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Volume 12 Number 2 Summer 2000 The Launching of the Euro
Lee Cheol-won
PREFACE
With the formal launching of the European Union's new single currency, the euro, on New Year's Day 1999, Korean exports to the European Union (EU) were expected to hit a snag. Some researchers anticipated that the birth of the European Economic and Monetary Union (EMU) would work as a trade diversion rather than a trade creation effect in the short-term trade between EU and non-EU countries.1) Other analyses projected that unit costs for Korean exporters would be negatively influenced by the integration of EU markets ushered in by the single currency, as EU's price competition would be strengthened and price gaps would be diminished among EU countries. In this connection, Korean exports to the EU, Korea's second biggest export market following the U.S. were expected to face difficulties to some degree. Korea's exports to the EU, however, increased dramatically in 1999, along with an increase in imports from the EU. That increase in imports can be attributed to the recovery of the Korean economy, but fortunately, the unfavorable situation of the EU market, mentioned above, seems to have had no impact on Korea's exports in 1999. In this vein, two questions are raised. The first is why worsening export conditions as mentioned above were never reflected in Korea exports with the EU in 1999. Second, if not, when and how will the negative impact of the euro influence Korea-EU trade? To answer those questions, export results must be analyzed more closely in light of the export products in order to aid in forecasting future Korean exports to the EU. This article briefly looks at recent trends in Korean trade with the EU, and then analyzes both the favorable and unfavorable factors influencing Korea exports by classifying export products under two categories: the export-active goods and the export-inactive goods. This will enable further investigation of the active and inactive factors influencing exports. Finally it will discuss future Korean trade with the EU and suggest ways to boost Korean exports.
RECENT KOREA-EU TRADE
TRENDS
Recent Korean exports to the EU demonstrate positive signs, in contrast to expected fearful results after the EMU was established, as Table 1 and Figure 1 show. In fact, Korea's exports to the EU increased by 7.7 percent in 1998 compared to the previous year, and increased again by 11.4 percent in 1999. Total export volume hit over 20 billion dollars for the first time, boosting the EU to second place, after the United States. Moreover, the figure topped Korea's average export increase rate of 8.6 percent in the same period. In the same vein, exports increased to 14.1 percent in 1999 from the 11.8 percent in 1996. With the rapid recovery of the Korean economy, imports from the EU increased by 15.6 percent compared to the previous year,1998, when it had dropped sharply as a result of the foreign currency crisis. In general, the emergence of the EMU was expected to cause a trade diversion effect over the short-term period and a trade creation effect from the long-term perspective. Another expectation was that greater price transparency would be guaranteed by the conversion of prices into the euro, which would lead to concealed price disparities, and therefore increased competition among suppliers throughout the euro zone.2) The projected result: Once Europe was perceived as a domestic market, the euro would cause non-EU exports to the EU to suffer at least in the short-term. In Korea, especially, with the value of the won on the rise in 1999 and the value of the euro continuing to drop after its official launch, some warned that Korea's export price competitiveness could be sharply weakened. The negative impacts of the euro, however, certainly did materialize Korean exports to EU in 1999. (See Table 1 and Figure 1.) That is, the emergence of EMU did not strike any blows against the Korea exports. As EU market transparency continues to increase competition, thus, lower price has gained speed in capital/service goods including communications, while consumer goods loosely adjusts mainly due to the various regulations and distribution patterns. The price differentials within the euro zone still exist in accordance with the varying market situations in individual European countries. The factors mentioned above were partly responsible for Korea's sharp export acceleration in 1999. A clearer explanation is seen in the intensification of marketing strategies targeting the EU market, which were undertaken in order to compensate for the losses in trade with developing countries. Looking at Table 1, Korean exports to developing countries increased by 3.4 percent, while those to advanced countries increased by 14.2 percent. Those indicators signal that Korean companies mainly targeted advanced countries as its export markets instead of developing countries which had lost purchasing power as a result of the Asian financial crisis. In the same vein, Korea's exports to the US and Japan increased by 29.2 and 29.6 percent respectively. On the other hand, the fact that the rate of EU domestic consumption remained steady despite a slow-down in its economy caused by the loss in export market in the developing countries, also acted favorably upon Korean exports to the EU.
KOREA EXPORTS TO EUROPEAN UNION BY
PRODUCTS
Korea's imports from the EU, which had decreased rapidly during the 1997-1998 foreign exchange and financial crisis, increased again in 1999. This reversal could be explained by the recovery of the Korean economy and its efforts to overcome the crisis through economic reform and restructuring. The rapid increase of exports to the EU by more than double-digits, despite many negative forecasts, indicates the need for more thorough analysis. Overall, Korea's export to the EU expanded vigorously. In that respect, exports can be divided into two categories: export-active and export-inactive products. The export-active products include machinery and vehicles such as automobiles, ship-building and automotive parts, and electronics such as computers, wireless communication devices, and liquid crystal devices. In light industry, only clothing is included. (See the Table 2.)
