Jack Harlow
Political Instability and Economic Fallout: Lessons from South Korea’s Six-Hour Crisis
On December 3, 2024, South Korean President Yoon Suk Yeol declared martial law, citing threats from “pro-North Korean and anti-state forces”. Although it was lifted after only six hours, this event caused significant disruptions to South Korea’s economy and exposed vulnerabilities in global trade networks. As a key supplier of semiconductors and other critical commodities, South Korea’s political stability is paramount to maintaining its economic role. Current recovery efforts focus on short-term market stabilization, but broader, more systemic changes are necessary to restore trust and reinforce resilience. South Korea must adopt proactive measures to secure its trade reliability and safeguard its position in the global economy.
South Korea’s role as a significant global economy is central to international trade, particularly in high-tech industries. Approximately 20% of the world’s semiconductors, an essential component for electronics and vehicles, are manufactured in South Korea. The martial law declaration disrupted logistics at key ports, delaying exports and exacerbating an already strained semiconductor supply chain. This delay created ripple effects across industries in China, the United States, and beyond – forcing companies to adjust production schedules at significant cost. These disruptions demonstrate how necessary internal political stability is to South Korean efforts to maintain their pivotal role in global supply chains.
These disruptions went beyond physical supply chain disruptions as the financial markets were also heavily impacted. The South Korean won depreciated to its lowest value in two years, hitting 1,415.40 KRW per USD. While this depreciation made exports more competitive, the rapid decline unsettled investors, increased import costs, and contributed to inflationary pressures. These financial shocks have raised concerns about the won’s reliability as a global currency and highlighted the economic costs of political instability.
Current efforts to stabilize South Korea’s economy, such as monetary interventions and logistical adjustments, fail to address long-term vulnerabilities. Trade partners and investors may accelerate efforts to diversify their supply chains, reducing reliance on South Korean exports. For instance, nations like the United States and Japan have already increased domestic semiconductor production. Without decisive measures, South Korea risks losing its competitive edge in global trade and weakening its influence in trade agreements such as the Korea-U.S. Free Trade Agreement (KORUS FTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
South Korea must proactively take steps to restore trust and reinforce its economic resilience. Policymakers should consider establishing trade continuity agreements with key partners to ensure that exports and imports remain uninterrupted during future domestic crises. Additionally, South Korea should invest in diversifying its supply chains to reduce dependence on imported raw materials, such as crude oil. Collaborative efforts between the government, the private sector, and international organizations are necessary to implement these strategies effectively.
Failing to act on these recommendations could have severe consequences. Competing nations like Vietnam and Taiwan are well positioned to capitalize on any perceived instability by attracting investments that might otherwise flow to South Korea. If left unaddressed, future political disruptions could further erode South Korea’s reputation and economic standing. For a nation so deeply integrated into global trade, inaction is not an option.
The martial law declaration serves as a wake-up call for South Korea and its trade partners. Political stability is not just a domestic issue but a prerequisite for maintaining international trust and economic resilience. By prioritizing reforms and fostering confidence among its global stakeholders, South Korea can ensure its continued role as a reliable trade partner and economic powerhouse.
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