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The Peninsula

Korea Crosses the $1 Trillion Threshold in Trade

Published December 14, 2011
Category: South Korea

By Troy Stangarone

For the first time this year, Korea has surpassed the $1 trillion mark in annual trade volume, making it just one of nine nations to do so. This milestone comes after years of intensive export lead growth that have transformed Korea from one of the poorest nations in the world into a modern, developed economy. While Korea has been wildly successful in developing as an exporting powerhouse, it also faces challenges in the years ahead to economic growth from demographic trends and an under developed services industry that increased exports are unlikely to resolve.

Before beginning its industrial drive in 1962, Korea was still one of the poorest countries in the world. In 1961, Korea had a total trade volume of $357 million, while exporting a mere $40 million. A half century later, Korea has crossed the $1 trillion threshold in total trade and is expected to export $557 billion in goods this year and pass the $600 billion mark next year.

                                 Source: Korea International Trade Association, Millions U.S. Dollars

Perhaps most remarkable is that Korea continued to expand its trade volume despite the global economic difficulties of recent years. Korea first passed the $500 billion mark in trade volume in 2005, and yet was still able to double its trade volume in six years despite the global financial crisis of 2008 and the economic slowdown this year from the increasing uncertainty related to European sovereign debt.

However, despite the impressive nature of this feat, Korea faces challenges ahead as it seeks to continue to expand its economy and reach the $2 trillion threshold. While Korea has always been dependent upon trade for economic growth, it has become more so in recent years and the returns to job growth Korea earns on that trade have been diminishing over time.

In the last two decades, Korea’s trade has grown from just over 50 percent of GDP to nearly 90 percent of GDP. In contrast, for developed nations such as the United States and Japan, trade represents only 18.7 and 22.3 percent of GDP respectively. Even for a developing nation like China, trade is only 45 percent of GDP.  At these levels Korea may be pushing the outer limits of export lead growth, while becoming highly dependent on continued economic growth abroad for growth at home. At the same time, each billion won in increased exports is creating fewer jobs than just a decade ago, having fallen from 15.3 jobs in 2000 to 9.4 in 2008.

While Korea has continued to successfully expand exports, continued export growth will not address all of the challenges Korea will face in the future either from increased international competition or domestic factors such as demographic decline and an underdeveloped services industry.

Korea’s population has already begun to age and is expected to peak in 2033 at 52 million and then decline to 44 million by 2060. At the same time, Korea’s population is rapidly aging. In 2000, the share of Korea’s population over the age of 65 stood at 7 percent. By the middle of the 2020s that share will surpass 20 percent. In the coming years Korea will need to increase the share of government expenditures and employment in the healthcare industry to accommodate its aging population. As Korea’s population ages and declines, the labor force is expected to peak at the beginning of the next decade and then decline by 24 percent by 2050, at which point the projected share of the elderly in Korea will be approaching 38 percent.

However, Korea may be able to partially address its expected labor force decline by encouraging more women to take part in the labor force and adjusting its pension system to reduce the current incentives that currently lead to early retirements. Among OECD nations, Korea has one of the lowest levels of participation by women in the workforce at 53 percent. Because many women are employed as non-regular workers, the average salary for women is just over half the average salary of men, further discouraging participation.  If Korea were able to increase the participation of women in the workforce, this could help mitigate part of the expected decline in the overall workforce.

At the same time, the weak point in the Korean economy has long been the services sector. This partially stems from Korea’s initial focus on manufacturing exports, but productivity in the services sector has consistently lagged that of the manufacturing sector. In 2009, the Ministry of Strategy and Finance indicated that the productivity of the services sector was only 58 percent of Korea’s manufacturing sector and 44 percent of the U.S. services sector. Improving productivity in the services sector would have the benefit of helping to increase domestic demand and help to boost employment.

Given the success that Korea has had as a trading nation, it will likely reach the $2 trillion mark in trade volume in the coming years. However, the long-term well being of the Korean economy will also depend on its ability to address challenges in the services sector and the demographic changes that will be coming in the decades ahead.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

Image by Zampano.

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