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Korea’s Sluggish Trade and the Government’s Efforts to Boost This Slump

Blog, Global Trade, ONESOURCE May 27, 2016

Current status of international trade in Korea

Being the world’s sixth largest exporter, South Korea has a high level of dependence on exports for the economy. Recently though, the fiscal prospect of Korea’s economy for 2016 is dark, as exports are shrinking year-on-year from Jan. 2015 to Mar. 2016. In fact, Korea noted 15 straight months of decline in exports, when comparing the year-on-year rate decline percentages[1]:

2015

Jan       -1.0%

Feb      -3.4%

Mar      -4.6%

Apr      -8.0%

May     -11.0%

Jun       -2.7%

Jul        -5.2%

Aug     -15.2%

Sep      -8.5%

Oct      -16.0%

Nov     -5%

Dec      -14.3%

2016

Jan       -19.0%

Feb      -13.0%

Mar      -8.1%

 

The cause of the slump in trade

South Korea has noted a large slump in trade because of the reliance on the global economy needing goods from this country and most importantly from the influence in changes recently noted with China’s drop in trade. China is a large trade nation with South Korea (China represents 26% of Korea’s export volume) and the recession of China’s economy is serious. If demand for goods had held steady or increased, South Korea would benefit from the opportunities of greater demand on products, and thus more exports. Unfortunately many countries, including China, are decreasing their expenditures and investments due to the global economic concerns impacting their overall financial status.

Additionally, with the oil producing countries noting a decrease in the price of oil, they historically lower their purchasing power as oil prices drop, adding to the impact on China and exports for the region. Once these factors are adjusted, South Korea will see a positive change to their export volume.

The efforts Korean government taking to shore up international trade

The government’s task this year is in finding a solution to increase their exports, which is imperative to remedying up the country’s growth momentum. One of those steps the government of South Korea is taking is to fortify the budget by helping the sagging economy through supporting companies in securing deals in new markets that are opening up, such as Iran and Cuba. Additionally, the Bank of Korea is considering cutting its key interest rate in line with the actions recently taken by Japan in lowering its interest rates, similar to what Europe’s central banks had done to boost their economies[2].

The South Korean government has also looked at ways to boost its exports through increasing FTA utilization rate. South Korea has signed several major free trade agreements in recent years to help its exports, with the U.S., China, the European Union, and the ASEAN countries. Those agreements have had a very positive impact on reducing the declines to South Korea’s overall exports. The government is also promoting FTA utilization through facilitating industry related FTA sessions to promote FTA education for exporting companies domiciled in South Korea.

The government has also committed to supporting export promotion by reducing importing country’s non-tariff barriers through ratifying AEO (Authorized Economic Operator) MRA (Mutual Recognition Arrangement). If AEO MRA is ratified, simplification of international trade procedures between both parties will be achieved. One important change and a key metric for supply chains, would be the reduction of time spent for Customs clearance.  AEO MRA proposes a significant expedited process to participating companies and countries, including the reduction or omitting of customs inspections as added benefits associated with the Customs clearance process. The removal of importing countries non-tariff barriers should greatly improve South Korea’s ability to export to these destinations, creating greater demand for South Korean products.

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Reference list

http://financialtribune.com/articles/world-economy/35521/s-korea-exports-slump-biggest-six-years

http://www.ft.com/fastft/2016/02/01/korean-exports-slump-the-most-since-2009/

http://www.ft.com/fastft/2016/02/01/korean-exports-slump-the-most-since-2009/

http://www.marketwatch.com/story/south-koreas-exports-shrink-122-in-february-2016-03-01

https://www.ajot.com/news/chinas-new-economy-leads-to-deepening-export-slump-in-asia-1

http://www.morningstar.com/news/dow-jones/TDJNDN_201601311667/south-korean-exports-plunge-at-fastest-pace-since-2009.html

http://financialtribune.com/articles/world-economy/35521/s-korea-exports-slump-biggest-six-years

[1] KITA Import and Export Statistics

[2] http://www.bloomberg.com/quicktake/negative-interest-rates