The intensification of marketing by Korean companies was mainly responsible for the increase of exports and the increasing demands of the EU market could be suggested as the second factor that helped Korea to actively export particular products. In particular, the volume of automobile exports grew rapidly from 1998, with the demand for new cars, following various de-regulations, including tax cuts in EU countries. Furthermore, Korean automobile companies were able to employ competitive pricing in accordance with diverse market situations in EU countries. Their price gaps of 40-60 percent were caused by differing regulations, complex distributions, and various dealer systems. Exports in home-electronics rose because Korean companies diverted their products into the EU from the discouraging Eastern European market. Textile goods such as apparel enjoyed growth, even though the overall textile sector suffered a downward trend, thanks to an abnormal weather phenomenon, La Nina, that increased the demand for cool-weather knit clothing. Two types of goods, examples of decreasing export, were synthetic-fiber textiles and synthetic fiber yarns, and chemicals such as petrochemical products and organic chemical products, steel goods such as steel sheeting and steel tableware showed a visible decrease as well. Overseas sales of electronic and machinery goods such as functional parts, machinery parts and steel machine tools also declined. (See Table 3.) The increase of price competition, which was expected before the launch of the euro, is partly responsible for the fall in exports. The depreciation of the euro and the rise of won also negatively influenced the export of those products. In fact, the expected negative factors resulting from the launch of the euro have been already reflected upon export-inactive goods. Steel product exports drastically surged in 1999. During that time, Korea found it difficult to make a profit due to the rise of price competition in the EU market, and the continued threat of anti-dumping litigation by the EU. Those moves included curbing steel import products in the wake of the European Iron and Steel Association's filing of dumping suits against Korean-made stainless steel wire cable in May 1998.
Anti-dumping lawsuits by the EU have surged, especially in the textile sector, which hopes to protect its marginal industry. Among the 129 antidumping suits filed by EU member nations for the last five years, 31 cases were over textile goods and 26 involved steel. As price competition has intensified in the EU textile market, Korean-made textile products have lost competitiveness against late-developing countries. The export of electronic products has also suffered from strengthened price competition and the threat of anti-dumping suits. Chemical products have remained relatively free from suits but they suffer the effects of price competition as well. Those products, which bore severe price competition, sensitively reacted to low-euro and high-won situation. The won value reached the highest and the euro value its lowest point during the second and fourth quarters of 1999, when export-inactive products volume hits bottom. In conclusion, with increased cost competitiveness in the age of the euro, a disadvantage in foreign-exchange rates influences export-inactive products' trade volume. The strength of the won has taken a severe toll on the competitiveness of export goods.
PROSPECTS FOR KOREAN EXPORTS TO THE
EU
Pessimistic factors prevail in the future of Korea's exports to the EU, contrasting with a few favorable variables. After the conversion of prices into the euro, several forces including enhanced competition and minimized price gaps will exert pressure on prices in the euro zone, which will dampen Korean exports to the EU. According to a survey of the top 200 exporters to the EU market by Korea International Trade Association (KITA), in May 1999, 27.5 percent of the respondents predicted that the outlook on exports to the EU would be cloudy after the launch of the euro. In addition, 70.6 percent of the exporters to the EU felt it had adversely affected South Korean trading companies active in the EU. In a survey of the top 200 Korean exporters to the EU market, KITA said that 27.5 percent reported suffering negative effects from the launch of the euro, while only 3.9 percent said the euro has worked to their advantage. In addition, 70.6 percent of those exporters differentiated export prices within a range of 20 percent, 49.3 percent of them reported planning to narrow the range or to lower prices. The protectionist mood in the EU can be also suggested as a negative factor against the Korea's exports to the EU. As Figure 3 reveals, Korean exports to the EU have shown a trend of 2-3 year's growth and one year's shrinkage, indicating that EU trade pressures periodically move to curb imports from Korea. The rapid import growth of certain products could provoke a protectionist mood in the EU, evidenced by the EU's anti-dumping lawsuit against Korean-made textiles and steel products. If the export of automobiles, accounting for the greatest portion, should be regulated, it would result in severe repercussions to Korean exports to the EU. In addition, Korean companies' marketing efforts to the developing countries can be a negative factor as well. The concentrated marketing efforts of Korean companies in 1999 greatly contributed to the surge in exports to the EU. The economic situation of developing countries, however, is expected to recover soon, and this will induce Korean companies' investment. In this connection, Korean companies' marketing efforts, which were concentrated upon the advanced markets, are expected to be dispersed to the developing countries. The increased demand, first, for clothing resulting from La Nina, and second, for automobiles resulting from the need to change official cars may end sooner or later. The trend of the weak euro and the strong won can also be a negative factor. On the other hand, the global economy is expected to grow 3.5 percent next year, slightly higher than this year's estimated 3 percent, despite slower-phase growth in the U.S., thanks to improved economic conditions in the EU and Southeast Asia. The EU economy is expected to grow between 2.6 percent and 3.1 percent due to market recovery. And the value of the euro, weak in 1999, will be strengthened in the future due to the slowing down of the U.S. economy and the prospect for the recovery of EU economy. This can be a positive factor for Korean exports to the EU. Taking all trends into account, negative factors outweigh the positive factors. In this connection, exports to the EU are expected to fall slightly down from last year's 11.4 percent. However, it is expected to be minor, thanks to the positive factors. In conclusion, it is strongly desired that the Korean government and exporters should prepare for mounting protectionism among its major trade partners, including the EU and should switch from its former defensive stance to a more aggressive policy by working out swift and proper countermeasures, such as gathering related information on procedures in various countries regarding protectionism as well as their actual implementation. Then Korea's exporters to the EU can overcome the trends of decreasing exports. 1) Welfense P.J.J., "Facing the Euro: Prospects for Growth or Stagnation?" Intereconomics, Vol. 33 (1998). 2) The Association for the Monetary Union of Europe, "Production, Prices and Procurement," (http://amue.if.net/). | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||