Trade tensions hit the world’s largest exporters
“Things are not so good,” said Jeong Tae-ki, the plant manager at steelmaker Posco’s factory in Pohang, eastern South Korea.
He was referring to the level of demand for Posco’s hot-rolled steel, but he could just as well have been talking about the global trade outlook. In the 18 months since US president Donald Trump launched a trade war, international commerce volumes have suffered — hitting export-dependent economies like South Korea.
In October, South Korea exports fell 14.7 per cent compared with the same month the previous year, the largest drop in nearly four years and 11th consecutive monthly contraction.
Iron and steel exports have dropped 9.7 per cent by value in the 10 months to October compared with the same period last year.
Two-thirds of Korean goods export categories contracted year-on-year in October according to official data from the Korea Customs Service. The pain was particularly badly felt in electronic products, down 18 per cent, and semiconductors, down 32 per cent.
It is part of a wider pattern. Global trade volumes shrank 1.2 per cent in August compared with the same month last year, the third consecutive monthly annual fall and the longest stretch of contraction since the global financial crisis more than a decade ago.
Last month the IMF cut its forecast for global GDP growth this year from 3.3 per cent in the spring to 3 per cent, partly because of the trade slowdown.
Posco is feeling the pain, reporting falling net profits in the third quarter.
“The global economy is slowing so we are seeing weaker steel demand,” Mr Jeong said.
Exports of goods and services account for more than 40 per cent of GDP in South Korea, the highest among the world’s 20 largest economies — equalled only by Germany, which is similarly suffering from trade-related malaise.
But the damage is not just restricted to export-heavy economies.
Nearly 100 countries — including South Korea — saw the value of their exports shrink in the first half of the year according to an FT analysis of IMF data, up from 33 last year. Exports of machinery and transport equipment were particularly severely hit.
This month the IMF slashed its forecast for the annual growth rate of global goods and services exports by volume to 1.2 per cent for 2019, down from the 3.7 per cent it forecast last year.
“Services linked closely to the goods trade — like transport — are slowing, barriers to trade in some sectors have crept up and financial services trade growth is weak,” said Adam Slater, an economist at Oxford Economics.
The high level of policy uncertainty means that many companies are cutting back on investment. Investment growth is expected to slow to 1.5 per cent in advanced economies this year, compared with 4.1 per cent in 2017, according to the IMF.
The trade tensions have added to other economic headwinds that are also unfavourable for South Korea, where the economy grew by just 0.4 per cent in the third quarter of the year from the preceding three months, below analysts’ forecasts.
As a major supplier to China, it is feeling the effects of slowing growth in the world’s second-largest economy. Exports from South Korea to China dropped 17 per cent by value year-on-year in October. Other countries in the region are also affected with exports to China contracting in many countries including Thailand, Japan, Singapore, Vietnam.
South Korea is also suffering from rising tensions with Japan. The spat has escalated in recent months as Japan slapped new restrictions on the exports to Korea of key materials used by chipmakers.
And the semiconductor industry, a staple driver of South Korea’s growth, is experiencing a cyclical slowdown.
There are some signs that the situation may be stabilising. Negotiations between the US and China have taken a less confrontational tone as they try to finalise a deal, although many experts remain wary that any short-term deal will resolve underlying tensions.
Global trade fell at a milder rate in July and August than in June, while the global JPMorgan IHS manufacturing purchasing managers’ index for new export orders pointed to a smaller contraction in September than in the previous month.
Recent evidence “indicates that whilst world trade is likely to remain weak in the near term, the situation at least isn’t getting any worse”, said Bethany Beckett, an economist at Capital Economics.
Yet hopes for a trade deal have disappointed in the past, economic data remains mixed and US tariffs on Chinese imports which were introduced in September could pile more pressure on to the global economy.
South Korea’s economy “remains hampered by the slowdown in global demand for tech products, trade protectionism and declining prices for semiconductors”, said Steven Burke, an economist at the consultancy Focus Economics.
As a result policymakers have recognised the need for stimulus measures.
In October Moon Jae-in, South Korea’s president, warned about the “grave situation” facing the economy as he urged lawmakers to pass the country’s biggest fiscal stimulus programme since the financial crisis.
And economists warn of further pain in the coming months.
Tay Qi Hang, an analyst at Fitch Solutions, said its expectations for the South Korean economy had been “slightly more bullish” earlier in the year, but now the group believes it “is likely to remain weak over the coming quarters”.
That leaves Posco scrambling to protect its profit margins, in particular by automating its production further.
“The battle is about saving costs by even one to two per cent or increasing margins by 1 to 2 per cent,” said Kim Ki-soo, Posco’s senior vice-president. This “can be a make-or-break situation in the market”.