[Issue Interview] Juhyun, President of the Korea Institute for Industrial Economics and Trade, "Trade Deficit Unavoidable for the Time Being... Situation Worsening"

"It seems unavoidable to face a trade deficit for the time being. In the forecast made in November last year, a trade deficit of $26.6 billion was expected for this year, but reflecting the worsening economic conditions from November to December last year, it is expected to deteriorate further."

"The amplitude of South Korea's economic growth rate in the 1% range will be determined by the development of the Russia-Ukraine conflict that caused the global economic downturn, the shift in monetary policy stances of major countries, and especially the recovery of growth due to China's reopening (resumption of economic activities)."

Joo Hyun, President of the Korea Institute for Industrial Economics and Trade (KIET), said in a recent interview at the Asia Economy building in Jung-gu, Seoul, "The global economy this year is expected to worsen due to complex threats in the real economy sector such as intensified inflation, supply chain disruptions, and geopolitical risks," adding, "Continuous financial tightening by major countries to curb inflation and uncertainties related to COVID-19 will act as very significant downside risks limiting growth."

President Joo analyzed, "Domestically, the main factor will be the slowdown in consumption due to the full-scale impact of monetary tightening, and externally, the global economic downturn and decline in trade volume will keep the growth rate in the 1% range." He explained, "An increase in U.S. interest rates has the effect of slowing down the global economy, and when the economy slows, global trade volume decreases, and when trade volume decreases, our country's exports inevitably decline. It's like a single chain."

Juhyun, President of the Korea Institute for Industrial Economics and Trade. Photo by Younghan Heo younghan@

-The trade deficit has continued for 12 consecutive months from March last year to February this year. How do you see the outlook for our industrial exports this year?

▲The trade balance, which had maintained a stable surplus trend since the financial crisis, has recently shown a continuous deficit trend. This is mainly due to a sharp increase in import amounts caused by rising prices of energy raw materials. This is a common reality faced by non-resource countries including South Korea, Japan, and Germany. In addition, the slowdown in exports due to China's economic slowdown and the semiconductor downturn, which accounts for about 20% of our exports since the second half of last year, have had a major impact on the trade deficit trend. It is expected that imports will decrease as raw material prices stabilize due to domestic economic slowdown and global recession this year, but the problem is that exports will decline more significantly due to reduced overseas demand for semiconductors and other major export items for the same reason, making it unavoidable to avoid a trade deficit for the time being.

-Specifically, it seems that exports of our key industries such as semiconductors, steel, and chemicals will also be hit hard.

▲We have many heavy and chemical industries with large cycles. This structure is such that once prices rise, a boom is maintained for several years, but when oversupply occurs in the global market, prices fall. Memory semiconductors are a representative example. Exports of automobiles, whose parts supply chains have normalized, shipbuilding delivering 2021 order volumes, secondary batteries, and bio sectors are expected to increase somewhat, but the problem is that semiconductors, information and communication devices, and general machinery, which led export growth during the COVID-19 phase, are expected to turn to export decline due to demand contraction. In particular, materials industries such as steel and chemicals, and memory semiconductors may be affected not only by demand slowdown but also by a sharp drop in unit prices. In other words, for steel and chemical items, export volume may increase, but export value could decrease by more than 10%.

-The Korea Institute for Industrial Economics and Trade predicted a trade deficit of $26.6 billion this year.

▲This figure was announced in November last year. The industrial environment has deteriorated significantly since mid-October last year. Including the worsening economic conditions in November and December last year, the economy is expected to worsen further. There has been almost no period with such high uncertainty in the past several decades. Previously, uncertainty factors were limited to sharp rises in oil prices or financial crises. But now, with the Russia-Ukraine war, U.S.-China conflicts, and raw material disputes, it is unclear from which side or factor problems may arise.

-The scope of export controls is expanding due to U.S.-China hegemonic competition.

▲Since the Obama administration, regardless of political party, the U.S. has consistently and increasingly strengthened its checks on China. Considering this, the hegemonic competition over advanced technology between the U.S. and China is likely to continue for a long time. In other words, the competition between the U.S. and China should now be treated as a constant rather than a variable. The U.S. is already tightly encircling China in advanced strategic industries such as semiconductors, communication equipment, and artificial intelligence (AI), which will have a significant impact not only on future industrial hegemony but also on defense and security. As seen in the cases of Huawei and SMIC, China's importance and share in the global ecosystem of advanced strategic industries are being significantly reduced. Recently, the U.S. reached an agreement with Japan and the Netherlands on export controls of semiconductor equipment to China. Although our companies have received a one-year grace period from the U.S., it is expected to become more difficult to import semiconductor equipment into China. The intensification of U.S.-China conflicts has made it inevitable to revise the global value chain (GVC) strategy of advanced industries that heavily depended on China. This acts as a major factor affecting our export structure. Our intermediate goods exports related to information and communication technology (ICT) have already shifted from China to new southern regions such as Vietnam. The U.S.-China conflict will accelerate further.

