"International Oil Prices Peak Nearing End... Trade Deficit Expected to Shrink from Second Half"

On the 3rd, amid the sharp rise in international oil prices, fuel price information is displayed at a gas station in Seoul, where domestic gasoline and diesel prices continue to soar. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Jin-ho Kim] International oil prices, which had been hitting new highs daily due to Russia's invasion of Ukraine, are expected to turn downward in the second half of the year. Accordingly, South Korea's trade deficit is also projected to gradually shrink.

According to the "Recent Trade Balance Deficit Assessment and Outlook" report released on the 30th by the Korea International Trade Association's International Trade and Commerce Research Institute, the recent deterioration in trade balance is a common phenomenon among manufacturing export countries such as Germany, Japan, and China. From the second half of the year, with the decline in oil prices, the trade deficit is also expected to gradually improve.

The report evaluated that the occurrence of a trade deficit despite steady exports, as seen this year, is a very unusual phenomenon. It analyzed that among the five trade deficits that have occurred since 2000, except for this year, the cause of the trade deficits was a decrease in exports, such as during the global financial crisis.

Furthermore, this year's trade deficit phenomenon was explained as a result of a combination of cyclical factors and structural factors. Cyclical factors include the rising momentum of international raw material prices such as crude oil, copper, and zinc, driven by expectations of economic recovery spreading since last year, and the expanded import demand of domestic manufacturing companies to replenish inventories depleted due to supply chain bottlenecks.

As structural causes, the report analyzed that the surge in oil prices following the Russia-Ukraine situation and the increase in natural gas imports due to the expansion of eco-friendly and low-carbon demand acted as factors worsening the trade balance.

It further explained that manufacturing countries with a high proportion of intermediate goods imports generally experience a significant deterioration in trade balance during periods of high oil prices and recover their trade balance during periods of low oil prices. South Korea's intermediate goods imports account for more than half (50.9%) of total imports. Over the past 10 years, South Korea, China, and Japan have repeatedly shown a pattern where their trade balances fluctuate inversely with international oil price changes.

Despite the recent trade deficit, the current account balance and foreign exchange reserves have been maintaining a stable situation. The current account balance maintained a surplus of $1.9 billion even in January this year when the trade balance recorded a large deficit of $4.74 billion, and the service balance deficit has significantly decreased since 2017, contributing to the current account surplus. The scale of foreign exchange reserves also ranked 8th in the world as of the end of March this year, following Hong Kong.

Jung Ji-sang, a research fellow at the Korea International Trade Association's International Trade and Commerce Research Institute, said, "We expect a gradual decline in oil prices from the second half of the year," adding, "From June, Saudi Arabia's crude oil will be introduced at a better official selling price, and accordingly, the trade balance is expected to quickly return to normal."