Economic slumps in U.S., Japan hit Korea

``When the United States sneezes, Canada and Mexico become ill and Korea, Thailand and Taiwan got colds.``

These were the words that The Economist, a British business magazine, used earlier this year to describe the effects of the U.S. economic slump on the global economy.

Korean industrialists may now sense the truth of the statement more than at any other time as the economic downturn in the United States continues to negatively affect the nation. There also are concerns about the troubled Japanese economy, another pillar supporting Korea`s economy as well as a major rival in the international export market.

``We were already suffering because of the slumping domestic market. But we have two more pieces of bad news: the plunging stock market and the deterioration of export conditions,`` said a Samsung Group executive. ``What is more regrettable is that there is nothing we can do except hope that overseas economic conditions will improve.``

The United States and Japan are the nation`s largest export markets, accounting for a combined 33.7 percent of all outbound shipments. Korean exports to the United States, which amounted to $40.3 billion last year, are led by a few items such as semiconductors ($7.9 billion), automobiles ($5 billion), wireless telecom equipment ($3 billion) and garments ($2.3 billion). Thus, if any disruptions occur in the exportation of these goods, it inevitably leads to a slump in the entire Korean industrial sector.

According to the LG Economic Research Institute (LGERI), a one-percentage point drop in the U.S. economic growth rate slashes Korean exports by up to $5.4 billion. ``When the U.S. economy heads south, the problem is not only the difficulties in exporting goods but also the accompanying slowdown of Southeast Asian and European Union economies, which are also major export markets for Korea. Consequently, the entire Korean export industry suffers greatly,`` said a LGERI researcher.

Experts fear that if exports decline, companies will face liquidity problems and that the situation will, in turn, bring about lower corporate profitability, falling share prices and fewer investments in facilities and research and development (R&D). ``Some industries, which are still struggling to recover from the economic crisis, would then be in danger of collapsing,`` he said.

Another bad omen for the Korean economy are ongoing declines in the Japanese yen. A drop in the yen sharpens the competitive edge of Japanese products in overseas markets. Korean manufacturers of goods like automobiles, machines and electronic products then face fierce competition with their Japanese rivals in the Southeast Asian and U.S. markets.

The Korea International Trade Association (KITA) estimated that a 10-percent drop in the yen would cut Korean exports by $2.7 billion and imports by $800 million a year. KITA warned that Korean losses from the competition with Japan would be greater than the damage to Taiwan as Seoul has 20 to 25 percent more products competing with Japan than Taipei.

Park Won-Jae parkwj@donga.com