Rajiv Biswas, Asia Pacific chief economist at IHS Markit
Key Points:
- The decision of the South Korean Constitutional Court to uphold the decision of the South Korean parliament to impeach President Park Guen-hye has pushed South Korea into near-term political uncertainty and the likely further escalation of economic risks facing South Korea.
- With fresh presidential elections now due to be held within 60 days, South Korea is entering a political vacuum at a time when tensions with North Korea have escalated to crisis point, following North Korea’s ballistic missile tests on 6 March and when South Korea’s relations with China have also become tense.
- While the impeachment decision does clear the ground for new political leadership and should end the protracted period of widespread discontent and protests among the South Korean public about the corruption scandals under the Park presidency, South Korea’s future foreign policy under the next president towards North Korea and China will now become an unknown factor for the near-term.
- The South Korean economy is currently facing escalating economic measures from China in response to South Korea’s installation of US THAAD missiles to counter the North Korean missile threat, and these are having an increasingly significant impact on the South Korean economy. North Korea fired four ballistic missiles on 6 March from its Dongchang-ri long-range missile site that landed in the East Sea or Sea of Japan, the latest in a series of missile tests in recent weeks. Two of the four missiles landed within Japan’s Exclusive Economic Zone.
- The latest measures have been the closure of 23 Lotte stores in China after inspections by Chinese authorities. Lotte Duty Free has also announced that cyberattacks launched from Chinese Internet Protocol servers temporarily crashed its website last week.
- Last week, China’s tourism ministry, the China National Tourism Administration, instructed tour operators in Beijing to stop selling package tours to South Korea, with similar measures expected to be announced in other major Chinese cities.
- South Korea is highly vulnerable to Chinese government actions that impact on Chinese tourism flows, as China accounted for almost half of total international tourist visits to South Korea in 2016. A total of 8.067 million Chinese tourists visited South Korea in 2016, up 34.8% on the previous year.
- The South Korean economy is highly vulnerable to Chinese economic retaliation as China is South Korea’s largest export market. South Korean exports to China reached USD124 billion in 2016, accounting for around 25.1% of total South Korean exports worldwide. South Korean manufacturing companies also have large-scale production facilities in China, making them vulnerable to economic retaliation by China. South Korean firms have already been suffering from increasing competition from Chinese domestic manufacturers competing in products such as electronics, industrial machinery and auto components.
- However, China also faces some vulnerabilities if economic measures it is taking against South Korea escalate further. China remains highly dependent on imports of electronic components, particularly for sophisticated electronics components such as semiconductors. China accounts for around 30% of worldwide semiconductors consumption, but is highly reliant on imported semiconductors, with only around 10% of total Chinese demand for semiconductors met by domestic production. South Korea is still an important source of electronics exports to China. For example, around 25% of total Chinese imports of integrated circuits are from South Korea. Taiwan still dominates China’s overall market for integrated circuits, supplying around 37% of total Chinese imports of integrated circuits.
Outlook:
The impeachment of President Park Geun-hye has plunged South Korea into a political vacuum at a time when tensions with North Korea have reached crisis point and there are escalating political and economic tensions with China over the installation of the THAAD missile defense systems in South Korea. The political uncertainty about the new foreign policies of the next president adds to the challenges facing South Korea in 2017. The South Korean economy is already facing significant economic challenges, with South Korea’s shipping industry in crisis with the collapse of Hanjin Shipping in August 2016, and other shipping companies also face crisis conditions due to chronic overcapacity in the world container shipping industry amid the slowdown in world trade growth from the previous two year, as well as protracted weak freight prices. South Korea’s shipbuilding industry is also in a protracted crisis due to the oversupply conditions in world shipping, with the South Korean government having developed a USD9.6 billion rescue plan to provide financing and new ship orders to support its major shipbuilders.