Subscribe
E-Paper
 |
| Korea International Trade Association Vice Chairman Jeong Marn-ki / Courtesy of KITA |
By Jeong Marn-ki
Recently, Korea's trade deficits hit an all-time high as its exports continue to struggle. In February this year, Korea's exports had fallen 12.1 percent year-on-year to $96.4 billion while imports grew by 0.2 percent year-on-year to $114.3 billion, resulting in a trade deficit of $18 billion.
In response, the Korean government has employed various measures to boost its exports. Nevertheless, a path to recovery seems uncertain as the sluggish exports are due to several factors: global recession prompted by quantitative tightening with higher interest rates, Korea's export structure reliant on intermediate goods including memory semiconductor and a weakening industrial base in recent years.
First of all, the global economic outlook remains gloomy. The OECD forecast global economic growth to decelerate from 3.5 percent in 2022 to 2.5 percent in 2023. Threatened by protectionism, global trade growth is also projected to further drop to just 1 percent in 2023, down from 3.5 percent in 2022. Korea's exports to China, Japan and ASEAN already decreased significantly by 27.9 percent, 8.9 percent and 18 percent, respectively, in February.
Second, another factor is its export structure heavily centered on intermediate goods that are sensitive to economic fluctuations. For instance, China and Vietnam accounted for around 23 percent and 9 percent, respectively, of Korea's total exports in 2022. Of those, 32 percent and more than 50 percent of Korea's exports to China and Vietnam were mainly sold to the U.S. and European markets respectively after being processed in the intermediary countries. With China's and Vietnam's global exports dropping 6.8 percent and 9.3 percent each, Korea's exports to these markets accordingly fell 27.9 percent and 25.5 percent, respectively, by February 2023.
 |
| HMM's container ship / Courtesy of HMM |
More importantly, the fundamental problem behind its falling exports lies in a continued decrease in Korea's global export market share. Shrinking exports due to a weakening industrial base cannot be resolved within a short period unlike other factors mentioned above. Having peaked at 3.23 percent in 2017, Korea's global export market share has constantly diminished to 2.83 percent as of 3Q 2022. According to the Korea International Trade Association (KITA), a 0.1 percent point drop in global export market share leads to about 140,000 potential job cuts in Korea. This means Korea already lost around 500,000 jobs.
A dwindling industrial base stems from Korea's weakening attractiveness as a manufacturing destination. For example, Korea's outbound FDI outweighed its inbound FDI by 8.3 times in the third quarter of 2022 from annually 2 to 3 times from 2006 to 2017. Major factors behind its diminishing attractiveness are tightening regulations including an inflexible 52-hour workweek, illegalization of dispatched labor, limitation of conglomerate's internal transactions, etc.
Furthermore, Korea's demographic cliff acts as another obstacle to potential export growth in the long term. As the working-age population has decreased, this year 2023 is expected to be the first year for Korea to experience the negative impacts of demographic changes on its economic growth rate. Unless Korea makes a drastic turnaround, the future of its trade will remain grim in the long run.
What should Korea do to address these challenges? The short-term solution is to tackle the immediate difficulties that export firms faced. Particularly, financial stress caused by high interest rates should be eased first. According to KITA's survey, approximately 40 percent of export firms responded that they had only managed to pay interest within their operating profits. In the long term, Korea should implement regulatory reforms and increase Korea's attractiveness as an industrial base in the global market, thereby creating a level playing field for Korean companies, at least, with its key global competitors.
In addition, the demographic cliff issue requires a significant shift in Korea's efforts to overcome the low fertility rate. At the frontline of Korea's exports, a declining working-age population has already emerged as a major concern since the total fertility rate fell to 2.1 children per woman in 1983. A growing number of exporters are giving up on winning contracts or suspending production primarily due to the lack of a decent workforce. Recently, its birthrate hit a record low of 0.78 children per woman, the world's lowest, despite the government's huge investment worth KRW 280 trillion. Experts say that the low fertility rate is caused by mixed factors including not only child-rearing challenges and the high cost of living but also difficulty finding a partner and delayed age perception for childbirth.
A wrong diagnosis will result in a wrong prescription. More than anything else, it's crucial to find the exact cause of the low fertility rate in Korea. In conclusion, considering more complex and diverse elements behind sluggish exports, Korea must enhance its industrial base and national competitiveness now in the long run rather than look for a silver lining in the darkness.
The writer is vice chairman of the Korea International Trade Association.
