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RHEE Tae-Hwan

How Korea’s Exports Are Doing Well

RHEE Tae-Hwan

June 11, 2010

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The recent performance of exports, one of the main engines that helped the Korean economy recover from the global financial crisis, is indeed astounding. Average daily exports in May recorded an all-time high of US$1.84 billion and outbound shipments to Europe have risen at a double-digit growth rate despite volcanic ash covering the sky and disrupting air transport. The record pace came on the heels of last year's performance, which was even more surprising. Amid a 12.2% drop in the global real trade volume, Korea's exports bucked the trend for a slight increase. How did this happen?

First, Korean exporters successfully leveraged the foothold they had established in high-growth emerging market economies. In recent years, emerging economies and developing countries have enjoyed higher growth than advanced economies. Due to the global financial crisis, the global economy contracted 0.6% in 2009 but performance was polarized: advanced economies declined 3.2% and emerging economies grew 2.4%. Emerging market economies' share in global trade rose accordingly. In nominal terms, emerging economies accounted for 40.5% of total world trade in 2009 compared to 33.4% in 2005.

Against this backdrop, Korea's exports to emerging economies have increased not only in absolute terms, but also in relative market share. Between 2000 and 2004, Korea accounted for 4.22% on average in emerging economies' total imports, but that rose to 4.67% in 2005-2009. China certainly made the most contribution, now accounting for more than 25% of Korea's total exports. Yet exports to other developing countries are also increasing, exemplified by the fact that shipments to ASEAN member countries surpassed those to the US or Japan in 2009.

A weak won also has helped Korea's exports. The average won/dollar exchange rate was 1,276 in 2009, up 15.8% from the 2008 average. The won's depreciation extended beyond the greenback, also weakening against the euro, Japanese yen and Chinese yuan. Last year, the won/euro exchange rate was 10.4% higher than that of 2008, and the won/yen exchange rate was 26.6% higher during the same period. This dramatically boosted the price competitiveness of Korean exports.

A global recession chokes demand worldwide and has a deflationary effect. Last year was no exception, with the global export unit price index measured by the International Monetary Fund dropping 10.6% from the previous year. Korea's index plunged 16.5%, in terms of the US dollar. But as the won/dollar exchange rate rose 15.8%, export price index changed little in terms of won. This enabled Korean exporters to maintain the same export volume and keep factories humming.

Lastly, the parts and materials industry displayed a strong export performance. The share of parts and materials in the nation's exports has steadily increased since 2000, and surpassed 50% for the first time in the first quarter this year. Stronger exports of electronic parts such as semiconductors and liquid crystal displays (LCD), as well as automotive parts like auto engines have led the upswing.

Exporting parts have at least two advantages over exporting final goods. First, it has knock-on effects. LG Electronics' LCDs are used not only in LG's mobile phones but also in Apple's iPad. As the global economy recovers from a recession, sales of both Korea-made mobile phones and iPads will rise, which can ramp up the exports of Korea-made LCDs further. Second, the value-added ratio of the parts industry is generally higher than the average value-added ratio of the manufacturing sector. So it is more profitable to export core parts rather than to import parts and assemble and sell the final goods if we have the comparative advantage in the parts industry. This is the case in various sectors: IT sector, automobile, steel and petrochemicals.

In short, the success factors come down to the following: aggressive advancements into emerging markets on the back of price competitiveness stemming from the weak won, and strong competitiveness of the parts and materials industry. How about the future? Although advanced economies are finally rebounding, emerging market economies are likely to grow faster at least for a couple more years. In this regard, Korean companies need to continue to widen their presence in emerging markets and add new destinations. Try India or Africa. Continued efforts in strengthening the competitive edge of parts and materials industry will also be crucial. Even with the stellar performance in exports, Korea's trade deficit with Japan persists.

he economic situation in the EU is growing more uncertain every day, and China's growth might be slowed if it starts to raise interest rates. Korean won's steady appreciation is expected in the coming months, and the foreign exchange market has been quite volatile recently. Overall, the export environment is likely to be worse in the second half of 2010. The more difficult it is, the more standard tactics should be employed. Got some profit from exports? Invest it in R&D and human capital.

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