[One Year of Trade Deficit] ① Sharp Increase in Imports of Three Major Energy Sources... Direct Hit from Export Decline

Exports, which have supported the Korean economy, have experienced negative growth for five consecutive months through last month, resulting in a trade deficit that has persisted for a year. Imports of the three major energy sources?crude oil, gas, and coal?have increased by nearly 20% compared to the same period last year, while trade with China, Korea's largest trading partner, has declined, and exports of key items such as semiconductors have dropped by more than 40%. In particular, the rise in energy raw material prices has led to increases in public utility charges such as electricity and gas, as well as manufactured goods prices, creating a vicious cycle that ultimately drives up consumer prices. Experts warn that if the uncertainty surrounding the Russia-Ukraine war prolongs, Korea's trade deficit could continue through the second half of this year.

According to the Ministry of Trade, Industry and Energy on the 2nd, last month's export value (provisional customs clearance basis) was $50.1 billion, down 7.5% from the same period last year, while imports increased by 3.6% to $55.4 billion. With exports decreasing and imports increasing, the trade balance recorded a deficit of $5.3 billion. The trade balance has been in deficit for 12 consecutive months from March last year to this month, marking the first time since January 1995 to May 1997. The annual trade deficit this year reached $17.956 billion in just two months, accounting for 38.0% of last year's total trade deficit of $47.2 billion.

Increase in Energy Imports Hits Trade Deficit Directly

Experts cite soaring international energy prices as the biggest cause of the prolonged trade deficit. This is a consequence of the ongoing Russia-Ukraine war that began in February last year. Even with efforts to boost exports, the sharp rise in energy import costs has deepened the trade deficit. Last month, imports of the three major energy sources?crude oil, gas, and coal?amounted to $15.3 billion, a 19.7% increase compared to the same period last year. This contrasts with imports excluding energy, which recorded the lowest level since May last year at $40.1 billion. During this period, crude oil imports ($7.25 billion) decreased by 0.1% compared to the same period last year, while gas ($6.18 billion) increased by 73.2%, and coal ($1.87 billion) rose by 4.4%. The share of the three major energy imports in total imports also rose by 1.5 percentage points from 26.1% last year to 27.6%.

The impact of rising international energy prices continues to negatively affect the domestic economy. As raw material prices rise, the prices of manufactured goods have increased. According to the Bank of Korea, the Producer Price Index (provisional, base year 2015 = 100) in February this year was 114.82, up 0.4% from the previous month (114.40). The indices for coal and petroleum products and chemical products also reached their highest levels in nine years since February 2013, at 166.79 and 117.36 respectively (compared to 170.07 and 117.62 in February 2013). This has ultimately led to consumer price increases, causing high inflation rates in the 5% range for six consecutive months from August last year to January this year.

Uncertainty of the War Remains... Too Early to Feel Secure About Energy Stabilization

Experts believe that most of the trade deficit is due to the sharp rise in raw material prices and that the trade balance will improve rapidly if prices stabilize. The Bank of Korea estimates that a $10 annual average drop in international oil prices would improve the trade balance by around $9 billion. Fortunately, crude oil prices (Dubai crude) have been declining since the beginning of this year. After reaching $108.16 per barrel in May last year, prices fell to $82.11 per barrel last month, showing signs of stabilization.

The problem is that international energy prices can fluctuate again at any time depending on the course of the Russia-Ukraine war. Lee Sang-yeol, a research fellow at the Korea Energy Economics Institute, analyzed that if Russia completely halts natural gas supplies to Europe, up to 100 million tons of European demand could shift to the international liquefied natural gas (LNG) market. He expressed concern, saying, "The global LNG production facility utilization rate is already at 88%, so short-term production increases are limited," and "Due to Europe's high price premium, the concentration of international LNG supplies in Europe will cause supply disruptions in traditional Asian LNG importing countries."

If natural gas supply becomes unstable, prices could rise due to increased demand for alternatives such as coal. According to the Korea Energy Economics Institute, after the war began in March last year, global coal prices reached a record high of $380 per ton. When Russia reduced gas exports to Europe in July of the same year, coal prices temporarily surged above $400 per ton. This shows that international energy prices are directly influenced by Russia's energy policies. A representative from the Korea Energy Economics Institute explained, "The coal market is expected to maintain a tight supply-demand balance until 2025," adding, "The direction of futures prices will be significantly influenced by the situation in the European gas market."

Increasing Domestic Energy Consumption Poses a Burden

Increasing domestic energy consumption is also a burden. While increased energy consumption in the industrial sector for exports has positive aspects, in a situation where the global economy is in recession and raw material prices remain high, it contributes to a higher proportion of energy imports. According to the Monthly Energy Statistics Report, the provisional final energy consumption in 2022 was 234.6 million tons of oil equivalent (toe), surpassing the previous record of 233.37 million toe set in 2018. This is why the government is undertaking a major transition to a low-consumption, high-efficiency energy structure in the industrial and economic sectors. Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "Although the deterioration of the trade balance was caused by rising international energy prices, if energy imports enter a stabilization phase, it could negatively affect our export performance," adding, "It is necessary to strengthen the export competitiveness of key industries."