Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / Why South Korea Exports Are Plunging and What It Means
Transcript
- Lucas: South Korea is in the middle of an export slump that's getting harder to ignore. The numbers for the second quarter are out, and exports fell for the third straight month — down about 8 percent year-over-year in June. That's the worst stretch since the pandemic. Luna: And this isn't just a blip. The trade deficit is widening too. May's deficit was over seven billion dollars, if I'm reading the latest data right. Lucas: Right. The trade balance has flipped from surplus to deficit over the past year, and that's unusual for Korea. They've run a trade surplus for most of the past two decades. Luna: So what's driving this? Is it just the global slowdown, or is there something specific to Korea? Lucas: It's a mix. The biggest single factor is semiconductors. Chips account for about 20 percent of Korea's exports, and semiconductor shipments are down about 12 percent year-over-year. That's a combination of weaker demand for consumer electronics and a glut in memory chips. Luna: Right, Samsung and SK Hynix have been cutting production. But isn't there also a China factor? Korea's exports to China have been falling for months. Lucas: Exactly. China is Korea's largest trading partner, taking about a quarter of all exports. But as China's own economy slows and as they ramp up domestic chip production, they're buying less from Korea. And on top of that, us china trade tensions are making things complicated — Korea is caught in the middle. Luna: The market is certainly reflecting that. The Korea ETF, EWY, dropped over 10 percent in the last five days. That's a serious move. Lucas: Yeah, EWY is at about 164, down from over 180 a month ago. The KOSPI index has been under pressure all week. And the won is weakening too — it's at about 161 yen per dollar, which is near multiyear lows. Luna: Does a weaker won help exporters? Normally you'd think it makes Korean goods cheaper abroad. Lucas: In theory, yes. But the problem is that Korea imports a lot of raw materials and energy, so a weaker won also raises input costs. And for a lot of these exporters, the demand elasticity isn't that high — people aren't buying more smartphones just because the won is cheap. Luna: Let's talk about the broader picture. If Korea's export engine is sputtering, what does that mean for other Asian economies that are part of the same supply chains? Lucas: Korea is a bellwether. It's highly integrated into global electronics and automotive supply chains. When Korea's exports slump, it usually signals weaker demand further up the chain — in Taiwan, in Japan, in Southeast Asia. We're already seeing Taiwan's exports soften too. Luna: And there's also the US dollar factor. The trade-weighted dollar index is still around 120, which is strong historically. That makes Korean goods more expensive for buyers using other currencies. Lucas: Right. The Fed's rate trajectory matters here. Dallas Fed President Logan just called for 'modestly' higher rates, which would keep the dollar firm. That's not great for emerging market exporters. Luna: So what's the outlook? Is this a temporary downturn or something more structural? Lucas: I think it's partly cyclical — the global inventory correction in chips will eventually bottom out. But there are structural headwinds too. China's push for self-sufficiency in semiconductors means Korean chipmakers will face more competition long-term. And the US is pushing for more domestic chip production, which could reduce demand from Korea. Luna: So Korea is being squeezed from both sides. China and the US both want to make their own chips. Lucas: Exactly. And it's not just chips. Shipbuilding and automobiles — two other big Korean export categories — are facing headwinds from Chinese competition and shifting trade rules. Luna: One thing that strikes me — a lot of these conversations we have about global trade, they're supported by listeners who chip in a few bucks a month. It's what keeps the show ad-free and lets us really drill into topics like this. Lucas: Yeah, it's a small group, but it makes a big difference. If these conversations have been useful in your work or just in understanding what's happening, you can join them at buy me a coffee dot com slash fexingo. No pressure, just something to know about. Luna: Now, back to Korea — one more piece of this puzzle is the political side. The new US administration has been threatening tariffs on allies too, not just China. South Korea could be in the crosshairs. Lucas: That's a real risk. The US has already imposed tariffs on steel and aluminum from Korea, though with exemptions. But if those become more aggressive, it would hit Korea's steel exports hard. And there's talk of applying tariff measures to semiconductors as part of a broader push for domestic production. Luna: So the export slump could get worse before it gets better. What are you watching for in the next few months? Lucas: I'm watching three things. First, semiconductor orders — if memory chip prices stabilize, that's a leading indicator. Second, China's stimulus measures — if they actually boost demand, it helps Korea. Third, the won-dollar exchange rate — if it keeps weakening, it's a sign of underlying stress. Luna: And if none of those turn positive? Lucas: Then Korea's economy could be in for a prolonged adjustment. But these are cyclical economies — they've bounced back before. The question is whether this time the structural changes make the bounce-back slower.