South Korea’s exports will fall by 10% if the world’s major economies split into two groups and strengthen trade barriers against each other, according to a report. However, if Korea promotes export diversification, it will be able to significantly reduce adverse effects.
According to the Bank of Korea Issue Note Report titled “Background and Impacts of Recent Changes in the Global Trade Environment,” released by the BOK on Dec. 27, a scenario analysis using a general equilibrium model shows that global trade fragmentation has a negative impact on Korea’s exports while export diversification mitigates it.
Due to Korea’s high trade dependence on some countries such as China, global trade fragmentation can have a relatively big impact on Korea, but at the same time Korea will be able to enjoy many benefits from export diversification.
First, in a limited global trade fragmentation scenario where major economies impose import tariffs to increase self-sufficiency in high-tech industries (electronics and transportation equipment), Korea’s exports decline by around 3% in the long run, mainly in those industries, and global exports contract by 2%.
In the second scenario of increased global trade fragmentation, where major countries are divided into two blocs, trade barriers between the blocs are strengthened, and protectionist measures are implemented within the blocs, Korea’s exports fall by up to 10% and global exports shrink by around 4%. The decline is particularly sharp for Korea’s main export items such as chemicals, machinery and electricity.
However, if intra-block barriers are reduced while inter-block fragmentation intensifies, the adverse effects of fragmentation are significantly mitigated, with Korea’s exports falling by mid-3% and global exports by mid-2%.
“This suggests that the negative impacts of an intra-bloc confrontation can be offset to a large extent by export diversification through trade cooperation among countries within a bloc,” the report said. “By industry, exports decline across our main export categories, including electrical and electronic products, machinery, and metals, while exports of transportation equipment, including automobiles, actually increase.”
As a result, the report pointed out the importance of diversification efforts in a rapidly changing trade environment. “Korea needs to steadily promote diversification by product and region and sharpen its industrial competitiveness,” the report said. “The strengthening of industrial policies and trade regulations in major countries and the expansion of investment in low-carbon and eco-friendly sectors are a big challenge for Korean companies and they cannot respond to the challenge through individual strategies alone, so they need policy support from the government, including improving investment environments for Korean companies, especially in high-tech industries.”