Korea's real trade deficit hits all time high

Real trade loss hits record high in H1

The nation's real trade loss hit an all-time high of 54.9 trillion won ($54 billion) in the first half, reflecting worsening terms of trade, data by the Bank of Korea showed yesterday.

According to the central bank, this implies the economy lost real income equal to 54.9 trillion won in the first half, based on the condition that trade terms had remained the same as 2000, the base year.

Due to worsening terms of trade in Asia's fourth-largest economy, the real trade loss showed a sliding trend from 12.6 trillion won in the first half of 2004 to 37.1 trillion won posted in the first half of 2007.

The net terms of trade index for goods also went down to 81.9 in the first five months of the year, falling 14 percent from 95 in the same period of last year. The index is calculated by dividing the export price index by the import price index. The base year is 2005 with a benchmark of 100.

Some economists like Kwon Soon-woo, a researcher at the Samsung Research Economic Institute, believe the major reason behind the worsening terms of trade is Korean exporters, whom Kwon says are still relatively incompetent in global markets. He says many are failing to match consumer prices rises with increased costs of raw materials.

Amid rising international prices of oil and other commodities, import prices in June surged 49 percent year-on-year, the largest margin in a decade.

Kwon cited the Japanese economy as an example.

"Japan has bargaining power to ease the cost burden by raising prices of their exports because many of its companies enjoy monopolistic status in the global market," the expert said.

He suggested that a fundamental solution for Korea would be to boost the quality of its export goods, which would help raise the country's overall bargaining power. He noted that surging import prices including oil are beyond the country's control.

Another challenge for the economy, Kwon added, is reducing its dependency on raw material imports and shifting the industrial structure to an energy-saving one.

The world's 13th-largest economy depends on imports for almost all of its oil needs and is the world's fifth-largest importer of the resource.

However, the BOK downplayed the significance of the real trade loss data, stressing that the overall increase in trade volume is also a major determinant of increasing the real trade loss.

"The real trade loss has been worsened by the simultaneous effects of worsening trade terms and increased trade volume," said Chung Young-taek, head of the national income team at the central bank.

"The real trade index is one factor considered for calculating the real gross national income. Because it is a hypothetical figure based on 2000, it doesn't mean an actual income loss," Chung said.

Korea recorded a deficit of $6.2 billion in trade in the first half of the year.

Korea International Trade Association forecast yesterday that the economy is likely to post a trade deficit of $3.5 billion this year due to high energy and food costs. It would make the first annual shortfall in 11 years.

By Kim Yoon-mi

(yoonmi@heraldm.com)

2008.08.06