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Bank of Korea "In the aftermath of the U.S.-China trade conflict. S. Korea's GDP May Decline by 0.3%

If supply chain risks due to the U.S.-China trade conflict become a reality, Korea's gross domestic product (GDP) is likely to fall by up to 0.3%, according to an analysis.

"If our exports are directly or indirectly affected by the U.S.-China trade conflict, total nominal exports are likely to fall 1.0-1.7% and real GDP is likely to fall 0.1-0.3%," the Bank of Korea's model forecast team said in a BOK issue note titled "Global Supply Chain Risks and Implications in the Future." The figure is calculated under the assumption that the decline in exports to China is not replaced by exports to other regions, but the impact is greater when service exports (such as inflow of Chinese tourists) are included, according to the model outlook team.

After the COVID-19 pandemic, the global economy is showing signs of deepening fragmentation movements, such as strengthening protectionism. The Russia-Ukraine war and the U.S.-China trade conflict seem to expand this. Segmentation is expected to have a significant impact on the global economy through restrictions on trade and technology transmission and restrictions on labor and capital movements. The International Monetary Fund (IMF) also expected global GDP to fall 0.2 to 0.7% in the mid- to long-term depending on the degree of recent segmentation.

The model forecast team pointed out that Korea's exports of key items are mainly concentrated in the U.S. and China, and its dependence on imports of major raw materials will be relatively large. Semiconductors, a key export item, account for 55% of the public as of last year, while automobiles account for 40% of the US. The high dependence on imports of raw materials means that deepening segmentation will cause production disruptions and inflationary pressure.

It is analyzed that changes in the global supply chain after the pandemic require a new perspective and response across the macroeconomy and industry. As supply chain volatility has increased, supply changes need to be carefully considered, unlike in the past, which focused on demand in judging idle production capacity (unused part of economic production capacity).

The model outlook team evaluated that semiconductors, and electric vehicles (batteries), which have recently been the main targets of trade and technology segmentation, have both positive and negative aspects of the domestic economy. While there are positive aspects such as technology alliances and opportunities to enter the market due to segmentation, there are also negative aspects such as worsening domestic industrial ecosystem and the possibility of employment contraction.

The model forecast team pointed out, "We need to strengthen risk management by thoroughly monitoring the development of the U.S.-China conflict in the future," adding, "We need to prepare for risk realization through diversification by region and item and technological innovation." The IMF analyzed that if the production structure is diversified, losses from supply chain disruptions will be reduced by 50%. [E-Daily]

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