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KDI FOCUS
Mounting Uncertainties in the Global Trade Order and Korea’s Policy Response

January 30, 2020

  • Author SONG. Yeongkwan
  • Series No. KDI FOCUS No. 98, eng.
  • Language English
PDF
KDI FOCUS
Mounting Uncertainties in the Global Trade Order and Korea’s Policy Response

January 30, 2020

PDF
    Ⅰ. Issues

    Ⅱ. Economic Fallout from the US-China Trade Conflict

    Ⅲ. Korea’s Policy Response

    Ⅳ. Conclusion
KDI Report VOD
As the US and China continue to lock horns over trade, it is expected that many countries will see their GDP fall in 2019.

If we take a closer look at major manufacturing exporting countries like Germany, Japan and Korea, we see that manufacturing productivity and exports declined.

Despite the two economic powerhouses signing phase one of a trade deal earlier this year in January, the difficult issues have been pushed back to a later phase.

Accordingly, KDI conducted an analysis to examine the impact on major manufacturing exporting countries like Korea if phase one tariffs are maintained and the trade war intensifies, leading to the additional tariff measures that were announced in Dec. 2018.

As the tariffs measures become broader, both the US and China will be affected. But, with an export scale three times larger than its western counterpart, the repercussions for China will be greater.

As for Germany, Japan and Korea, all three will see a decline in GDP and total exports. But, Korea will suffer more because of the significant drop in its China-bound exports.

This is because Korea’s share of exports to China and it’s dependence on certain export items are significant.

Specifically, the electronics and chemical industries, which make up 60% of Korea’s exports to China, has seen the most damage in semiconductors and petrochemicals, and this is expected to continue.

Unilateral trade regulations fueled by protectionism, like the US-China trade war, and Japan’s removal of Korea from its white list, will weaken the WTO system and global value chains.

So, what does the future have in store for Korea, whose rapid growth has been driven by the WTO’s stabilization of global trade markets?

As the uncertainty in the world trade order grows, Korea must overcome its dependence on some countries and export items, and enhance its competitiveness.

Firstly, to reduce Korea’s dependence on China, efforts must be made to join the CPTPP, which enforces the cumulative rules of origin, to diversify the list of trade partners.

Also, the government’s current R&D support must be overhauled to provide SMEs with practical assistance to enhance the competitiveness of the parts and material industries in order to respond to Japan’s trade restrictions.

Finally, to tackle the growing concerns about overlapping projects and problems over the effectiveness of the current government export support policy, especially support for export marketing, a careful examination is required on whether beneficiaries are deserving and valid and whether the support methods are effective.
□ The US-China trade war is propagating uncertainties within the global trade order, weakening global value chains and the WTO system. These uncertainties pose a considerable threat to the Korean economy which is heavily dependent on foreign trade. To tackle this, the Korean government needs to positively consider joining the CPTPP and make efforts to improve the effectiveness and efficiency of policies for the materials and components industries as well as export support.

- The US-China trade conflict is generating uncertainty over the global trade order and economic prospects.

- This study compares and analyzes the impact of the US-China trade war on major manufacturing countries and presents the policy countermeasures for Korea.

- The trade war between the US and China is already having a tangible impact, particularly on major exporting countries such as Germany and Korea, weighing down on their GDP growth.

- Mounting uncertainties in the global trade environment and growing trade protectionism pose a great threat to Korea as its economy is heavily dependent on manufacturing exports.

- Compared to Germany and Japan, Korea is likely to experience more negative effects from the trade war due to its export structure.

- The US-China trade conflict could directly/indirectly reduce Korea's exports, which in turn, could lead to a fall in GDP.

- The analysis found that due to the differences in export volume and exportto-GDP ratios between the two countries, China is likely to be hit far harder than the US as a result of the intensifying trade disputes.

- Most of the negative impact on the Korean economy from the trade war derives from the reduced exports to China. Also, the electronics and chemical industries were hit hard.

- The US’ trade policies are highly likely to disrupt the WTO trading system and GVCs. Korea’s future policies need to focus on responding to the changes in the global trade order, including the weakening of the WTO system and GVCs and ensuing fall in global trade volume.

- Korea’s accession to the CPTPP is a necessary approach to reduce its dependence on exports to China.

- Japan’s export restriction on Korea is a testimony of the weakening WTO system due to the abuse of the national security exception clause.

- To cope with a weakening WTO system and GVCs, efforts should be made to increase the effectiveness and efficiency of support policies for the material and parts industries.

- There should be efforts to improve the effectiveness and efficiency of the export support policy which is needed to alleviate Korea’s high concentration of export products and destinations.
 
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