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How South Korea is Critical to The Global Economy

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How South Korea is Critical to The Global Economy

Economic integration, which ballooned in the mid and late 20th century, has provided consumers with many more alternatives than they ever had.  Trade between continents increased with the creation of the World Trade Organization and bilateral and multilateral trade agreements between nations and economic unions.  However, as the current geopolitical climate shifts, the rise in international tension in Korea creates a conundrum for the global economy, and raises the crucial question – what would be the global impact of heightened escalation in Korea?

To answer this question, we need to look at the South Korean economy and its role in global trade, especially the production of electronic products, vehicles, and steel.

A key player in global trade

South Korea plays a vital role in global trade, much like China and Japan.  Nine of the world’s ten most used container ports are in Asia, with the port city of Busan, South Korea ranking number five on the Forbes’ Top Ten World Container Ports list.  As a result, the country is a top exporter, ranking fifth among the largest export economies in the world, according to the Observatory of Economic Complexity (OEC).  The country is also ranked number three in the OEC’s Economic Complexity Index (ECI), which provides a measure for how relatively complex a country’s exports are compared to the rest of the world.  Much of South Korea’s trade consists of small, technologically complex components that go into finished products, rather than the final products themselves.

The top exports in the country are integrated circuits, or semiconductors, which are used in a variety of electronic goods. In fact, South Korea is the fourth largest exporter of semiconductors and the second largest exporter of semiconductor manufacturing equipment in the world.  In terms of production, the country is the second highestproducer of semiconductors, with 17 percent share of global sales.  Samsung and SK Hynix, both South Korean companies, are the second and third largest semiconductor companies in the world, respectively.

A global electronics giant

Many consumers around the world are familiar with the popular South Korean company Samsung.  Samsung Electronics, which is the electronics segment of the company, alone is ranked number 15 in the Forbes 2017 Global 2000 list, and accounts for more than 20 percent of the market value of the Korean Stock Exchange.  What is even more impressive, Samsung, the entire company, accounts for nearly 20 percent of the country’s overall GDP.

It may also be surprising to learn that Samsung dominates the smartphone market, not Apple.  In the first quarterof 2017, Samsung was ranked number one, with 23.3 percent market share.  Apple, for comparison, was in the second position, with a global market share at 14.7 percent.  This is even after Samsung struggled with their Note 7 battery fiasco that cost the company billions last year.

South Korea is the fourth largest producer of electronic goods (over 6 percent of global production), with Samsung Electronics being the leader in the production of memory chips, smartphones and televisions. When South Korean companies aren’t making popular electronic products, they are producing parts that go into other products.  For example, Samsung is Apple’s leading supplier, making processors, flash, and memory chips for the popular iPhone line.  South Korea is also the top exporter of LCD screens om the world (40% share), with Samsung and LG Electronics (another South Korean company) dominating shipments.

An industrial heavyweight

South Korea is also home to a widely popular auto manufacturer – Hyundai Motors.  The company is the world’s fifth largest automaker (based on annual sales) and has an 8.1 percent market share in the United States (when paired with Kia, its subsidiary company). The auto export sector is driven by the strong market for inexpensive cars in the United States and China.

South Korea is also an important player in the ship building industry. The country is the leading exporter of passenger and commercial cargo ships in the world, which accounts for 29 percent share of the world’s exports (2015).

The country is also a large exporter of steel, ranking third in the world in 2015 and represents nearly 7 percent of all steel exports globally.  POSCO, the South Korean steel company, is the fourth largest in the world, with an output of 41.5 million tons of crude steel in 2015, holding a 41 percent market share in the country.

Potential for severe global economic disruption

As we can see, South Korea is very important to the global economy.  Any geopolitical crisis that impairs the global logistical supply chain could upend global economic growth, as South Korea is home to one of the busiest ports in the world.  Since much of the world’s trade is transported to and from Asia, trade blockages could impact companies that depend on imports.

For example, companies like Apple could face a logistical nightmare when it comes to delivering products to consumers, given how important South Korea is to the technology sector. Not only would delivering finished iPhones to consumers be a headache, but getting parts from suppliers would also put production at risk.  Samsung itself would be extremely vulnerable given the vast amount of business the company does with the rest of the world, and as we know, if Samsung’s growth slows, so too will the South Korean economy.

Companies that depend on steel manufacturing could also feel some bumps and bruises as a result of trade blockages, as POSCO is one of the top steel companies in the world. This could result in a slowdown in global industrial production, which has been expanding since the start of the year. Hyundai-Kia could be directly impacted as well, given the variety of electronics and steel components that go into vehicle production.

Related: Are Cellular Plans to Blame for Falling Inflation?

Three percent of U.S. imports and ten percent of Chinese imports originate from South Korea.  If anything, this only underestimates the importance of the actual products being imported. In the event of trade disruption, integrated circuits and LCDs will be significantly harder to replace than say, textile imports.

As businesses deal with logistical problems, consumers may have to reckon with delayed delivery of products and higher prices.  If trade routes are blocked due to security concerns in Asia, that could impact a variety of products, including clothing, food, and basic materials.  Central banks would eventually have to respond to rising prices, which could slow normalization in the United States and Europe.

Even though tensions in the region have escalated and uncertainty has risen, there are many reasons why hostile actions could produce severe blowback for all parties involved.  In addition to the unimaginably large toll on human life in the event of a war (estimates range from 50,000 to a few hundred thousand in the first few days alone), the interdependence of the global economy ensures significant costs to countries even outside the Korean peninsula.  One would imagine that policy makers are taking into account the direct and indirect costs of potential hostilities, even if these are limited (and there is no guarantee that they will be).

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