South Korea: Potential trade disruptions could impact the Won – BNY

Shifting Trade Surpluses in Asia

Geoff Yu from BNY notes that as China's exports to the United States have declined, South Korea, Taiwan, and Japan have stepped in as major surplus contributors. The Bank of Korea (BoK) cautions that the current supply disruption may be more intense than what was experienced in 2022–2023, suggesting a possible transition from substantial surpluses to deficits. This shift could significantly reduce capital outflows that have previously bolstered global financial markets.

Bank of Korea Warns of Significant Surplus Reversal

With Chinese exports to the U.S. dropping sharply (excluding trans-shipment adjustments), Japan, South Korea, and Taiwan have collectively increased their surplus contributions to the U.S. In January, their combined surplus reached $40 billion, and the three-month rolling average was $30 billion.

There is now a considerable risk that these surpluses could quickly turn into deficits. During a recent BoK meeting, Governor Rhee Chang-yong, whose term concludes this week, emphasized that the current supply shock may surpass the severity of the 2022–2023 period. If this scenario unfolds, the resulting shift in capital flows—from surpluses to trade deficits across the Asia-Pacific region—would be substantial.

According to Governor Rhee, if South Korea and its regional partners face even larger deficits than in 2022, the change could be dramatic. A swing from a $40 billion surplus to over $30 billion in deficits would mean a $70 billion reduction in capital outflows in just one month (assuming full recycling). Over a three-month period, this shift could total $150 billion, moving from a $30 billion positive average to a $20 billion negative. In March alone, the combined surplus drop for China, Taiwan, and South Korea for intervention purposes surpassed $100 billion, making a $150 billion loss in recycling flows a plausible scenario.

This article was produced with assistance from an AI tool and reviewed by an editor.