Surging Trade Reliance

Nov. 13, 2009 -- South Korea has tried to reduce its heavy dependence on foreign trade in a move to lessen its exposure to external shocks since the outbreak of the 1997-98 Asian financial (NYSE:DYP) crisis. In the early 2000s, one of the nation's policy goals had been to boost domestic demand and beef up its services industry. But the plan failed; dependence on exports and imports has only surged.

According to official statistics, the proportion of trade to gross national income soared to a record 92.3 percent last year, up from 69.4 percent in 2007. It is unusual for the ratio to jump by more than 20 percentage points in a year. The figure once declined to 54.6 percent in 2002 from 57.8 percent in 2001 and 62.4 percent in 2000. But it started to rise in 2003 and reclaimed the 60-percent level in 2004.

The irony is that the ongoing global economic crisis, which started in September 2008, has contributed to deepening the nation's reliance on overseas trade, while weakening its domestic market. This runs counter to a general belief that such a worldwide turbulence usually saps global demand drastically, with export-oriented economies such as Korea taking the brunt of a recession. Actually, the nation's exports plunged right after the unprecedented turmoil, although they are now rebounding and leading the nation's economic recovery.

The real cause for the upsurge in the country's trade dependence was attributed to the local currency's sharp depreciation against the U.S. dollar. The Korean unit tumbled below the 1,500-won mark early this year from the 900-won level right before the global crisis. In fact, the weak won has greatly helped the nation export more goods by taking advantage of their improving price competitiveness in world markets. Yet, despite this boon, the Korean economy is still struggling with the flagging domestic consumption and job cuts amid the global crisis.

To be more precise, the ever-heavier trade dependence was the direct result of the calculation of gross domestic product (GDP) by using the U.S. currency. The rapid depreciation of the won caused the value of the GDP to fall in dollar terms, while having the effect of increasing value of exports and imports compared with domestic demand. Experts predict the dependence will decrease as the won has been gaining ground against the dollar.

It is more or less inevitable for Korea to rely on foreign trade, considering its export-focused economic structure. But too heavy a dependence on trade leaves the nation more vulnerable to fluctuations in overseas market conditions, especially those arising from a worldwide financial and economic crisis. Thus, it is important to reduce the trade dependence in order to create a resilient and stable economic structure to better cushion external shocks.

Policymakers and businessmen are required to recognize the importance of maintaining a balance between foreign trade and domestic demand. And they should no longer delay structural reform of the services industry to improve its competitiveness. Such fields as education, health care, law and financial services are increasingly open to foreign competition in line with market liberalization and globalization. Therefore, the Lee Myung-bak administration should map out bolder measures to foster the services industry as the nation's new growth engine. It goes without saying that the services sector has great potential and could also create numerous jobs.