As the U.S. economic crisis was just getting off the ground, many analysts claimed Asia would be relatively immune to the impact because its economies had “decoupled” from the United States. The exports of countries like Japan and Korea were no longer as oriented to the United States as in the past. Instead, China was the major growth market.

In reality, the decoupling story is woefully wrong, for Korea as well as Japan. In both countries, this decade’s economic expansions have been extremely unbalanced; they combine a huge shortfall in consumer income and spending with a stunning rise in the trade surplus to make up for the shortfall in consumer demand. The notion this doesn’t matter because China is the market doesn’t hold water. That’s because many of the exports from Korea and Japan to China serve as inputs to China’s own exports to the United States. As U.S. imports from China slow, so will China’s imports from Korea and Japan.

What strikes us is the degree to which the growth strategy for the big three of Northeast Asia—Japan, China, and Korea—have all converged on the same flawed pattern in this decade: falling consumer income and spending as a share of GDP and an explosive rise in the trade surplus. It’s a very risky strategy that could be sustained only as long as the United States kept expanding its trade deficit. But now the price-adjusted U.S. trade deficit is plunging and imports are declining.

All of this makes Korea, as well as Japan, very vulnerable to the U.S. slowdown. Indeed, while the official forecasts from the Korean government still project growth of 4.8–5.2 percent in 2009, private forecasters think this is whistling past the graveyard. The Korea Economic Research Institute believes growth will slow to 3.8 percent next year, following projected 4.2 percent growth for 2008. Citigroup sees a slowdown to 3.4 percent in 2009. This is a far cry from the 4.8 percent that Korea has averaged since 2002, and even these numbers may prove to be too optimistic depending on the severity of the U.S. recession.