A warning light flashes on Korea's trade front. According to the Bank of Korea, the nation's current account surplus plunged to $1.07 billion in July from $7.71 billion a year earlier. It was due in part to the deficit of $1.18 billion in merchandise trade, the first red-ink figure in goods trade in 10 years and three months. Imports of oil and gas surged 99.3 percent and 58.9 percent, respectively, while semiconductor exports inched up 2.5 percent. As a result, the export increase slowed at 6.9 percent but purchases from abroad soared 21.2 percent.
Reflecting Korea's sputtering export engine, the nation's currency is also weakening rapidly against the U.S. dollar. The won-dollar exchange rate broke the 1,380 range for the first time since April 2009, increasing the burden from energy and commodity imports. The central bank warned the current account might even turn into a deficit in August. If the twin deficits of fiscal and current accounts become a reality, Korea Inc. will fall into a combined crisis with a decline in overseas credit standing and the outflow of foreign capital.
This is no time for economic officials to repeat, “Our economic fundamentals are solid.” The Korea Development Institute (KDI) recently said, “Due to the global economic slowdown, downward pressure on the economy has increased, mainly in the manufacturing industry.” It was a warning that economic recovery has become uncertain because of sluggish exports. The government must reexamine its economic policies, not downplay danger signals.
For instance, it should diversify its export destinations from China to India and Europe, reorganize the energy-guzzling industrial structure, maintain the technological lead and develop new growth engines. Policymakers must not let go of the current difficulties, saying they have little to do with external circumstances. Officials should prevent the aggravation of the trade balance, even by holding daily export promotion meetings if needed. Koreans remember well how the neglect of the trade deficit drove the exchange rate out of control and triggered a currency crisis, about a quarter century ago.