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Oil Price Affecting South Korea’s Trade Balance

South Korea’s trade deficit for the first 20 days of this month amounts to US$3.94 billion with the producer price index showing a month-on-month rise for the eighth consecutive month with regard to the rising prices of petroleum and raw materials. According to experts, adverse effects of the rising prices are beginning to manifest themselves.

Although the rising prices have been caused by a global economic recovery, the result means that South Korea’s export costs are increasing fast in that it is highly dependent on imported crude oil and raw materials. Even if South Korea’s exports substantially increase, imports may increase more than that and South Korean companies’ profits may decrease due to the increasing costs.

According to the government, the trade deficit for the first 20 days of this month may lead to a monthly trade deficit and yet it is likely to be one-off. Those in industries, however, have a completely different view. “The international oil price, which was less than US$40 per barrel last year, is likely to remain at US$70 or more in the second half of this year, and then a negative surplus may be repeated and the government may fail to meet its 4 percent growth target for this year,” one of them explained.

The 20-day trade deficit is the largest since January 1 to 20, 2016, the first period of the Korea Customs Service’s relevant statistics. “The deficit has to do with large-scale investments in the semiconductor industry and an increase in consumer goods imports led by a domestic demand recovery,” the Ministry of Economy and Finance said, adding, “In other words, the deficit is not entirely negative and it does not have to be seen as a risk.”

However, experts point out that imports are increasing too fast and this tendency may continue for a while due to the international oil price. The WTI price jumped from US$47 to US$67.2 per barrel from early this year to July 20 and that of the Dubai crude oil jumped from US$50 to US$71.28 per barrel in that period. This month, South Korea’s automobile, petroleum product, gas, crude oil and semiconductor imports increased 176.8 percent, 123.3 percent, 146.7 percent, 83.6 percent and 29.9 percent, respectively.

South Korea’s trade deficit is predicted to continue in the second half of this year. According to the Korea International Trade Association, its exports for the second half of this year are estimated at US$304.6 billion (up 12 percent year on year) and its imports for the same period are estimated at US$306 billion (up 28.7 percent year on year). If this really happens, South Korea will show a half-yearly trade deficit for the first time in 13 years although the association estimated this year’s trade surplus at US$10.6 billion.
Source: Business Korea

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