#Key Business Issue l 2019-08-05
With Japan’s export restrictions targeting Seoul as well as the trade war between the U.S. and China, South Korea is under growing pressure. U.S. President Donald Trump has claimed that it is necessary for the World Trade Organization or WTO to change the rules governing the status of developing countries. Washington has also decided to impose anti-dumping duties on oil pipelines imported from Korea.
Let’s first examine the increasing trade pressure from the U.S. with Professor Kim Gwang-seok from the Hanyang University Graduate School of International Studies.
The U.S. has cited the so-called “particular market situation” as grounds for its tariff changes. Under its investigation system, the U.S. Department of Commerce sets tariff rates arbitrarily when it determines that documents submitted by a particular exporter are insufficient.
The Commerce Department decided last month to impose anti-dumping tariffs of up to 39 percent on South Korean oil pipelines. It is lower than the 59 percent proposed in the tariff rate review in February but more than doubles the rate set during the previous year’s review. Last year, Korean oil pipeline exports to the U.S. amounted to 350 million US dollars. The tariff hike is expected to place a heavy burden on mid-sized Korean steelmakers, which comprise a considerable part of oil pipeline production in South Korea.
In the meantime, Seoul is seeking to impose punitive tariffs of up to 350 million dollars annually on particular types of U.S. products after Washington failed to follow a WTO ruling. Previously, the U.S. raised tariffs on oil country tubular goods from South Korea up to a maximum of 29.8 percent. It’s been over a year since the WTO ruled in favor of South Korea, saying that the U.S. violated the WTO agreement, but Washington has yet to address its unfair duties. In addition to the anti-dumping duties, another downside risk awaits South Korea.
At present, South Korea enjoys the status of “developing country” only in terms of agriculture. So the nation can place over a 500 percent tariff on foreign imports of rice, even though it is a WTO member, to protect its local farming industry.
But Trump is now arguing that it is unfair to give that status to a rich country with over 30-thousand U.S. dollars in per capita income and also since it is one of the world’s ten biggest exporting countries as well as a G20 member. Simply put, Trump is pressuring South Korea to stop receiving benefits for the domestic agricultural industry.
On July 26th, President Trump ordered the U.S. Trade Representative to take all necessary measures to prevent wealthy countries from benefiting from their statuses as developing countries in the WTO. Trump’s main target is China but he also mentioned South Korea, Mexico and Turkey, all of which are members of the G20 and the Organization for Economic Cooperation and Development. He added that if the WTO does not make any substantial progress in this matter within 90 days, the U.S. will take its own action to stop treating the relevant nations as developing countries.
I think South Korea may lose its developing country status. If Korea no longer receives tariff or subsidy benefits, other developing countries will have more opportunities to export their goods. Even if South Korea sustains its status in the WTO, the U.S. could withdraw from the trade body and attack Seoul one on one, just like it slapped 25 or 10 percent tariffs on Chinese goods.
The WTO gives special treatment to developing countries to enlist their participation. Countries with this special status are entitled to various advantages, including longer periods to implement WTO treaties and favorable treatment for about 150 provisions. While developed economies are committed to reducing their agricultural tariff rates by 50 to 70 percent over ten years, developing countries are committed for just 33 to 47 percent in the same period. For specific items, developing countries enjoy lower tariffs or even tariff exemptions within the quota.
Currently, South Korea is allowed to impose high tariffs of up to 513 percent on imported rice and provide local farmers with subsidies of some 1.2 billion US dollars a year. However, if it gives up its status as a developing country, South Korea will be stripped of these privileges.
Washington’s growing trade pressure is casting a dark shadow over the Korean economy, which has already been grappling with the fallout from the ongoing U.S.-China trade row and Tokyo’s export curbs on Seoul.
According to a report released by the WTO in April, a prolonged global trade war will lead to a reduction in the world GDP and global trade in 2022. In particular, the downturn is forecast to deal a severe blow to South Korea’s GDP.
Korea’s exports fell 8.5 percent in the first half of this year. But the figure may plunge even further to 20 percent amid the drawn-out U.S.-China trade war and the Korea-Japan trade conflict. Decreasing outbound shipments in the export-based Korean economy will inevitably affect the nation’s growth negatively. This is a worrying situation.
The WTO report calculated the potential effects of the protracted trade dispute between the U.S. and China. Apart from the gloomy outlook for the global economy, South Korea must deal with other negative factors. The coincident and leading composite indexes, which gauge current and future business conditions, have fallen simultaneously, the first such decline in three months, indicating that the local economy will continue to experience a slowdown. Amid growing economic uncertainties, Korean companies should overhaul their business strategies.
So far, South Korea has relied on China and the U.S. too heavily for its exports. Now is the time to expand its export destinations to emerging markets so the country will not be swayed by any row between the world’s two largest economies.
South Korea also needs to secure more alternatives, other than Japan, as suppliers of key materials in order to maintain a stable supply chain even if its relations with some countries worsen. Through structural reform, Korea should turn the crisis into an opportunity.
Amid a series of risk factors and growing protectionism trends around the world, the prospects for the South Korean economy remain grim. To fend off the ever-intensifying trade pressure, Seoul should respond to the external trade environment smartly and effectively, while diversifying its export and import destinations.