Central bank warns of negative impact of US-China relations, geopolitical conflicts on Korea's key export industries

Korea's export-oriented economy could face threats because of its heavy reliance on raw material imports amid rising geopolitical tensions, a senior researcher at the country's central bank said during a seminar Wednesday.

The Bank of Korea stressed a fragmented global trade regime could harm the country's key export sectors such as semiconductors, electric vehicles and secondary cell industries due to their high dependence on the import of raw materials and intermediate goods to produce them.

Kim Woong, director general of the BOK's research department, shared his study on risks to the global supply chain during a joint seminar hosted by the state bank and the Korea Chamber of Commerce and Industry, discussing changes in Korea's economic paradigm and countermeasures.

"As Korea is a small-sized open economy deeply nestled in the global supply chain -- heavily dependent on the export of IT, electric vehicles and batteries that are core items of the US-China trade conflict -- it can be directly affected by the rising fragmentation,” Kim explained.

In recent years, trade protectionism has risen across the globe, accelerated by the COVID-19 pandemic and Russia's invasion of Ukraine.

“If the fragmentation accelerates, it will add pressure to production disruption and inflation,” Kim said.

Korea Customs Service data showed 81.5 percent of rare earth element imports were from China in 2022. For aluminum, 21.9 percent came from China.

Even as Korea tries to diversify its sources, it will not be able to avoid a price hike as it lacks the upper hand in negotiations, Kim said.

Meanwhile, China's electronic vehicle and secondary cell industries are developing fast, he said, citing data from the United Nations Comtrade.

"Though Korea is globally competent in semiconductors, China's competence in electric vehicles and secondary cells is developing at a fast rate," Kim said.

The fragmentation phenomenon, however, could also have positive impacts for the Korean industry.

Korea's semiconductor and electric-vehicle industries could strengthen their technological competence and make their way into the US market, if China looses the market share, Kim said.

But the new trade order could also lead to the downfall of the domestic market, as firms expand their investments overseas in factories and research and development. It could also lead to cuts here in jobs in related industries.

Furthermore, Kim picked the reopening of the Chinese economy as a short-term risk for the global economy. China’s reopening is expected to ease supply chain disruptions, but it could also lead to raised demand for raw materials, increasing the volatility of inflation in major countries.

Kim suggested that Korea take a new perspective in assessing changes in the global supply chain as it recovers from the pandemic, while tightly monitoring the policy changes of major nations and participating in diverse discussions at a global level.