The Growing Shadow of a One-Year Trade Deficit... Triple 'Headwinds' in Energy, Semiconductors, and Trade with China (Comprehensive)

[Asia Economy Sejong=Reporter Dongwoo Lee] The trade deficit has approached $6 billion from the beginning of this month to the 20th, making a deficit for the second consecutive year almost certain. This is due to a continued increase in imports of the three major energy sources?crude oil, gas, and coal?while exports of the key item, semiconductors, have decreased by more than 40% compared to the same period last year. Despite China, the largest trading partner, reopening its economy, export momentum has not revived, resulting in a triple whammy causing the trade balance deficit.

According to the Korea Customs Service on the 21st, the export value (provisional customs clearance basis) from February 1 to 20 was $33.549 billion, down 2.3% from the same period last year, while imports increased by 9.3% to $39.536 billion. The number of working days during this period was 15.5, two days more than the 13.5 days in the same period last year. Considering the working days, the average daily export value was $2.16 billion, a 14.9% decrease. With exports falling and imports rising, the trade balance recorded a deficit of $5.987 billion up to the 20th of this month. It is almost certain that the trade balance will continue to show a deficit for 12 consecutive months from March last year to this month.

[Image source=Yonhap News]

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The main cause of the year-long trade deficit is the prolonged surge in international energy prices due to the Russia-Ukraine war. Given South Korea’s industrial structure, which has a large manufacturing sector and high energy consumption, it is vulnerable to strong energy prices. From the beginning of this month to the 20th, imports of crude oil, gas, and coal amounted to $10.648 billion, accounting for 26.9% of total imports ($39.536 billion). During this period, gas imports ($3.935 billion) increased by 81.1%, crude oil ($5.379 billion) by 7.6%, and coal ($1.334 billion) by 11.2% compared to the same period last year. The import value of the three major energy sources has risen by about 50%, from an average monthly $10 billion over the past decade to $15 billion in the past year, directly contributing to the trade deficit.

The decline in semiconductor exports, South Korea’s key export item, is also a major factor worsening the trade balance. Semiconductor exports amounted to $3.83 billion up to the 20th of this month, down 43.9% from the same period last year. Semiconductor exports have been shrinking for seven consecutive months since August last year (-7.8%) through the 20th of this month. Particularly, semiconductor exports last month fell by a staggering 44.5%, marking the largest decline in the past year. Due to the drop in international semiconductor prices, Samsung Electronics’ semiconductor division operating profit in Q4 last year decreased by 96.95% (270 billion KRW), and SK Hynix recorded an operating loss of 1.7012 trillion KRW during the same period. Experts analyze that if energy imports are not reduced, the trade deficit is likely to continue in the first half of this year. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho also stated, “Despite rising energy prices, winter energy imports such as oil and gas have not decreased, while the decline in semiconductor exports, which account for about 20% of total exports, is intensifying due to the global economic slowdown.”

The prolonged trade deficit with China, the largest trading partner, continuing for nine months is another negative factor. Although China is accelerating the reopening of its domestic industries (resumption of economic activities), the recovery speed from the COVID-19 impact that has lasted for a year is not fast. Exports to China until the 10th of this month were $6.664 billion, down 22.7% compared to the same period last year. The decline in exports was significant in items with high export shares to China, including semiconductors, home appliances (-32.9%), computer peripherals (-55.5%), and home appliances (-38.0%). During the same period, imports from China amounted to $7.445 billion, resulting in a trade deficit of $0.781 billion with China. The government also stated that the long-term trade deficit is due to the fact that the effects of China’s reopening still require time.

With the triple adverse factors of increased energy imports, decreased semiconductor exports, and sluggish trade balance with China continuing, the annual trade deficit this year has reached $18.639 billion. This figure accounts for 39.4% of last year’s total trade deficit (-$47.2 billion) in just 50 days since the beginning of this year. As concerns over the prolonged trade deficit grow, the government plans to focus all ministries on expanding export capabilities. First, it plans to fundamentally improve the export structure by discovering promising export items, diversifying markets, and strengthening service export capabilities. Additionally, to strengthen global competitiveness and promote investment in national strategic industries such as semiconductors, the government intends to expedite the passage of amendments to the Restriction of Special Taxation Act in the National Assembly.

Meanwhile, up to the 20th of this month, exports were driven by passenger cars (56.6%), petroleum products (16.3%), and ships (21.7%). By region, exports increased to the United States (29.3%), the European Union (18.0%), and India (26.0%), while they decreased to China (-22.7%), Vietnam (-18.0%), and Japan (-3.1%). During the same period, imports of crude oil (7.6%), gas (81.1%), and petroleum products (4.9%) all increased compared to the same period last year, while semiconductors (-6.1%) and precision instruments (-3.9%) slightly decreased. By region, imports increased from China (5.1%), the United States (13.7%), and the European Union (14.5%), while they decreased from Japan (-4.4%) and Malaysia (-7.7%).

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