The trade balance is in the ‘surplus’ and the trade balance is the ‘largest deficit ever’… Same, but very different stats

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The trade deficit continues as exports decrease and imports increase.

There is an uproar in various places that the emergency light has been turned on in the Korean economy, which lives on exports.

However, the government is diagnosing that it is not in a serious crisis, predicting that the goods balance will record a surplus of 9.5 billion dollars this year.

Why are the judgments on the 'trade balance' and the 'goods balance' based on exports and imports of the same Republic of Korea so different?

The Korea Customs Service announced that imports fell by 8.8% to $33.6 billion and increased by 1.9% to $40 billion in the first 20 days of this month.

The trade deficit stands at $6.4 billion.

The export growth rate is expected to decline for the third consecutive month after recording -5.8% in October and -14% in November, and the trade balance is expected to set a new record for decreasing for the ninth consecutive month.

It is the first time in 25 years that exports have declined for 9 months in a row since May 1997, 7 months before the outbreak of the financial crisis.

As of the 20th, the cumulative trade deficit for this year was 48.9 billion dollars, and it is certain that the annual trade deficit in 2022 will exceed 50 billion dollars.

This year's projected trade deficit is not only the largest ever, but also more than double the previous record deficit of 20.6 billion dollars in 1996.

Exports to China, Korea's largest export country, are decreasing, and even semiconductors, the country's largest export item, are struggling with falling prices and sluggish demand.

Exports of steel and wireless communication equipment also decreased significantly.

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However, on the 21st, the government announced the '2023 economic policy direction' and predicted that Korea's goods account surplus would record a surplus of 9.5 billion dollars this year, and the goods account surplus would increase to 23 billion dollars next year.

The Bank of Korea also calculated that Korea's balance of payments for October recorded a surplus of 13.12 billion dollars until last October this year in Korea's 'October International Balance' announced on the 9th.

On the other hand, the Ministry of Trade, Industry and Energy announced that the trade balance recorded a deficit of 35.58 billion dollars during the same period.

From this year to last October, there is a difference of 48.7 billion dollars between the trade balance and the goods balance based on the import and export of goods in the same Republic of Korea.

According to the statistics of the Ministry of Trade, Industry and Energy, Korea's trade balance is expected to show a deficit of more than 50 billion dollars this year, and the government expects a surplus of 9.5 billion dollars. As a result, the trade balance gap announced by the Ministry of Industry is expected to reach 60 billion dollars.

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There are three main reasons for such a large gap between the 'trade balance' and the 'goods balance' statistics, which are based on the import and export of the same quantity and type of goods. The gap between the balance of goods and the balance of trade is expected to widen further .

The biggest factor in the difference between the balance of goods and the balance of trade is the difference in

The trade balance announced by the Ministry of Industry is a preliminary figure compiled by the Korea Customs Service based on the price at the time of customs clearance. Exports are based on FOB (Free On Board) prices, but imports are CIF (Cost Insurance Freight: prices including freight and insurance). ) based on

Exports reflect only commodity prices when preparing the balance of trade, whereas imports are inevitably more expensive as they add transportation and insurance to commodity prices.

On the other hand, the balance of goods prepared by the Bank of Korea is prepared on an FOB basis for both exports and imports.

As for exports, both the trade balance of the Ministry of Trade, Industry and Energy and the balance of goods of the Bank of Korea are based on FOB standards.

Since the amount of imports on the balance of trade prepared by the Korea Customs Service includes freight rates and insurance premiums, it is bound to be higher than the amount of income on the balance of goods prepared by the Bank of Korea.

After all, the trade deficit of the Korea Customs Service is inevitably larger than that of the Bank of Korea.

The second factor is

.

As the balance of trade is prepared based on the time of customs clearance, statistics are prepared based on the time of import and export declaration, but statistics on the balance of goods are prepared based on the time of transfer of ownership.

In most cases, the timing of customs clearance and transfer of ownership are the same, but the timing of customs clearance and transfer of ownership are different for products such as ships, in which advance payments, interim payments, and the balance are paid sequentially until delivery 2-3 years after receiving an order.

The balance of goods reflects the amount received each time the import and export payment is sequentially received in the export statistics, but the trade balance is reflected in the export statistics at the time of customs clearance when the product is completed and finally delivered.

Finally, there

.

The trade balance of the Korea Customs Service reflects all goods that are cleared through customs in statistics.

Import and export based on customs clearance includes the movement of all real assets that cross Korea's customs border, that is, the movement of goods by commercial transactions as well as the movement of non-commercial goods in and out of Korea.

In addition to commercial transactions such as import and export of automobiles, exhibits or samples sent from Korea to overseas for participation in overseas exhibitions or consultations with buyers, and moving cargo brought into Korea by international students, all that cross the customs line are counted as imports and exports.

On the other hand, imports and exports of goods that do not cross the domestic customs line, such as overseas transit trade, are excluded from trade balance statistics.

Through comprehensive scope adjustment, the Bank of Korea prepares the balance of goods by excluding re-exports and imports that are not based on the balance of payments, exports and imports of sample goods, etc.

Lim In-hyeok, head of the International Balance of Payment Team at the Bank of Korea, said, “The balance of trade is a breaking news figure and is used as a measure of Korea’s industrial competitiveness. The bigger the gap between the balance of goods and the balance of trade, the bigger the globalization of Korean companies, such as building factories abroad, widens.”

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Economic downturn due to global austerity, decrease in demand and price of semiconductors, Korea's flagship product, decrease in exports to China following the US embargo on China, crude oil and minerals due to the war in Ukraine, etc. There is a prospect that Korea's terms of trade will inevitably suffer for a considerable period of time due to rising prices.

Last October, the trade balance prepared by the Korea Customs Service and the goods balance prepared by the Bank of Korea also showed a deficit of 1.48 billion dollars.

However, the sense of crisis that there is a serious problem with Korea's external solvency is excessive, saying that the scale of the trade deficit is larger than during the 1997 foreign exchange crisis, exceeding 50 billion dollars this year.

Although the trade deficit continues to appear to be widening, the won-dollar exchange rate, which was close to 1,450 won in October, has fallen sharply since last month, recording 1,280 won per dollar on the 23rd.

The reason why the exchange rate has returned to stability even though there is no major change in the economic situation is because the speed of interest rate hikes in the US has eased, but one factor is also that the excessive sense of crisis about our economic reality has eased.

Policy authorities are also making efforts to increase the supply of dollars by expanding the limit on currency hedging for pension funds’ overseas investments.

The upcoming year of 2023 is the geopolitical crisis represented by the war in Ukraine and the conflict between the US and China, the energy crisis triggered by this, and the debt crisis caused by the US Fed's austerity. It is predicted that it will be the most difficult year since then.

This is a time when policy authorities need leadership to navigate through the waves of crisis by drawing up accurate statistics to properly inform the reality and carrying out bold policies based on the statistics.