South Korea – USA: the missing piece

South Korea – USA: the missing piece

July 10, 2018

Carmela di Terlizzi

The internationalization of the Asian country makes it particularly sensitive to the current protectionist trends

 

In times of World Cup a parallel with football comes naturally: not only the direct matches matter but also the result in the qualifying round. Similarly for S. Korea the impact of US protectionism on its economy will not be tied only to bilateral relations, but also to the outcome of the many trade fronts that the United States has opened; primarily towards China, of which S. Korea is the main supplier of components.

The recent chronicle of the commercial relations between the two countries marks a change compared to a past in which trade played a key role in relations between the two countries and in S. Korea economic development. In early sixties, for example, the US granted privileged access to South S. Korean industries to their market, in the name of the "Trade not Aid" policy. Until the early 2000s these exports represented the main driver of S. Korean growth (in 2001 the United States represents more than 1/5 of the country's total exports).

In June 2007, the US and South S. Korea also signed KORUS, a free trade agreement that in five years led to duties’ elimination on 95% of bilateral trade.

 
Fig.1: Main target markets for South S.Korean exports (% )
South Korea – USA: the missing piece
Source: ITC
 

2018 marks a breaking point. In January, the US administration imposed duties on the S. Korean washing machine manufacturers. In the following months, President Trump announced measures on imposition of duties of 25% on steel and 10% on aluminum (S. Korea is the second largest steel supplier in the United States after Canada with a share of more than 10%). In the first instance, S. Korea was not exempted from the measure (such as Canada and Mexico). After a series of meetings, it was agreed that the S. Korean producers are exempted from Section 232 duties up to 2.68 million ton. (about 70% of the average annual export quota to the US between 2015 and 2017). This is certainly a not encouraging premise for the revision of the Korus agreement currently under way.

 
Fig.2: Main export sectors of South S.Korea (%)
South Korea – USA: the missing piece
Source: ITC
 

Meanwhile, other games are being played on other fields, of which the one between United States and China will be the most important for the S. Korean future. China today represents the first destination market for S. Korea (the second is the United States), absorbing a quarter of its foreign sales. Over 40% of exports to the country of the dragon are represented by components (electrical and electronic) and enter in a global technological supply chain that would be heavily penalized by a closure of US market towards China. The initiatives announced a few days ago on hi-tech products, machinery, cars and engines (just some example) will, in fact, impact first on Chinese manufacturers and then along their supply chain, including S. Korea.
It is also worth to underline that exports to S. Korea represent 43% of GDP (compared to 31% for Italy). Changes in trade policy will therefore be crucial not only for exports but also for the overall growth of this economy. Returning to the football metaphor, S. Korea will not only have to play its direct match well, but will also have to prepare to face the results of the other field.

 
 
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