What is happening in South Korea and how will it affect Colombia?

This week South Korea experienced an acute political crisis that almost culminated in a coup d’état as the escalation of the confrontation with North Korea and its growing involvement in the war in Ukraine may upset all balances on the eastern side of Asia and eventually affect supply chains and financial markets worldwide.

Although Asian markets have shown some resilience, with the Nikkei closing at zero and moderate declines in China, the situation has raised concerns about the stability of South Korea as a key U.S. ally in Asia. This crisis could strengthen China’s influence in the region and increase tensions with North Korea.

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What is going on in South Korea?

The recent declaration of martial law by South Korean President Yoon Suk-yeol and its revocation a few hours later have triggered a political crisis impacting financial markets and raising concerns about stability in the region.

Yoon’s announcement, justifying the move by an alleged pro-North Korean plot, sparked mass protests and prompted the National Assembly to vote to rescind the order. Troops deployed around the parliament were withdrawn early Wednesday morning, but the political crisis continues. Opposition parties are demanding Yoon’s resignation, while his close team has resigned en bloc.

As a result, the Kospi stock index closed down 1.5%, while the Kosdaq gave up 2%. In the United States, the iShares MSCI South Korea ETF (EWY) was volatile, falling as much as 7% before moderating its losses to 1.6%. The national currency, the South Korean won, fell 1.7% against the dollar to a two-year low, although it later regained ground following the repeal of martial law.

The Bank of Korea and the country’s financial regulator have implemented emergency measures to contain volatility, including the sale of dollars in the foreign exchange market and the preparation of a 10 trillion won stock market stabilization fund.

A strategic country in the geopolitical context

South Korea, with its more than 51 million inhabitants, is the main trading partner of China and Japan and the seventh largest trading partner of the United States. Although it is an economic power with a rich history and culture, its territory is one tenth of that of Colombia.

In the world geopolitical architecture Korea is an ally of the United States and has formed an alliance with Taiwan, Japan and Australia to counter Chinese influence in the Eastern Pacific.

At the same time it maintains an active trade and investment relationship with numerous countries, mainly Asian.

Its political system was formed after the civil war that divided it into southern and northern sectors. After this rupture, South Korea received special treatment from the United States as a result of the intensification of the Cold War and had an authoritarian regime until the mid-1990s.

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A major player in international trade

Despite its small territory, South Korea is an economic giant. In 2023, its GDP reached USD $1.8 trillion, equivalent to a per capita income of USD $35,563.

China is its main trading partner, accounting for 22.8% of exports and 21% of imports. It is followed by the United States (16% of exports and 11% of imports) and Japan (4.5% and 7.5%, respectively).

The main products exported by South Korea are chips (16.5%), vehicles and auto parts (10%), petroleum oils (9%), cell phones (4.1%) and ships (2.2%). Meanwhile, the main imported goods include petroleum (14.5%), chips (8.5%), natural gas (7.8%), coal (3.8%) and petroleum products (3.6%).

South Korea has signed 20 free trade agreements and four partial scope agreements, and is currently negotiating new agreements with Mexico and Japan.

Trade relations with Colombia

Bilateral trade between Colombia and South Korea is governed by two agreements: the Global System of Trade Preferences among Developing Countries, in force since 1989, and the Free Trade Agreement, in force since 2016.

South Korea accounts for 2% of Colombian exports, which are concentrated in coal, coffee, and copper scrap. In terms of imports, Colombia purchases from Korea products such as vehicles, propylene polymers, chemical compounds, construction machinery, and pharmaceuticals.

Impacts on Latin America and Colombia

A political conflict in South Korea could disrupt Colombian exports to that country, as well as imports of South Korean products. In case of disruptions, it is likely that Colombia will turn to other Asian suppliers, mainly China, to supply these needs.

Additionally, foreign direct investment flows from Korea to Colombia, which in the last three years totaled USD $44 million, could decrease. South Korean tourism to Colombia, which in 2023 registered more than 7,000 visitors, could also be affected.

South Korea is not only a key trading partner for Colombia, but also a key player in global supply chains. Therefore, any instability in its economy and politics would have a significant global impact, including on the Colombian economy.

According to Bloomberg, Latin American stock markets had a mixed performance on Tuesday. In Mexico, the S&P/BMV IPC index (MEXBOL) rose 0.82%, driven by the non-core consumer and financial sectors. In contrast, Colombia’s Colcap index (COLCAP) retreated by 0.51%, affected by utilities.

In terms of currencies, the Argentine peso led global appreciations with an increase of 40.1% in the first 10 months of the year, while the Brazilian real lost nearly 13% of its value.

Brazil’s economy grew by 0.9% in the third quarter of 2023, exceeding expectations thanks to public spending and consumption.

If instability in the Asian country continues, given its importance, there may be adverse effects in Latin America and Colombia.