Where to Turn?
South Korea’s exports fell 12.4 percent in the first half of the year. Therefore, South Korea became the only country in the world’s top 10 to post a double-digit decline in exports. Its global export ranking dropped to eighth place from sixth in 2022. South Korea’s trade deficit is expected to reach 40 trillion won this year due to deflation in China and a weaker Japanese yen.
According to the Korea International Trade Association (KITA) on Aug. 28, South Korean exports reached US$385.3 billion from the beginning of this year through Aug. 20. That represented a drop of 13.2 percent from the same period of last year.
Exports were expected to recover beginning in the second half of the year, but they have been shrinking further. In July and August, exports were down 16.4 percent and 16.5 percent, respectively, from the same period of 2022.
Exports of information and communication technology (ICT) products were particularly sluggish. A decline in exports of five major IT items -- semiconductors, computers, displays, wireless communication devices, and home appliances -- accounted for 76.9 percent of the country’s total export decline in the first half of this year. A drop in demand for IT products pulled down the prices of memory semiconductors, South Korea’s main export item. The price of 128GB NAND memory was US$7.25 per unit in 2021, but stood at US$6.31 in July.
Korea’s imports this year are also down 12.0 percent from the same period of last year to US$413.7 billion. The country continues to show a recessionary deficit, with both exports and imports falling.
This year, Korea’s total exports are expected to fall 7.7 percent from last year to US$630.9 billion, while imports 9.7 percent to US$660.5 billion. Its trade deficit is expected to stand around US$29.5 billion (about 39 trillion won).
In the first seven months of this year, South Korea’s largest export market was China. Its exports to China amounted to US$70.1 billion. Its second largest export market was the United States with US$64.4 billion in exports. While its exports to the United States fell by 1.1 percent during the period, it exports to China plummeted by 25.9 percent, narrowing the gap between its exports to China and those to the United States to 1.6 percentage points.
In particular, Korean semiconductor exports to China plummeted. In the first seven months of this year, they reached US$19.7 billion, down by US$13.4 billion (40.4 percent) from the same period of 2022. Due to the slump in semiconductor exports to China, Korea’s trade balance with China also switched from a surplus in 2022 to a deficit of US$14.4 billion in the first seven months of this year.
A bigger problem is that China’s economic slowdown may be prolonged, with its economic growth expected to hover around 5.1 percent and 4.6 percent this year and next year, respectively. If China’s real estate market slump continues to drive down consumption and investment, Korean exports are bound to be negatively affected.
In fact, if assuming a delayed recovery effect of 0.6 percentage points from China’s economic growth forecast of 5.7 percent in the first quarter of this year minus the current growth forecast (5.1 percent), Korea’s real gross domestic product (GDP) will fall by 0.05 percentage points and its total export volume by 0.16 percentage points this year, according to a KITA study.
The weakening of the Japanese yen is also a big challenge for Korean exporters. The yen-dollar exchange rate is currently at US$0.68 per 100 yen as of August. From US$0.87 at the beginning of 2022, it dropped by 22 percent. A weaker yen can make Japanese goods more competitive in the global market, which can have a negative impact on Korean exports. It can also have a negative impact on Korea’s travel balance.
However, as the yen has weakened, the Korean won has also weakened, and the Korea-Japan ExportSimilarity Index (ESI) decreased from 0.481 in 2012 to 0.458 in 2022, so some experts forecast that the impact of a weaker Japanese yen on Korean exports will be less than before.
The recovery of Korean exports is likely to depend on the timing of a recovery in the global ICT market. In particular, the semiconductor market is expected to recover in the fourth quarter of this year due to leading demand from a recovery in IT demand and increased demand for high-bandwidth memory (HBM) for artificial intelligence (AI).
The Korea Semiconductor Industry Association forecasts that the growth rate of Korea’s memory semiconductor exports will surge to 26.9 percent in October, 85.5 percent in November, and 70.4 percent in December. A semiconductor inventory glut has also been easing since May. Korea’s semiconductor inventory index fell to 213.1 in June from 243.1 in May.
Korea’s exports are expected to rebound in the first half of 2024. According to a survey of exporters conducted the KITA in June, 39.5 percent of Korean exporters surveyed expect exports to be smaller this year than last year, and 80.9 percent of those expecting a decline in exports expect a recovery after the end the first half of next year.