, Imports, and Trade Balance'

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] This year, the phenomenon of 'King Dollar (global dollar strength)' has led to an increase of $6 billion in South Korea's trade deficit over the past two quarters, according to an analysis.

On the 26th, the Korea Development Institute (KDI) released data titled 'The Impact of Exchange Rate Fluctuations on Exports, Imports, and Trade Balance,' revealing this finding. KDI explained, "The global dollar strength in the 2nd and 3rd quarters of this year has contracted overall trade and acted as a factor expanding South Korea's trade deficit by $6 billion."

KDI analyzed the impact of exchange rates on goods exports, imports, and trade balance by separating the fluctuations of the won-dollar exchange rate and the exchange rate fluctuations of other countries' currencies excluding South Korea. Analyzing data from 2000 to 2021, it was found that a depreciation of the won reduced both exports and imports in dollar terms in the short term (one year later), but the decrease in imports was larger. This was the result of import volumes declining due to rising import prices while export prices fell and adjusted following the won depreciation.

In the medium term (two years later), export volumes increased, gradually raising export amounts in dollar terms, and the decline in import amounts slowed. This implies that won depreciation acts as a factor expanding the trade surplus through import reductions, and its effect grows over the medium term through increased export amounts.

When the dollar value rises against all other currencies, export and import volumes significantly decrease in the short term, reducing both export and import amounts in dollar terms. This export slowdown leads to an expansion of the trade deficit. However, the impact of dollar appreciation on exports and imports weakens over time.

Considering this, from the 2nd quarter when the dollar value began to surge sharply until the 3rd quarter, fluctuations in the won-dollar exchange rate reduced the trade deficit by $2 billion. Conversely, exchange rate fluctuations of other countries' currencies against the dollar during the same period expanded the trade deficit by $8 billion. As a result, KDI's analysis shows that the global dollar strength increased the trade deficit by $6 billion.

However, from a medium-term perspective, exchange rate fluctuations during this period are expected to increase the trade surplus by $6.8 billion over two years from the 2nd quarter of this year to the 2nd quarter of 2024.

KDI stated, "Exchange rate fluctuations are playing a role in alleviating trade balance imbalances," and added, "As long as the foreign exchange market operates smoothly, it is necessary to allow exchange rates to be autonomously determined to some extent according to the supply and demand conditions of the foreign exchange market."

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