A hidden hero will drive South Korean trade closer to the US

A 20% drop in total exports to China, the biggest destination for South Korean goods, was offset by a 31% rise in foreign auto sales. (Source: Bloomberg)

South Korean exports took a beating in 2023, dropping for the third time in five years as the global economy slowed. Yet it was the nation’s forgotten automotive sector that softened the blow and brought outbound trade to the US to within a whisker of overtaking China. As demand for electric vehicles continues to grow, expect this relationship among long-standing allies to deepen.

Semiconductors have long been a mainstay of South Korea’s economy, but much of those are sent to China and Southeast Asia, where they’re assembled into electronics devices from smartphones to computers, and then shipped back overseas to final customers across the globe. This flow of components slumped last year, and overseas sales of chips dropped 24 percent. Cars and machinery are helping fill the void.

A 20 percent drop in total exports to China, the biggest destination for South Korean goods, was offset by a 31 percent rise in foreign auto sales. Demand for EVs and high-performance SUVs were the chief driver of a 5.4 percent rise in exports to the US. (China buys very few cars from its neighbour.)

All up, the US is fast catching up to China as a destination for South Korean goods, lagging by just 1.4 percentage points last year.

There’s a lot more going on beyond the numbers. A possible rebound in the global economy this year, including an uptick in the memory chip sector, suggests South Korean exports to China will resume their upward trajectory, while weakness in EVs could hurt trade with the US. But that’s in the short-term.

In the long term, US demand for new-energy vehicles is a trend that can only be slowed, but not halted, by temporary headwinds such as rising interest rates and tweaks to government subsidies.

A supporting character in the Asian nation’s export recovery will be machinery. South Korean sales to America of equipment used in manufacturing rose 25 percent last year. That growth is likely to continue as Washington rolls out policies — including raising tariffs and boosting incentives — in order to have more products like steel, renewable power plants, and cars made in the US.

American automakers won’t account for all of the growing EV pie. Likewise, geopolitical tensions mean Chinese manufacturers like BYD Co are unlikely to gain much of a foothold in the US if they even try to enter the market, in part because they already face an import duty of around 25 percent. New rules on tax credits for EVs further diminish the competitiveness of models which are fully or partly sourced from China.

That leaves Europeans, Japanese and South Koreans to fill the gap. In traditional vehicles, Japan is the standout leader. Toyota Motor Corp and Honda Motor Co remain dominant players alongside locals Ford Motor Co and General Motors Co. But they don’t hold a strong position in EVs — everyone is playing catchup to Tesla Inc.

Hyundai Motor Co and Kia Corp are seizing that opportunity. South Korean EV sales to the US climbed 60 percent last year, according to data from the ministry of trade, industry and energy, and were up five-fold over the figure posted in 2021.

The US will also lean on it for batteries, machinery and auto parts as Washington drives new policies aimed at ensuring a greater share of new-energy cars are made on home soil.

For more than 70 years, Seoul and Washington have been close military and political allies. In the coming decade, trade will start to become an equally important part of the relationship.

Tim Culpan is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.

Credit: Bloomberg