Oil-induced Regionalism Besets Korea’s Exports

With the global economy facing a downturn due to the rising prices of natural resources including crude oil, regionalism has been growing, along with looming anti-globalization sentiment.

It is a dreaded situation for Korea, which is heavily dependent on trade for its economic survival. High oil prices do not only add burden to citizens, but also literally change the face of the world economy.

Recently the global powers utilizing their political influence have exerted all-out efforts to secure energy and resources overseas. This puts an added burden on Korea, since the country has few natural resources.

○ World retreats from globalization to regionalism

U.S. weekly magazine Newsweek in its latest issue predicted that the global economy may shift towards regional trade, as high oil prices force nations to favor trade with neighboring countries due to rising costs on freight delivery and storage.

The world witnessed a similar trend during the oil shocks of 1973 and 1979, during which the United States increased its trade volume with geographically close countries in Latin America by 6 percent from the previous level.

If this trend resurfaces, it will deal a severe blow to countries resorting to trade to make its ends meet like Korea. Korea’s reliance on trade and exports accounted for 71.54 percent of its GDP in 2006, 17 percent up from 1997, indicating a typical free market economy.

Many experts believe that the logic behind the recent anti-KORUS FTA movement in the United States lies in calculations that exclusive protectionism serves more of its national interest.

Last month, Korea saw its trading volume to the United States drop by 5.4 percent year-on-year due to the sluggish U.S. economy. Against this backdrop, if the world superpower adopts protectionist measures, Korea’s exports are bound to suffer down the road.

Although exports to the European Union increased 17.6 percent last month, export volumes of major items such as automobiles, semiconductors and computers decreased. All this resulted from surging oil prices, which placed a huge burden on freight delivery costs.

An official from the Ministry of Planning and Finance said, “Thanks to the rise in won-dollar exchange (drop in the value of the won), exports have been growing. However, if high oil prices turn the table of the trade, it may be hard to expect any ‘export boom’ in the future.”

○ Nations in desperate search for energy and resources

The recent high oil prices literally changed the term “resource diplomacy” to a “war for resources.” With the world powers making aggressive moves in search of energy resources, the world saw the emergence of neo-colonialism in the ways powerful countries acquired resources from resource-abundant foreign countries using their political power.

A case in point of struggles for energy resources is Korea’s Daewoo International Corporation, which recently led a multi-billion dollar energy project in Myanmar, but unfortunately lost its bid for the right to natural gas to China. Although Korea made efforts to cut a deal with Myanmar, it couldn’t beat China who offered to develop a port in the nation and lay a pipeline to transport natural gas from Myanmar.

Choi Ki-ryun, a professor of energy engineering at Ajou University, said, “Korea should establish a strong diplomatic relationship with developing countries, not just with advanced countries.” This means that Korea should come up with mutual growth strategies such as receiving oil instead of dollars when it sells a ship to a developing country with ample natural resources.

○ More FTAs needed

If the regionalism and nationalism driven by energy resources strengthen trade barriers, domestic enterprises could face hardship since the barriers would make it hard for the firms to enter foreign markets.

In an effort to secure overseas resources, since 2006, China has cut tax benefits to foreign firms and forbids foreign control through acquisition and merger of its major industries such as steel and shipbuilding. This makes it hard for Korean firms to gain benefits in doing business in China.

In particular, companies have no choice but to suffer loss if the country where the firm invested in adopts a protectionist policy against foreign firms.

Experts say that in order to tide over these problems, Korea should sign FTAs with as many countries as it can find, establish creative business models, and come up with devices to resolve possible conflicts.

Lee Bok-jae, a senior research fellow at the Korea Energy Economics Institute, said, “Korea cannot survive without trade. If we could open a way to export petrochemicals overseas through FTAs with many countries, we can significantly offset the rising oil prices.”