South Korea’s trade is facing a crisis. Last year, South Korea’s trade deficit hit $47.8 billion, more than double the 1996 deficit. Last year was the second time that South Korea had an annual trade deficit since the 2008 financial crisis. According to the Korea International Trade Association (KITA), the trade deficit from January to March this year was $24.1 billion, already more than half of the total trade deficit for the previous year. What causes South Korea’s trade deficit? The reason is that exports have decreased and imports have increased.
The global semiconductor market has been experiencing a sharp drop in demand due to recession fears and inventory adjustment. In terms of exports, sluggish semiconductor exports and sluggish exports to China had the biggest impact. Semiconductors accounted for 20% of South Korea’s exports. As demand plunged due to the accumulation of semiconductor inventories, South Korea’s semiconductor exports in 2022 were valued at around $129.2 billion, just a 1% increase from 2021. Exports to China, South Korea’s largest trading partner, fell 4.4% year-on-year last year. This was largely due to the economic downturn and decreasing consumer sentiment due to ‘China’s zero-COVID-19’ policy. There is also the impact of China’s red supply chain policy. The red supply chain replaces intermediate goods imported initially and used by China from South Korea and Taiwan with Chinese goods. The rapid replacement of intermediate goods that South Korea and Taiwan were in charge of in the existing supply chain with Chinese products adversely affects South Korea’s exports. Last year, Korea posted a trade deficit with China for eight out of 12 months. On the other hand, imports increased significantly. Due to the war between Ukraine and Russia, South Korea’s energy imports increased 70% year-on-year to $190.8 billion.
With the ongoing China-United States trade dispute and deglobalization, South Korea’s trade outlook is expected to be challenging. South Korea has no natural resources and a small domestic market, making it highly dependent on exports. South Korea’s export structure is vulnerable to economic fluctuations due to its high share of intermediate goods. According to the KITA, annual exports could fall to $624 billion, an 8.7% decrease from the previous year, if the current slump in exports continues until the end of the year.
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