December 26, 2024
SEOUL – The South Korean economy has been chugging along thanks to solid shipments of semiconductors this year. But the outlook for exports in 2025 is far from optimistic, and the reason also involves chips, the country’s key export item.
Business organizations project that exports could stagnate next year largely due to worsening market conditions for semiconductors and automobiles. Demand for Korean chips may weaken amid intensifying competition with China. A global economic slowdown cannot be ruled out in connection with the uncertainties in major economies around the world, which in turn could hurt the export-driven Korean economy.
The Federation of Korean Industries, a major business lobby group, forecast a meager 1.4 percent increase in exports next year, citing its survey of 150 companies across 12 key export industries.
The Korea International Trade Association similarly predicted that the growth rate of exports could slow to 1.8 percent. Other major economic institutes including the Bank of Korea and the state-run Korea Development Institute came up with an export growth projection of less than 2 percent.
Only the Institute for Industrial Economics and Trade said exports would increase by 2.2 percent next year. But its survey of 133 industry professionals showed the manufacturing sector’s export sentiment index for January 2025 would slide to 76, a negative outlook based on a neutral figure is 100.
The key reason for the negative outlooks is the looming trouble in the semiconductor sector in Korea. This year, total shipments of semiconductors are forecast to hit a record $139 billion, or roughly 20 percent of the country’s total exports. There is no question that chip exports have bolstered Korea’s exports as a result of a higher demand worldwide.
But Korean chipmakers may not enjoy a boom next year largely because Chinese rivals are rapidly encroaching on the market for legacy semiconductors. Chinese electronics makers, which long relied on imports of Korean memory chips, are increasingly shifting toward local alternatives. The continued replacement of Korean legacy memory chips by Chinese products could cut into the 2025 revenues of Samsung Electronics and SK hynix.
Aside from the threats to legacy products, the two major Korean chipmakers confront US restrictions on high-bandwidth memory, or HBM, exports to China. In addition, they are importing their own memory chips made in their Chinese production facilities for final processing since they cannot deploy the advanced chip equipment due to the US restrictions on China.
As long as the trade friction between the US and China persists, Korean chipmakers cannot avoid collateral damage. The problem is that US President-elect Donald Trump could make things more burdensome for all trading partners, including Korea, with his protectionist trade policies.
Beyond semiconductors, other industries are also faltering. Steel exports are expected to shrink by 3-5 percent, and automobile exports may grow by a modest 0-2 percent in 2025. The mix of a global economic slowdown and protectionist policies initiated by the US is feared to bring more uncertainties to Korea’s export-driven economic policy.
Even the country’s top official in charge of economic policy expressed related worries. Finance Minister Choi Sang-mok on Monday said, “Export growth faces headwinds from base effects and the shift in the semiconductor cycle, raising concerns about a potential slowdown.”
Strong exports have been a lifeline for the Korean economy this year, with domestic demand mired in a deep slump. Conversely, if export growth slows significantly and domestic demand fails to recover next year, the repercussions could be severe for the entire economy.
Given the gravity of the looming challenges, bipartisan efforts are urgently needed to devise a safety net for exports and prevent a hard landing. In the long term, policymakers also have to draw up plans for structural reforms such as reducing the country’s heavy reliance on semiconductor exports and rebalancing its trade dependence on the US and China. Bold and decisive action is the only way forward.