S. Korea posts a record-high trade deficit in January

South Korea posted a record-high trade deficit of 4.89 billion dollars in January since 1966, when the statistics began to be compiled, according to the Ministry of Trade, Industry and Energy on Tuesday. The overall deficit increased as export growth stood at a mere 15.2% while import growth reached as high as 35.5%. It is the first time in 14 years since the global financial crisis in 2008 that South Korea saw a trade deficit for two straight months. Concerns are mounting on the country’s trade front as the prices of oil and raw material, which have a direct impact on corporate production, are rising.

The fact that trade deficits are detected despite decent export of key items, such as semiconductors, means that supply and demand of energy and raw materials, which cannot be controlled by individual countries or companies, have a huge impact on the overall economy. Crude oil prices soared as the energy supply chain has been disrupted due to seasonal factors, such as a rise in winter demand, coupled with geopolitical factors, such as Ukraine crisis. As this trend is likely to continue for the time being, it is difficult to predict when South Korea’s trade deficit will end.

High oil price alone is a challenging risk to manage for an export-driven country like South Korea. The problem is the energy issue is not the only risk facing the Korean economy this year. As the U.S. has started tightening monetary policy, money is flooding out of emerging markets. On top of that, risk factors, such as the spread of the Omicron variant, the U.S.-China conflict, and a hard landing of the Chinese economy are piling up. Such risk factors are not separate issues, but complex risks that are interconnected. In the vicious cycle of increasing economic uncertainties resulting from COVID-19 mutation, disruption in the supply chain caused by geopolitical risks, and ensuing monetary policies, emerging countries, including South Korea, are inevitably more vulnerable than key currency countries.

The recent sharp increase in imports shows that supply chain risks have increased again while demand growth failed to be sustained after a moderate growth in the latter half of last year since the pandemic. Nevertheless, the fact that the government dismissed the trade deficit as a “temporary phenomenon” shows that it is short-sighted, failing to comprehensively see the other side of the economy. Amid growing global risks, such as tightening monetary policy and the U.S.-China conflict, there is a possibility that South Korea will experience ‘slowflation,’ where the economy grows very slowly while inflation continues to rise, and ‘stagflation,’ where the inflation rate is high and the economic growth rate slows. The government should not ignore the warning sign coming from the trade deficits and come up with preemptive measures.