South Korea’s chip exports lead trade gains fueling economy

South Korea’s export growth continued last month, led by demand for semiconductors, boosting the country’s trade balance to the biggest surplus since 2020 and supporting optimism among policymakers for better-than-expected economic expansion this year.

Shipments that reflect working-day differences increased 9.2% from a year earlier, easing from 11.3% from April, according to data released Saturday by the customs office. Without the adjustment, headline exports rose 11.7%, lower than the 15.3% forecast in a Bloomberg survey. Overall imports decreased by 2%.

The country’s surplus increased to $4.96 billion, the largest in 41 months. South Korea has seen gains in the trade balance for a full year, according to the trade ministry.

The Bank of Korea last month revised its forecast for economic growth sharply higher as export momentum stayed robust on the back of demand for products including semiconductors and automobiles. Chip sales have been particularly strong, leading gains in overall sales overseas from late last year.

In the first three months of the year, trade helped South Korea post an economic expansion that was twice as fast as analysts had anticipated.

South Korean exports of chips jumped 54.5% from a year earlier in May while those of displays climbed 15.8%. Overseas shipments of solid-state drives used in computers rose 48.4%, the trade ministry said. While semiconductor exports rose for a seventh month, the pace of increase moderated slightly from 56.1% in April.

South Korea and some of its neighbors in Asia occupy positions at the high-end of the overall hierarchy of technology supply chains and are set to benefit further from rising demand for electronics needed to advance artificial intelligence and data processing in major economies such as the US.

“Recent data suggest the strength in Asian exports may still have some way to go,” Sheana Yue, an economist at Oxford Economics, said. “This will, in large part, be due to the chip upcycle.”

South Korean chipmakers SK Hynix Inc. and Samsung Electronics Co., have reported better-than-expected earnings as demand for their memory chips recovered. The two firms are now competing to supply Nvidia Corp. with advanced memory that is more lucrative than conventional types.

This year’s export rally has been spurred in part by the won’s weakening against the dollar, with the Korean currency among Asia’s worst performing. Still, currency rates have mixed implications for overall corporate profitability, as the weak won has made it costlier for some firms that rely heavily on imported materials to assemble goods to be shipped overseas.

There are risks to the outlook for exports. Demand from China is uncertain as the world’s second-largest economy struggles to emerge from a domestic slump in spending. In May the International Monetary Fund called on Beijing to provide more monetary and fiscal support for the economy, including further steps to resolve the housing crisis, even as it raised its outlook for China’s growth this year to 5%.

Korean shipments to China in May rose 8% from a year earlier, while exports to the US increased 15.6%, according to the trade ministry.

South Korean industries are having to navigate ongoing geopolitical risks stemming from the US-China rivalry. China is the nation’s biggest trading partner while the US provides security guarantees. 

At a three-way summit last month, China asked South Korea and Japan to increase cooperation aimed at keeping supply chains stable, as Beijing tries to soften the blow from US export controls on devices it needs to advance its technology. Some South Korean firms with manufacturing facilities in China have had to contend with US restrictions aimed at limiting China’s access to certain materials and equipment.