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Economic Outlook

KDI Economic Outlook 2017-1st Half

Impact of China-US Trade Disputes on the Korean Economy

SUMMARY ■ In the event of a China-US trade dispute, the domestic demand in both countries will shrink, having a negative impact on the Korean economy. Indeed, such an impact will be much stronger on US trade restrictions than vice versa.

■ Korea must aim to diversify its export markets in response to growing trade protectionism led by the US while preparing to prevent any backlash from the China-US trade disputes from spreading to the Korean economy.
Report VOD
Having subsided after the 2008 global financial crisis,
trade protectionism is once again gaining momentum.

In response,
concerns are growing over the fall out from possible trade disputes
between the US and China, in regards to the Korean economy
as the Trump adminstration continues to focus on the US trade deficit with China.

this study quantitatively analyzes how the Korean economy will be affected by
the resulting trade reductions in terms of supply and demand.

For demand,
an examination was conducted on Korea’s intermediate and final goods
that are exported to China and the US for domestic demand.

While for supply,
the examination concentrated on the global supply chain,
through which intermediate goods are exported to the US or China.
and then processed locally and re-exported to either country.

Firstly, let’s look into the supply side.

Of Korea’s exported goods to China,
the share of those used in China’s processing trade
fell from 39.4% in 2007 to 25.8% in 2014;
from which the share of those re-exported to the US fell from 7.6% to 4.4%.

This implies that a 10% decrease in China’s exports to the US
will result in a 0.44% decrease in Korea’s exports to China.

And of Korea’s intermediate goods exported to the US,
the share used in processing US export items marked 10.4% during the same period;
only 0.8% of which was used in items to re-export to China.

The findings reveal that, within the global supply chain,
Korea is more closely connected to China than the US.

Therefore, the negative impact from a decline in China’s exports
to the US on US trade restrictions will be much more profound.

As for the demand side,
trade restrictions will reduce China’s exports to the US,
which will, in turn, lower its income and domestic demand.

Ultimately, this will reduce Korea’s China-bound exports,
as they are dependent on China’s domestic demand.

The same applies for China’s trade restrictions on the US.
That is, there will be a decrease in Korea’s US-bound exports.

16.7% of China’s total exports head for the US
while 7.8% of US exports head for China.

It can therefore be assumed that China’s income and domestic demand are
more vulnerable to trade disputes.

This mean that for Korea, who is more dependent on China,
the negative blow from its exports to China will be more significant than
from its exports to the US.

Based on these results,
further analysis was conducted on the impact of a China-US trade dispute on Korea,
assuming that the trade between the two countries dropped by 10%.

The results reveal that,
a 10% drop in China’s exports to the US due to trade restrictions,
cuts China’s GDP by 0.84%, the US’ by 0.03% and Korea’s by 0.31%,
making the demand path more vital than the supply.

On the other hand,
a 10% drop in the US’ exports to China, will have weaker a effect,
cutting Korea’s by 0.04%

The results of the analysis reveal that in the event of a China-US trade
dispute, Korea will be markedly affected by the reduced exports to China
on the latter’s weaker domestic demand.
Further still, the impact from US trade restrictions on China will be far worse than vice versa for the Korean economy.

Indeed, if Korea’s exports remain heavily dependent on specific countries,
this may leave it wide open to even local trade disputes. In order to
mitigate such risks, Korea must actively make new inroads into emerging
markets, such as India, to diversify its export markets.

Political and economical countermeasures must be established in order to
prevent the Korean economy from becoming immersed in such disputes.
Additionally, Korea must cohere with other countries to take the lead in
containing the ever expanding protectionism.
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