South Korea has become one of the biggest affected regions of the coronavirus outbreak because it is closely intertwined with a global value chain centered on China. (image: Yonhap)
SEOUL, Feb. 24 (Korea Bizwire) — The outbreak of the novel coronavirus, which began in China, the “World’s Factory”, has cast dark clouds over the global economy.
In particular, the South Korean auto industry was directly hit by the failure to obtain wiring harnesses, which has led to disruptions and shutdowns on automobile production lines.
South Korea has become one of the biggest affected regions of the coronavirus outbreak because it is closely intertwined with a global value chain (GVC) centered on China.
According to a recent report by the Korea International Trade Association, South Korea’s GVC participation rate as of 2017 was 55 percent, which ranked sixth among 18 major OECD countries.
Active participation in GVC has the advantage of reducing production costs and achieving rapid innovation through international division and cooperation, but also leaves operations susceptible to external factors.
Currently, China is the most key country in the GVC. In particular, South Korea is heavily dependent on China, its largest trading partner, and is likely to be affected by changes in the Chinese economy.
Last year, China accounted for 25.1 percent of Korean exports and 21.3 percent of imports.
In terms of GVC structure, South Korea’s dependence on China is very high, with the proportion of intermediate goods accounting for 79.5 percent of Korean exports to China.
Hana Institute of Finance, a research unit of Hana Financial Group Inc., said in a report that direct damage to the distribution, hotel, aviation and cosmetics industries is expected as the outbreak of Covid-19 puts a damper on tourism, keeps people at home, and results in weak domestic demand in China.
It also pointed out that if the suspension of Chinese companies’ operations is prolonged, the impact could spread to most Korean manufacturing industries, including information technology and automobiles, due to the weakening of GVC due to supply chain blows.
“In the event of a shock to China’s demand, the possibility of a hard landing in China could be seriously raised in economic stimulus measures,” said Im Dong-min, an analyst at Kyobo Securities, predicting that China’s growth rate could drop to 4.8 percent this year and South Korea’s growth could fall short of 2 percent this year.
D. M. Park (dmpark@koreabizwire.com)
