South Korea May exports expected to fall as US tariffs offset robust chip demand

A Reuters poll of economists forecasts a 2.7% year-over-year decline in South Korean exports for May, marking the first contraction in four months, primarily due to the impact of U.S. tariffs offsetting strong semiconductor demand; shipments to the U.S. fell 14.6% and to China 7.2% in the first 20 days of May, raising concerns about a broader slowdown in global trade despite a temporary pause in tariff escalations between the U.S. and China.

Analysis

South Korea's export performance, a key bellwether for global trade, is anticipated to have contracted in May for the first time in four months, with a Reuters poll forecasting a 2.7% year-over-year decline. This downturn is primarily attributed to the adverse effects of U.S. tariffs, which are overshadowing continued strong demand for semiconductors, particularly high-end products for artificial intelligence. Data from the first 20 days of May revealed a 2.4% overall export decrease, with significant drops in shipments to the U.S. (down 14.6%) and China (down 7.2%), fueling concerns of a broader slowdown in global trade rather than an issue isolated to U.S. relations. One economist from Hana Securities suggested that the observed strength in semiconductor exports might be inflated by advance orders due to worries about potential U.S. tariffs on chip imports. This follows a decline in South Korean exports in the first quarter, the first in 18 months, with economists like Stephen Lee from Meritz Securities expecting this negative trend to persist into the second quarter. Despite a temporary 90-day pause in the U.S.-China trade war and ongoing negotiations regarding U.S. tariffs on South Korean goods (excluding a 10% baseline), significant uncertainty remains, as highlighted by an economist at Societe Generale pointing to upcoming deadlines in July and August. South Korean imports are also projected to have fallen by 3.1% in May, following a 2.7% drop in April, with the trade surplus estimated at $4.61 billion, slightly down from April's $4.88 billion.

Key Decisions for Investors

• Investors should closely monitor the forthcoming May South Korean trade data, and subsequent releases, as they serve as an early indicator of global trade vitality and potential macroeconomic shifts, particularly given the observed weakness in shipments to both the U.S. and China.
• Consider reviewing exposures to companies and sectors heavily reliant on South Korean exports, especially in automotive and non-semiconductor manufacturing, and critically assess whether current semiconductor strength is sustainable or driven by tariff-related advance ordering.
• Exercise caution and potentially implement hedging strategies for portfolios sensitive to global trade tensions, especially around the noted July and August tariff negotiation deadlines, as the current environment suggests persistent tariff risks and a potential deceleration in global economic activity.