Outcome of Trump-Xi summit and impact on Korean economy

May is being defined by the “modest” outcome of the summit between U.S. President Donald Trump and Chinese President Xi Jinping, unusually hot days, the prolonged Middle East war and growing economic pains around the globe. The global community breathed a sigh of relief that the two superpowers managed to avoid the Thucydides Trap.

There were intense expectations for the Trump-Xi summit to deliver a promise to end the war in the Middle East, on top of addressing the 5Bs (Boeing, beef, soybeans, Board of Trade, and Board of Investment) and the 3Ts (Taiwan, tariffs, and technology). While the two leaders urged Iran to reopen the Strait of Hormuz, they provided no further details, much to the disappointment of the global community. The markets immediately reacted with sharp declines. The KOSPI slid 5 percent, the Nikkei dropped about 2 percent and the Nasdaq composite index also shed 2 percent. The 10-year U.S. Treasury yield surged to more than 4.5 percent. Oil prices jumped to $110 per barrel.

With no sign of the reopening of the Strait of Hormuz and an end to the war in sight, further economic difficulties are expected worldwide. The International Monetary Fund should soon brace for a downward revision to its global growth forecast, which was set at 3.1 percent in April under the assumption of a limited conflict in duration and scope.

Instability in oil and energy prices, as well as in global supply chains for critical materials and rare earths, poses a heavy risk of triggering an economic crisis. The International Energy Agency reported that global oil reserves have fallen by nearly 380 million barrels since the war began. Korea’s inflation increased to 2.6 percent in April from 2.2 percent in March year-on-year.

The Korean government has taken a set of measures in response to high oil prices and inflation, such as cutting energy taxes, offering subsidies, and encouraging the increased use of public transportation. Many governments and companies are shifting to a four-day workweek and reducing driving to counter the adverse impact of rising oil prices. However, these measures have not only become costly but have also fallen short of serving as a wake-up call, as people fail to drive less and consume less oil. Given that the war is unlikely to end soon, governments may soon find it difficult to keep these measures intact.

Korea, being a trading nation heavily dependent on imports of critical materials and rare earths, is particularly vulnerable to disruptions in global supply chains. It stands as the world’s second-largest consumer of naphtha, thus a 4.8 percent fall in the feedstock supply this past March heralded sustained high costs, which nearly doubled to $120 per barrel from prewar levels.

The Korean government is executing multifaceted support to stabilize naphtha supply and demand for the petrochemical industry. This includes procuring up to 2.1 million tons of naphtha from countries like Saudi Arabia and Oman by the end of the year through a joint public-private special envoy mission. The petrochemical industry is also minimizing the impact of supply disruptions by diversifying naphtha import sources, expanding the domestic supply for naphtha and petrochemical products, raising operating rates and restarting plants ahead of schedule. Consequently, the volume of naphtha secured in May is projected to recover to 85 to 90 percent of prewar levels.

Nonetheless, the naphtha crisis is spreading across downstream industries, including furniture, interior design, paint and consumer electronics, driving up cost burdens particularly for small and medium-sized enterprises (SMEs). The Ministry of SMEs and Startups is providing 550 billion won ($366 million) in emergency policy funds to SMEs affected by the Middle East war, while expanding logistics vouchers and export insurance. As of May 7, a total of 400.3 billion won ($266 million) has been disbursed through emergency management stabilization funds and new market entry support funds, picking up momentum. However, SMEs still face domino price hikes as the tangible relief from policy support and fuel price caps falls short.

Meanwhile, the government has decided to compensate oil refiners for their losses based strictly on actual costs, such as crude oil import prices and production expenses. The Ministry of Trade, Industry and Resources plans to officially announce the settlement criteria for loss compensation under the petroleum price ceiling system by the end of this month.

Apart from the war in the Middle East, another battle is currently unfolding in Korea. While the energy crisis has crippled downstream manufacturing, the concurrent semiconductor boom has generated record revenues, triggering fierce labor-management disputes at Samsung. The Samsung unions have demanded the removal of bonus caps and requested that 15 percent of operating profits be allocated for employee bonuses, insisting that these terms be formally integrated into the employment contract. However, these demands are failing to win the sympathy of the majority of citizens, who are currently suffering from the fallout of the Middle East war. The Samsung unions should act with prudence and demonstrate a sense of solidarity.

Song Kyung-jin is senior fellow at Asiatic Research Institute at Korea University.