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 Korea's May exports, marking the first contraction in four months, as U.S. tariffs offset strong semiconductor demand. While robust chip sales, particularly those for AI, provided some buffer, overall exports to the U.S. fell 14.6% in the first 20 days of May, with China also seeing a 7.2% decline, raising concerns about a broader slowdown in global trade and the uncertain impact of ongoing tariff negotiations.

Analysis

South Korea's export performance is signaling potential headwinds for global trade, with May exports projected to contract by 2.7% year-over-year, the first such decline in four months, according to a Reuters poll. This downturn is primarily attributed to the impact of U.S. tariffs, which are offsetting the otherwise robust demand for semiconductors, particularly high-end chips utilized in artificial intelligence. While April's exports unexpectedly rose 3.7%, driven by strong chip sales that compensated for a 6.8% drop in U.S.-bound shipments, preliminary data for the first 20 days of May indicates a broader weakening: overall exports fell 2.4%, with a significant 14.6% decrease in shipments to the U.S. and a 7.2% decline to China. An economist from Hana Securities suggested that the apparent strength in May's semiconductor exports might be due to advance ordering activity spurred by concerns over potential U.S. tariffs on chip imports. The simultaneous export declines to both the U.S. and China are viewed by Meritz Securities as indicative of a wider slowdown in global trade, with expectations of a second consecutive quarterly fall in South Korea's exports. Significant uncertainty remains regarding the resolution of U.S. trade disputes, with Societe Generale noting it is premature to declare an easing of tariff risks given upcoming deadlines related to paused reciprocal tariffs and the U.S.-China trade truce. Consistent with this weaker trade outlook, South Korea's May imports are also forecast to decrease by 3.1%, and the trade surplus is anticipated to narrow to $4.61 billion from $4.88 billion in the previous month.

Key Decisions for Investors

• Investors should closely monitor South Korea's official May trade data, scheduled for release on June 1st, as it serves as a critical early indicator for global trade dynamics and the real-world effects of U.S. trade policies.
• Consider a cautious stance on sectors heavily reliant on South Korean exports, such as automotive and potentially semiconductors, given the observed declines in shipments to key markets and the persistent uncertainty surrounding international trade tariffs.
• Portfolio managers should assess the potential for heightened market volatility and re-evaluate allocations to global equities if South Korea's export contraction signals a more sustained downturn in international commerce and economic growth.