[Viewpoint] Korea’s export machine humsThe recent performance of Korean exports, one of the main engines for recovery of the Korean economy from the global financial crisis, has been astounding.
Average daily exports in May recorded an all-time high of $1.84 billion and outbound shipments to Europe also rose at double-digit growth rates despite a cloud of volcanic ash that covered the sky and disrupted air transport.
The record pace has come on the heels of Korea’s surprising economic resilience last year, when the volume of global real trade dropped by 12.2 percent, but Korea’s exports managed to increase slightly. How was this made possible?
First, Korean exporters have successfully leveraged the foothold they have established in high-growth emerging market economies, which have managed higher growth rates than advanced economies in recent years.
The global financial crisis saw the global economy contract by 0.6 percent in 2009, but the performance of individual countries varied greatly: advanced economies declined by 3.2 percent while emerging economies grew at a 2.4 percent clip. The share of emerging market economies in global trade also rose accordingly. In nominal terms, emerging economies accounted for 40.5 percent of total world trade in 2009 compared to 33.4 percent in 2005.
Against this backdrop, Korea’s exports to emerging economies have increased not only in absolute terms, but also in relative market share. From 2000 to 2004, Korea made up 4.22 percent of total imports to emerging markets, but that figure rose to 4.67 percent from 2005-2009.
China’s growth certainly made the largest contribution, and the country now accounts for more than 25 percent of Korea’s total exports. Yet exports to other developing countries in the region are also on the rise, exemplified by the fact that shipments to Asean-member countries surpassed those to either the United States or Japan in 2009.
A weak won has also aided Korea’s export industry. The average won-dollar exchange rate in 2009 was 1,276, which represented a 15.8 percent drop from 2008. The depreciation of the won extended beyond the greenback, with the currency also weakening against the euro, Japanese yen and Chinese yuan. The won-euro exchange rate weakened by 10.4 percent from 2008 to 2009, and the won-yen exchange rate dropped by 26.6 percent over the same period. This depreciation dramatically boosted the competitiveness of Korean exports.
A global recession normally chokes demand worldwide and has a deflationary effect, and last year was no exception. The global export unit price index in 2009, measured by the International Monetary Fund, dropped by 10.6 percent from the previous year. Korea’s index also plunged by 16.5 percent in US dollar terms in 2009, but as the won weakened, the country’s export price index changed little in Korean won terms. This enabled Korean exporters to maintain the same export volume and keep factories humming.
Korea’s parts and materials industry also witnessed strong growth in exports in 2009. The share of parts and materials in the nation’s exports has steadily increased since 2000, and surpassed 50 percent for the first time in the first quarter of this year.
Growth in exports of electronic parts such as semiconductors and liquid crystal displays (LCD), as well as automotive parts such as auto engines, has led the upswing.
Exporting parts offers at least two advantages over exports of final goods. First, it has a spillover effects, as LG Electronics’ LCD screens are not only used in the production of LG’s mobile phones but also in Apple’s iPad. As the global economy rebounds from recession, sales of both Korean-made mobile phones and iPads should also rise, which will only ramp up exports of Korean-made LCDs further.
Second, the value-added ratio of the parts industry is generally higher than the average value-added ratio of the manufacturing sector. In essence, it is more profitable to export core parts than to import parts and assemble and sell the final goods, so long as Korea remains productive in these industries. This is still the case in various sectors, from IT and automobiles to steel and petrochemical production.
The crucial factors for success come down to the following: aggressive advancements in emerging markets on the strength of price competitiveness stemming from the weak won, and maintaining competitiveness in the parts and materials industry.
What does this mean for the future? Although advanced economies are finally on the rebound, emerging market economies are likely to continue to grow at a faster rate, at least for the next couple of years. With this trend in mind, Korean companies need to continue to widen their presence in emerging markets and add new destinations to their lists, such as India or Africa.
Continued efforts to strengthen the competitiveness of the parts and materials industry will also be crucial. Even with the stellar performance of its exports, Korea has continued to run a trade deficit with Japan. Meanwhile, the economic situation in the euro zone is growing more uncertain by the day, and China’s growth might slow if it raises interest rates. The Korean won is expected to appreciate steadily in the coming months, and volatility in the foreign exchange market will not decrease considerably.
All of which means that the export environment is likely to worsen in the second half of 2010. The more difficult it becomes, the more standard tactics should be employed: re-investing profits in R&D and human capital.
*The writer is a research fellow at Samsung Economic Research Institute.
By Rhee Tae-hwan