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[Yoo Choon-sik] Korea’s growing trade surplus with US

By Korea Herald

Published : April 15, 2024 - 05:33

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The crushing defeat of President Yoon Suk Yeol’s party in last week’s nationwide parliamentary election casts a dark cloud over the fate of his administration’s various reform plans as well as its ability to manage national affairs efficiently. His administration will face difficulty implementing many of its announced policies and creating new ones.

It is the first time under the current Constitution that a sitting president’s party has failed to win the majority in parliament at any time in the five-year presidency. With close to two-thirds of the seats, opposition parties have now secured the power to do everything but push for constitutional amendments, impeach the president or expel fellow lawmakers.

The ruling party, having won 108 out of the 300 seats in parliament as a result of the April 10 election, together with its satellite party, is similar to the 21st assembly‘s make-up. However, many of the policy promises made since President Yoon took office in May 2022 were based on the condition that his party would regain a majority in parliament.

It will be inevitable for the government to revise, push back or even cancel most of its policy plans unless it succeeds in persuading the main opposition party led by Lee Jae-myung, who was narrowly defeated in the 2022 presidential election. But there are a few areas Yoon can and should focus on: diplomacy and national security, among others.

In the diplomacy area, I want to focus on economic diplomacy as South Korea’s trade-dependent economy has been and will continue to be influenced by fast-changing trends regarding global supply chains and trade relations. Understandably, the upcoming presidential election in the United States deserves close attention in many senses.

The deepening trade conflicts between the US and China have offered opportunities as well as risks for South Korea and its companies, the responses of which until now have mostly been to invest more money and strengthen ties with the US. However, such efforts have produced an unintended and unwelcome outcome: a ballooning trade surplus in South Korea’s favor.

During the first quarter of this year, South Korea posted a trade surplus amounting to $13.3 billion, according to preliminary data from the Ministry of Trade, Industry and Energy, as Seoul redirected more of its outgoing shipments to the US from China. It was a whopping 86 percent increase from the amount recorded during the same period in 2023.

This comes after South Korea enjoyed a record surplus of $44.4 billion in trade with the US for the whole of 2023, which was a sharp 59 percent gain from a $28.0 billion surplus in 2022. South Korea has posted a trade surplus with the US since 1998, but the amount has been increasing rapidly since 2020 as Seoul’s trade relations with Beijing soured.

There is a voice of concern among experts about the fast widening of the trade imbalance between the two allies, especially ahead of the US presidential election in November. While it will most likely be a close contest between President Joe Biden and his predecessor Donald Trump, trade policy will continue to be the US government’s top priority.

South Korea needs to move fast and early toward identifying and addressing potential conflicts with the next US administration, instead of just waiting until it becomes too late. It should strengthen efforts to reach out to known and emerging key players within the current and upcoming administrations and establish solid communication networks in Washington.

Seoul may simply consider offering its intention to import more from the US as a way of containing the aggravating trade imbalance, but it will not be sufficient. At the same time, it may need to emphasize the fact that the increasing trade surplus has been an unintended outcome of a surge in direct investment by South Korean companies in the US.

South Korean companies have registered plans to invest a total of $111.7 billion in mostly manufacturing projects in the US for the past three years in line with the US government’s push for a so-called onshoring drive, marking a nearly doubling from $57.4 billion for the preceding three-year period, according to data from the Bank of Korea.

In addition, major South Korean companies, such as chipmakers Samsung Electronics and SK hynix, have been boosting investment in the US to secure federal subsidies and get ahead in the intensifying competition in the advanced chip packaging and artificial intelligence chip sectors.

Samsung Electronics, the world’s top memory chipmaker, is reportedly planning to increase its investment in its semiconductor fabrication plant currently under construction in Taylor, Texas. The Wall Street Journal reported the chip giant is expected to double its spending for the Taylor fab, adding about $27 billion to the original $17 billion plan.

Its global and domestic rival SK hynix has also recently announced a $3.87 billion investment to build an advanced chip packaging plant and research facility in West Lafayette, Indiana. SK seeks to increase cooperation with nearby Purdue University, which has one of the US’s biggest semiconductor and microelectronics engineering programs.

Yoon may wish to spend some time delving deeper into the implications and lessons from the latest election results before making any changes in the policy direction for domestic affairs. His own party has also yet to form a new leadership after the party’s interim leader resigned to take responsibility for the election defeat.

However, the world never waits, and trade policy is one of the few areas where Yoon can and should continue to focus regardless of domestic politics. The ruling party also needs to provide full support for him in fulfilling his duty as the No. 1 salesperson for South Korea, according to his own expression.

Foreign trade has been the overwhelmingly important engine of growth for the South Korean economy’s miraculous ascent to a high-income country from the ruins of war seven decades ago. It will continue to be the main engine for some time to come.

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.