"Can't Trust Gyeonggi-do in the US"... BOK Warns on 'Exports' [BOK Focus]

The Bank of Korea to Release Report on US Industrial Policy This Year
Recognizing Limits of Dependence on US and Semiconductor Exports

[Image source=Yonhap News]

The Bank of Korea has begun to raise questions about the long-term sustainability of exports, which have become a major driver of our country's economic growth. Although the Bank of Korea had previously unified its stance, stating that the strong U.S. economy and IT sector would offset sluggish domestic demand and drive growth, changes in the global trade structure have led to warnings that we cannot rely on the "miracle semiconductor" forever.

According to the Bank of Korea on the 19th, under the direction of Governor Lee Chang-yong, a report on U.S. industrial policy is scheduled to be released this year, which is likely to indicate its impact on our exports.

In the 'April 2024 Economic Situation Assessment' report released last week by the Bank of Korea’s Research Department and Economic Modeling Office, it was announced that due to a rapid export recovery, this year's economic growth rate could exceed the February forecast of 2.1%. This outlook is based on the expectation that the favorable conditions in the IT sector and U.S. economy will continue for the time being.

However, conversely, this reflects the reality that our country depends heavily on exports to the U.S., and specifically on semiconductors. With an aging population making it difficult for private consumption to recover, if exports also fail to support the economy, the time will come when we can no longer say that "sluggish domestic demand will be offset by exports" as we do now. From the Bank of Korea’s perspective, which comprehensively assesses domestic economic conditions and monitors them from a mid- to long-term viewpoint, this is a worrying situation. A Bank of Korea official explained, "This is why the Governor has continuously warned against the illusion created by the manufacturing sector’s rebound and emphasized the need for service sector development."

Moreover, the economic growth driven by semiconductors, while positive in macroeconomic figures, takes considerable time for the public to feel its effects. There is a significant time lag before export-led growth impacts employment growth or income expansion, as shown by indicators such as the Business Survey Index, and this is recognized internally at the Bank of Korea. Kim Min-sik, head of the Research Department’s General Survey Team, recently explained on the Bank of Korea blog, "As a small open economy, Korea experiences a significant economic improvement effect from increased exports, so we expect positive spillover effects to the domestic sector to become visible. However, it is judged that it will take time for households and domestic companies to feel the warmth of this economic improvement."

The Bank of Korea also issued a warning report regarding U.S. export figures, which recently surpassed exports to China in the first quarter. While the current strong U.S. economy is helping Korea achieve export success, the report cautions against premature reassurance, stating that "the effect of export growth will weaken in the mid to long term." This is especially problematic given the high uncertainty surrounding the upcoming U.S. presidential election and the direction of related industrial policies. According to the report, in the past, the U.S. has strengthened various trade sanctions when its trade deficit with Korea widened or when public opinion on protecting domestic industries intensified. This means that even if the U.S. economy continues to perform well, it may not positively impact our export growth. The Bank of Korea plans to release a follow-up report on U.S. industrial policy later this year under Governor Lee’s directive.

Professor Heo Jun-young of Sogang University said, "From a mid- to long-term perspective, it is time to consider whether exports to the U.S. will continue to perform well, how long we can rely on semiconductors, and what our next growth engine will be after semiconductors." He added, "Looking at the path Korea has taken to grow?'steel → shipbuilding → automobiles → electronics → semiconductors'?we can see that the country has continuously moved toward industries with higher added value. Therefore, as a mid- to long-term issue, people’s curiosity about what comes after semiconductors will grow."