South Korea’s Trade Conditions Getting Even Worse

The Japanese government decided to exclude South Korea from its list of trusted trade partners. This means its export restrictions on three semiconductor and display materials can be expanded over time.

In the meantime, the U.S. government is likely to put more and more pressure on South Korea regarding its decision to terminate the General Security of Military Information Agreement (GSOMIA) with Japan. U.S. President Donald Trump is publicly complaining about the decision, mentioning that South Korea’s developing country status in the WTO can be reconsidered.

Then, South Korea’s agricultural sector is likely to take a direct hit. The country’s developing country status is being maintained in view of potential impacts on the sector. In November, the U.S. government will make a decision on whether to apply Section 232 of the Trade Expansion Act of 1962 regarding up to 25 percent tariffs on automobiles and auto parts exported to the United States.

Protests in Hong Kong are another risk factor. Last year, South Korea’s exports to Hong Kong added up to US$46 billion, 7.6 percent of its total exports, and Hong Kong was the fourth-largest export market for South Korea behind China, the United States and Vietnam. In addition, semiconductor chips, one of South Korea’s major export items, accounted for 73 percent of its exports to Hong Kong last year.

Many South Korean exporters are currently exporting their products to China via Hong Kong and, as such, any aggravation of the situation in Hong Kong can lead to freight transport setbacks and higher financial costs attributable to more uncertainties. The South Korean exporters have enjoyed tariff benefits based on the Closer Economic Partnership Arrangement (CEPA) between China and Hong Kong. Last year, 94 percent of South Korean products exported to Hong Kong were re-exported and the ratio of re-export to China via Hong Kong amounted to 82.6 percent.