Trade war threatens Korea Inc.

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Trade war threatens Korea Inc.

Despite the Korean government’s claim that a trade war between the U.S. and China will have little impact on the local economy, there’s still growing concern among market watchers due to Korea’s strong dependency on the two major economies.

China accounts for 24.8 percent of Korea’s exports and that figure grows to 31.6 percent when including Hong Kong. The U.S. is Korea’s second-largest export market, accounting for 12 percent.

Overall, trade with China and the U.S. is equivalent to 68.8 percent of Korea’s exports.

Looking a little deeper, there are some areas that would be hit much harder by a trade war between the world’s two biggest economies. Intermediate products, like computer chips, are expected to see an especially big impact - intermediate products account for 78.9 percent of goods exported to China.

In the case of semiconductors, 40 percent of those manufactured from production lines in Korea are exported to China, which then process or assemble them before sending them on to the U.S.

The Korea Institute for International Economic Policy (KIEP) estimated that Korea’s exports would shrink by $237 million during the first phase of a trade war between the U.S. and China that kicked off on Friday.

The U.S. is levying a 25-percent tariff on 818 Chinese goods worth $34 billion and China is retaliating with a 25-percent tariff on 545 American products including automobiles, valued at $34 billion.

If the trade war escalates on July 20 and both countries levy further tariffs on $16 billion of goods, Korea’s exports to China will likely shrink an additional $190 million and exports to the U.S. will shrink by $47 million.

“The actual companies that would suffer will be multinational companies that supply intermediate goods to China,” said Yang Pyeong-seob, head of KIEP’s global research center. “We expect Korean electronic and machinery parts exports to China to slow down.”

According to a study by the OECD, when China’s imports shrink 10 percent, Korea’s economic growth shrinks 1.6 percentage points. Currently the Korean government projects the nation’s growth to reach 3 percent by the end of the year.

Singapore’s DBS Bank changed its growth forecast for Korea from 2.9 percent to 2.5 percent. It has also lowered projections for Taiwan, Malaysia and Singapore as a result of the trade conflict.

The bigger problem comes when the trade war expands to other economies.

The U.S. is not only waging a trade war with China, but has also escalated tensions with its allies including Canada, Europe and Mexico.

Global institutions including the International Monetary Fund and JP Morgan estimate that when major economies start leveling tariffs at 20 percent, world trade will shrink 7.9 percentage points by 2020 and global economic growth will shrink 1.3 percentage points.

The Korea International Trade Association estimated that Korea’s exports will likely shrink 6.4 percent or see $36.7 billion less in exports if the situation spreads to Europe.

Some market experts believe that the trade conflict will ease.

“Since the first phase, both countries will likely work on negotiating,” said Kim Yoon-seoh, an analyst at Shinhan Investment Corp. “It is clear that Donald Trump’s trade protectionism has a strategic purpose both politically and economically.”

Kim said politically Trump’s trade war is targeted at shoring up support for the mid-term elections in November and economically it is targeting at improving the U.S. trade deficit.

The analyst, however, added that if the tensions between the two countries continue, it would hurt Trump’s efforts as it will hurt U.S. industries from farming to metals including steel and aluminum and even automobiles and electronic goods.

The IMF estimates the U.S. current account deficit to amount to $614.7 billion, which would be a 32 percent increase compared to last year’s $466.2 billion.

The local market last week closed slightly higher than the previous day. On Friday it inched up 0.68 percent despite the tariffs being swapped by the United States and China. Analyst said that the market already had reflected the impact earlier. In fact, the Nikkei 225 closed 1.12 percent higher and the Shanghai market closed 0.49 percent higher.

However, some project that the benchmark Kospi could fall to as low as 2,200 this week if the situation continues.

On Friday, Korean Trade Minister Paik Un-gyu said the impact from the U.S.-China trade dispute is unlikely to have a major impact on the Korean economy.

“The tariffs are expected to have a limited impact on Korean exports in the short term,” Paik said. However, he added that the government will continue to monitor the situation in case the trade conflict intensifies and eventually affects the local market.

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