[Editorial] South Korea Must Inspect Its Bulwarks Against a ‘Three-Pronged Wave of Headwinds’

The external environment surrounding the South Korean economy has been engulfed by uncertainty on multiple fronts at once. A three-pronged wave of headwinds—soaring international oil prices, rising U.S. Treasury yields, and growing calls to slow the pace of the artificial intelligence (AI) industry—is arriving all at once. All three factors stem from external uncertainty. When the external environment deteriorates, even an economy with strong domestic fundamentals can inevitably fall into a quagmire of risks. The simultaneous emergence of three external headwinds—oil prices, interest rates, and AI regulation—could obstruct South Korea’s economic path for the time being, given its heavy reliance on overseas markets for both exports and raw-material imports.
A sharp rise in oil prices is now imminent. International oil prices surpassed $100 per barrel after the East-West Pipeline, a key Saudi Arabia oil pipeline, was shut down by a drone attack. Brent crude reached $105, while Dubai crude briefly climbed into the $120 range. If the Strait of Hormuz blockade is followed by the shutdown of the overland pipeline that served as an alternative route, the cost burden on South Korea’s refining and chemical industries, which depend on Middle Eastern crude, will increase enormously.
Restoring this crude oil transport route could take several weeks, and the possibility of further attacks cannot be ruled out. High oil prices will immediately push up import prices, which will in turn increase pressure on domestic consumer prices. Although several economic indicators are currently favorable, prices remain highly unstable. If international oil prices stay elevated, managing inflation in the second half of the year will become even more difficult.
The domestic and international interest-rate environment is also unfavorable. The yield on the 10-year U.S. Treasury note has breached the psychologically significant 5% threshold. This has resulted from concerns about inflation caused by high oil prices, combined with the U.S. government’s massive fiscal deficit and large-scale bond issuance to finance AI infrastructure investment. In addition, the possibility of further tightening has been raised at a Federal Open Market Committee (FOMC) meeting.
Rising U.S. Treasury yields have both direct and indirect effects on South Korea. When long-term U.S. yields rise, upward pressure on South Korean market rates also increases. In both the United States and South Korea, there is a clear trend toward raising policy rates to counter inflation. From the government’s perspective, however, rate hikes are unwelcome because they burden ordinary households and small and medium-sized businesses. The room for maneuver in interest-rate policy is narrowing.
Making matters worse, calls originating in the United States to slow the pace of AI development have recently emerged as an unexpected setback for the stock market. Until now, expanded AI investment had enabled semiconductor memory to enjoy an unprecedented boom. Exports consequently improved sharply, and major economic indicators traced an upward curve. With semiconductors effectively driving the economy, a sudden brake on AI investment could deliver a major shock.
It is true that South Korea’s economic performance has been broadly strong recently. Its competitiveness has improved enough for growth forecasts to exceed 3%, and excess tax revenue from expanding exports is also expected to reach a substantial level. After six years, South Korea’s leading economic index has risen to No. 1 in the world. In the global era, however, external variables often outweigh a country’s own competitiveness. South Korea can maintain its competitiveness only by responding effectively to external economic uncertainty.
The government must refine its response system for each scenario. Because the economy is highly dependent on semiconductors, current favorable economic indicators cannot be regarded entirely as a reflection of South Korea’s underlying strength. If the semiconductor sector falters, growth will slow rapidly. This is the time for a proactive plan that considers even the worst-case scenario, rather than succumbing to optimism.