-The global economy is fragmenting due to economic security concerns involving the U.S., European Union (EU), and others.

▲This is a point everyone agrees on. Global economic fragmentation is not a problem that can be resolved in the short term. We also need to consider between which regions and in which sectors fragmentation will occur. Despite the U.S.-China hegemonic war, trade volume between the two countries is actually increasing. Currently, fragmentation applies to core strategic assets and does not affect trade in education or consumer goods. The important point is that the international community must strategically expand essential sectors within the overall industrial structure. This means having cards to block supply if the counterpart country stops supply.

-Globally, countries are strengthening industrial policies again. How about South Korea?

▲No country has implemented industrial policies like South Korea, either in the past or now. We have aligned not only subsidies but also all systems such as education with industrial development. If skilled personnel were needed, the government directly supported industrial policies by increasing engineering colleges, etc. This structure changed after the 1997 financial crisis. After the crisis, direct support to large corporations except for research and development (R&D) practically disappeared. Recently, with the spread of the concept of global economic security, changes have come. The core of economic security depends on whether South Korea can maintain core industrial capabilities domestically and use them as weapons of the Korean economy globally. For example, in the case of secondary batteries, since overseas subsidies are received to establish battery production plants, a strategic perspective is needed to also focus on expanding domestic factories.

-There are concerns about 'Peak China,' where the Chinese economy is expected to enter a downward phase after peaking. Is the growth formula centered on exports to China problematic?

▲China's transition in its growth model is certainly an important challenge to South Korea's growth strategy. As China's industrial structure changes, South Korea's industrial and economic growth strategies and corporate business models inevitably need to change. Recently, China's growth model shift can be summarized as growth led by domestic demand rather than exports, import substitution of intermediate goods such as parts and materials, and technological self-reliance. This is an unfavorable change for South Korea, which focuses on intermediate goods exports based on relative technological superiority. The era when China concentrated production capacity as the world's factory and global market production base is over. North America, Europe, and China will all proceed with multipolarization of industrial ecosystems by strengthening regional production and supply chains for major products or industries. Direct investment is becoming increasingly important over exports as an approach to these markets. If necessary, it will be increasingly necessary to separate and build quasi-independent supply chains by global mega-market. As a result, attention should be paid to youthful Asia such as Southeast Asia and India, which have demographic complementarity with South Korea. In the long term, they will replace China's role as a global production base and serve as major frontiers for export market diversification and supply chain restructuring.

-After the Russia-Ukraine war, supply chains for energy, minerals, etc., are rapidly becoming strategic assets.

▲Fundamentally, diversification of supply chains as well as stockpiling and strategic securing of domestic production bases for key mineral assets are absolutely necessary. To do this, a detailed understanding of our supply chain structure is a prerequisite. We must comprehensively review the impact intensity on our industries and people's lives, likelihood of occurrence, and early recovery possibility in case of occurrence. Priorities should be set focusing on items with high dependence on specific countries, and diversification and stockpiling should proceed in order of urgency. In the worst case, a Plan B such as expanding domestic production bases should be prepared. Fortunately, after the element water (yo-so-su) crisis two years ago, our government surveyed about 3,000 supply chain risk items. Among them, 200 items requiring focused management have been designated as economic security items and risks are being intensively managed. Legislation for three laws including the Basic Supply Chain Management Act, Resource Security Special Act, and revision of the Materials, Parts, and Equipment Special Act is underway. Once passed, systematic government responses for supply chain stabilization will finally be possible.

-The government is praised for quickly building core mineral alliances in response to the U.S. Inflation Reduction Act (IRA). How do you see the future outlook?

▲This year, major automakers such as Tesla and Ford have successively announced price cuts for electric vehicles, and fierce price competition is expected in the electric vehicle market. Last year, with the IRA guidance adjustment, commercial vehicles such as rental cars became eligible for subsidies, but these vehicles account for only about 5% of U.S. sales. The U.S. accounts for 35% of our electric vehicle exports, so the negative impact of IRA implementation cannot be completely ruled out. In the short term, it is necessary to diversify sales channels such as subscription services and rental cars to expand electric vehicle sales. It is also necessary to advance the timing of full-scale electric vehicle production in the U.S.