Fallout of trade war

Korea should strive to cut heavy reliance on exports

South Korea is feared to bear the brunt of the escalating U.S.-China trade war. That's why the country should work out a contingency plan to minimize any fallout from the dispute between the G2 economies.

As a Korean saying goes, "A shrimp gets hurt when whales fight," concerns are growing that Asia's fourth-largest economy may emerge as one of the countries to be hit hardest. These concerns cannot and should not be brushed aside easily because the country is heavily dependent on exports.

The trade war between the U.S. and China is intensifying after both sides ended their trade talks in Washington, D.C., Friday without a deal. This caused the U.S. administration to raise tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent. America also threatened to slap new tariffs on another $325 billion in Chinese imports. China has vowed to retaliate.

The trade war shows no signs of abating even though the two sides agreed to continue their negotiations. Based on U.S. President Donald Trump's "America first" policy and his trade protectionism, the tariff war would deal a severe setback to the global economy if it is prolonged further.

It is worth noting a report by the International Monetary Fund (IMF) that the world economy could lose growth of 0.5 percent if the U.S.-China trade war escalates and Trump puts new tariffs on Chinese imports. Last Tuesday, IMF Managing Director Christine Lagarde warned that U.S. GDP would drop by up to 0.6 percent and China's GDP would fall by up to 1.5 percent.

China will suffer the most if the trade war gets worse. This could also be a cause of grave concern for Korea. According to official statistics, Korea's exports to China make up 26 percent of its total overseas shipments, while those to the U.S. account for 12 percent.

Intermediary products represent 79 percent of Korea's exports to China with semiconductors taking up between 40 percent and 50 percent. For this reason, Korea's manufacturing sector might be hit hard if the U.S. and China plunge deeper into a trade war.

More worrisome is that the trade war is getting fiercer when the Korean economy is on the brink of recession. The country's GDP contracted 0.3 percent in the first three months of the year from the previous quarter, the worst performance in almost a decade. The nation's exports fell 2 percent in April from a year before. They continued a five-month downward march.

In fact, the Korean economy has long been vulnerable to external shocks due mainly to its heavy reliance on exports. Thus, it is necessary for the country to expand domestic demand to reduce its excessive share of exports. It is also important to diversify its export markets to curtail its undue dependence on the U.S. and Chinese markets.

The Moon Jaein administration should use the Sino-U.S. trade war as an opportunity to push for structural reform to hone competitiveness of Korean industries and corporations. It also must promote innovation and deregulation to create a more business-friendly environment.