Trade wars to destroy value chain in North East Asia

Trade wars to destroy value chain in North East Asia

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Seoul | 09 August 2019 | lrb.munda | Get In Lamka

Gov’t advised to take prudent approach in handling Japan feud

By Lee Kyung-min

A U.S.-China trade war and a trade dispute between Korea and Japan will seriously undermine the manufacturing value chain in Northeast Asia, global economists said, Friday.

They warned that if ongoing trade disputes escalate further and more countries copy the U.S. and China’s retaliatory trade tactics, it will end up destroying the international trade system dealing a fatal blow to the global economy.

“The three countries ― Korea, Japan, and China ―- have created a synergy thus far, but the close relationship will likely break,” Park Chong-hoon, chief economist at SC First Bank, told The Korea Times.

“Close ties have been to their mutual benefits thus far in the global market. But their relationship now will be defined more by their competitive rather than cooperative nature.”

Troy Stangarone, a senior director and fellow at the Korea Economic Institute (KEI), said it is still early to say the value chain will be substantially undermined, but the newly triggered uncertainty in and of itself is already being felt.

“Until we know how long Japan will delay issuing licenses for export or whether it will restrict the total flow of any items that now face restrictions, we won’t know the true impact. But the uncertainty is already having an impact and we could see disruptions to supply chains in Asia,” he said.

The assessments came in response to the world’s two largest economies’ long-drawn-out feud now becoming a full-fledged currency war. Also, a trade dispute between Korea and Japan has been intensifying.

The U.S. designated China recently as a currency manipulator to counter China’s decision to let its currency drop below 7 yuan per dollar without state intervention to prop up the currency’s value. China did not sell off U.S. dollars to buy Chinese renminbi, a reason why the U.S. considers it a deliberate inaction.

The designation came on the heels of the announcement from China’s Ministry of Commerce that the country’s companies have stopped buying U.S. agricultural products.

This was the latest move at essentially dismissing U.S. President Donald Trump’s “threat” that his country will impose new tariffs on around $300 billion of Chinese goods, because Beijing had not fulfilled a promise to buy large volumes of U.S. agricultural products.

Analysts expect Korea could be the hardest hit as China and the U.S. are among the top trading partners of Asia’s fourth-largest economy and it plays a bridge role in the value chain of the region.

Taking the semiconductor industry, for example, Korea imports key materials from Japan for the manufacture of semiconductors. Then, made-in-Korea display panels and semiconductors ― the intermediate goods ― are shipped to China and used as key parts in IT gadgets, which are sold globally as final goods.

Data from the trade ministry and the Korea International Trade Association (KITA) showed that out of $54.6 billion of imports Korea received Japan, 53 percent or $28.8 billion was parts and materials.

Of $162.1 billion worth of goods Korea export to China, 79 percent, or $128.2 billion are considered intermediate goods.

China is the top exporter in the world, accounting for 13 percent of global exports, but over a quarter of exports are goods produced via processes involving intermediate goods producers.

Korea is between a rock and a hard place, Park of SC First Bank said.

“Korea’s export-reliant economy is sure to suffer if global trade takes a hit. The U.S.-China trade dispute has already taken a toll on Korea’s exports for the past seven months, and the prospect is becoming bleaker,” he said.

He said the economic outlook will be revised downward, an inevitable result of the subsequent slowdown in exports.

“Reduced exports means less corporate investment, smaller income and weaker consumption. The cycle is sure to become vicious. Year-on-year figures in 2020 may look less sobering because this year has suffered a particularly hard hit, but that does not mean the economy will regain vitality,” he said.

Sung Tae-yoon, an economist at the Yonsei University, echoed his view, saying Korea should exercise prudent judgment to prevent any further escalation of the feud with Japan.

“Unlike the U.S.-China dispute, the developments of which remain beyond our control, we have more discretion with the one involving Japan,” Sung said.

“Fueling anti-Japan, anti-Korea sentiment is destructive to both. Korea and Japan will lose more than they gain from hurting and retaliating against each other.”

Source: Korea Times

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