Breaking export paradigmKorea’s exports fell for the second consecutive year in 2016 for the first time since 1958. The external trade front looks murky this year as well due to prospects of trade friction between the United States and China because of the protectionist agenda of the new Donald J. Trump administration and repercussions from Britain’s divorce with the European Union.
Global trade has boomed since the 1980s following the opening of colossal Chinese and Indian markets and the international division of labor as the result of globalization. But the world economy and trade has stagnated since the 2008 financial crisis. The advent of the fourth industrial revolution led by artificial intelligence and full automation is expected to undermine the global value chain and scale down the global commodity trade. Exporters must explore new growth engines in an era when quantitative trade expansion no longer can be expected.
We must try to raise the value of exports more than the amount of shipments we send abroad. The value-added rate of Korean exports is about 58 percent, significantly lagging behind Japan and the U.S. whose rate is above 80 percent and Germany with 75 percent. The value of the product made in Korea is relatively low because the country relies on imports for the raw materials as well as key parts for manufacturing. Korea is also weak in consumer products and the services sector.
To retool exports structure to add more value, the competitiveness of mainstay industries must be upgraded. Key export items like semiconductors, smartphones and automobiles that had so far upheld reputations as manufacturing and exports powerhouses are being threatened by the fast advance of Chinese counterparts. Vendors of intermediary products are fishing in a Red Ocean, competing with tons of other fishermen out to sell the same standard product. Companies must come up with innovative technology, manufacturing abilities and services running on unrivaled business models and ingenious ideas to stand out from the flock.
The share of high-end consumer products also should rise. Luxury makes up just 12.4 percent of Korean consumer products, compared with a 27.1 percent share for German, a 17.1 percent share for the United States and 18.7 percent for Japan. Intermediary products have been hard hit by stagnation of the world economy and maturity in the global value chain. But the global consumer market has rapidly expanded due to increasing demand in emerging economies like China and India and a spread of across-the-border e-commerce.
Despite overall sluggishness in exports, the top consumer products like cosmetics, pharmaceuticals and food have grown 13.6 percent.
The value of Korean-made products could rise by developing high-end consumer products based on Korean sensitivity and ideas and capitalizing on the popularity of Korean culture and entertainment.
Attention must be paid to hone export competitiveness of Korean services as much as commodities. The service sector generates many jobs and can vitalize domestic demand. Its growth potential is big as unlike commodity, global service demand remains strong. Due to the proliferation of the digital economy, commerce in content, data and services has room to grow. Unnecessary regulations blocking competitiveness in the service sector must be removed. More effort should go to drawing foreigners to local tourism, conferences and medical care and connecting the demand to explore and make forays overseas.
Lastly, Korea must ensure a good business environment so that Korean as well as foreign companies willingly invest in the country. Trump has threatened companies taking their manufacturing bases outside with high tariffs and instead offered huge tax cuts and other benefits to those keeping jobs in the U.S. Others like Germany and Japan also have been aggressive to bring back companies through industrial reform, tax benefits and deregulations. What have we done? Scolding companies for lacking entrepreneurship by stacking away cash reserves and withholding investment won’t do any good.
Kyocera founder Kazuo Inamori, famous for his business turnaround ability, advises entrepreneurs to take pleasure in the moment of crisis. The age of chaos and stagnation could be an opportunity to build momentum to re-create and build value. The government should try to enhance competitiveness of exports with the farsightedness to foster business-friendly corporate environment and new value.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Jan. 23, Page 29
*The author is the director of research institute of the Korea International Trade Association.