US Protectionism Casts Dark Shadow over Even Exports of Semiconductors

As there are signs of the end of an upward trend in exports, mainly memory chips, due to U.S. protectionism, it casts a dark shadow over the South Korean economy. South Korea’s main exports, such as smartphone, display, shipbuilding and car as well as semiconductor and petrochemical product, have been declining.

According to industry sources on May 27, the export growth of semiconductors, which have accounted for 20 percent of the nation’s total exports, has gradually started to flatten out.

Industry tracker IHS Markit said the price of DRAMs per gigabyte, which increased a whopping 43.9 percent last year, fell 7.8 percent this year and the size of the DRAM market is expected to hit the peak at US$82.7 billion (89.23 trillion won) this year and then gradually decrease to US$76 billion (82 trillion won) in 2019 and to US$73.6 billion (79.41 trillion won) in 2020. The situation is also similar with NAND flash memory chips. However, the increase in production of domestic memory chip makers, such as Samsung Electronics Co. and SK Hynix Inc., is limited so it is hard to expect the growth in sales without price increases.

According to market research firm DRAMeXchange, the two companies’ operating profit margins on DRAMs in the first half of this year surpassed 60 percent but their increase in sales went up by a mere 2 percent on-year last year. Both firms are not planning to build a new factory yet, except for existing expansion plans.

This is why the growth in semiconductor exports has also slowed down from 57.5 percent last year to 37 percent in April this year. In short, it is impossible to expect an explosive growth like last year had.

Exports in other industries are also slack except for some sectors, including petrochemicals. In addition, petroleum and petrochemical products have limits in actual trade surplus as the import price of their raw materials grew 53.6 percent and 11.7 percent, respectively, due to the rise in international oil prices. In April, exports of ships dropped as much as 75 percent compared to the same period a year earlier, while that of wireless communication devices decreased 40.7 percent. Displays and home appliances also recorded a two-digit fall in exports.

Instead, South Korea’s imports have continuously increased since October 2016 and its cumulative trade surplus as of the end of April stood at US$19.9 billion (21.47 trillion won), down US$8.6 billion (9.28 trillion won) from US$28.5 billion (30.75 trillion won) a year ago.

There are also growing concerns over shrinkage of domestic investment and economic stagnation among domestic companies. Samsung Electronics, which invested 27.3 trillion won (US$25.31 billion) in semiconductors last year, is planning to reduce its investments this year considering oversupply of semiconductors.

As the U.S. is considering measures to impose a 25 percent tariff on imported cars according to the Section 232 of the 1962 Trade Expansion Act, South Korea’s car industry now faces an export crisis. The IT manufacturing industry, including home appliances and smartphones, can’t be a big help to the nation’s economic recovery because it produce most of its products overseas. Moreover, the drop in won-dollar exchange rates pulled down won-dominated exports by 7.2 percent last month compared to a year earlier. The price of the Dubai crude oil skyrocketed from US$60.39 (65,070 won) per barrel on March 1 to US$74.98 (80,791 won) on May 23, putting more burdens on production costs.

The outflow of foreign capital in South Korea to the U.S. on grounds of the interest rate reversal between Korea and the U.S. is another obstacle to the nation’s economic recovery. LG Economic Research Institute forested the nation’s economic growth at 2.8 percent, lower than 3.0 percent of the Bank of Korea.
 

The number of domestic companies coming back to South Korea keeps decreasing every year, while the amount of foreign investments are continuously on the rise. According to the data from the Ministry of Trade, Industry and Energy (MOTIE) and the Korea Trade-Investment Promotion Agency (KOTRA), the number of domestic firms coming back to South Korea fell from 27 in 2014 to 3 in 2017.

In contrast, the remittance of overseas direct investments increased 11.8 percent from US$39.1 billion (42.13 trillion won) in 2016 to US$43.7 billion (47.09 trillion won) in 2017, hitting the highest level since 1980 when it started compiling relevant statistics.