(2nd LD) Seoul braces for fallout from U.S.-Sino trade war

(ATTN: UPDATES with more details in paras 11, 26-27)
By Kim Kwang-tae

SEJONG, May 10 (Yonhap) -- South Korea's chief economic policymaker instructed officials Friday to maintain round-the-clock tabs on financial markets and iron out a set of measures to minimize any fallout from high-stakes trade talks between the United States and China currently underway in Washington.

Hong Nam-ki, the minister of economy and finance, also asked officials to be ready to take timely actions, if necessary.

Officials of the Ministry of Economy and Finance met with their counterparts from the Bank of Korea and other economy-related authorities to discuss South Korea's countermeasures.

The move comes amid growing concerns that trade negotiations between the world's two major economies could negatively affect South Korea.

The U.S. raised tariffs on US$200 billion worth of Chinese goods to 25 percent from 10 percent on Friday, prompting China to issue a statement threatening to retaliate.

In Washington, Chinese Vice Premier Liu He is set to meet again with U.S. officials on Friday, though it remains unclear whether the two sides can make progress.

A senior official of the Ministry of Industry, Trade and Energy met with industry officials on Friday to discuss South Korea's countermeasures, the ministry said, without elaborating.

South Korea is concerned that its exports of semiconductors and intermediate products to China could suffer a further setback in case of a deepening trade war between the U.S. and China.

China accounts for about 25 percent of South Korea's total outbound shipments. Among them, semiconductors make up about 40 to 50 percent of South Korea's exports to the world's second-largest economy.

South Korea -- a small, open economy -- depends heavily on exports and foreign capital investment, a situation that makes it vulnerable to external shocks.

Volatility was evident on Thursday when the South Korean won closed at 1,179.80 won against the U.S. dollar -- its lowest level in 28 months.

Some analysts said U.S. tariffs on Chinese goods could deal a blow to the Chinese economy amid concerns of a hard landing amid slowing growth.

"If the Chinese economy gets worse, it would have an immediate ripple effect on South Korea's exports," Joo Won, a deputy director at Hyundai Research Institute, said.

South Korea's exports fell 2 percent in April from a year earlier, extending their on-year decline for the fifth consecutive month, due to a drawn-out slump in chips and weak demand from China.

Exports to China -- South Korea's largest trading partner -- decreased 4.5 percent on-year in April, falling for the sixth consecutive month to $12.4 billion.

Yun Chang-hyun, a professor of finance at the University of Seoul, said the U.S. and China would strike a deal on trade in the long term, even though their trade talks may collapse this week.

"Chinese demand for South Korean intermediate products for its exports to the U.S. could fall, which in turn would lead to a decline in South Korea's exports to China," Yun said.

In March, Moody's Investors Service revised down its growth outlook for South Korea's economy this year to 2.1 percent from its previous forecast of 2.3 percent in November last year, citing lower demand for intermediate products from China.

"The weakening of the investment cycle and the deceleration in global trade have hurt economic momentum. Subdued demand for intermediate products from China, especially semiconductors, has had an adverse impact on exports as well as on the investment outlook," Moody's said.

South Korea's gross domestic product backtracked an estimated 0.3 percent in the first three months of the year from the previous quarter, marking the worst performance in almost a decade, according to the Bank of Korea.

The weak data has called into question whether South Korea can meet its goal of achieving economic growth between 2.6 percent and 2.7 percent this year. The economy expanded 2.7 percent in 2018, down from a solid 3.1 percent the previous year.

On Thursday, President Moon Jae-in said in a nationally-televised interview that the economy could improve in the second half and said South Korea's target is at least 2.5 percent or 2.6 percent growth this year.

"The 25 percent tariffs imposed by the U.S. on US$200 billion of Chinese imports from the previous 10 percent exacerbates the uncertainty in the global trading environment, further raises tensions between the U.S. and China, negatively affects global sentiment and adds to risk aversion globally," Moody's Investors Service said in a comment released earlier in the day.

"And for the rest Asia's export-dependent economies, a slowdown in China will dampen growth rates," it said.

Moody's said a trade deal will eventually be reached between the U.S. and China, the risk of a complete breakdown in trade talks has certainly increased.

Also Friday, Ku Yong-uk, head of the research center at Mirae Asset Daewoo, a major brokerage house in Seoul, said there is a low possibility that trade negotiations between the U.S. and China could collapse.

"I think the two countries could strike a deal in the second half," Ku said. He said there is a high possibility that the global economy could recover if the talks do not collapse and there is no tariff war.

entropy@yna.co.kr
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