conflict on the korean peninsula: implications for jobs in ... · would see the bulk of job losses...

A report from The Economist Intelligence Unit

CONFLICT ON THE KOREAN PENINSULA: Implications for jobs in the US agricultural and automotive sectors

© The Economist Intelligence Unit Limited 20181

CONFLICT ON THE KOREAN PENINSULA:Implications for jobs in the US agricultural and automotive sectors

Executive summary 2

Introduction 3

Macroeconomic impact of Korean conflict scenario 5

Vehicles and vehicle parts dominate imports from South Korea 9

Impact on key US agricultural exporting states 13

Data sources and methodology 19

1

2

3

Contents



Implications for US economic growth(2018 US real GDP growth forecast, %)

Source: The Economist Intelligence Unit.

Current forecast

2.7%

Impact of a Korean conflict on US automotive and agricultural jobs in select states

Note: Job losses include both direct and indirect jobs.Source: The Economist Intelligence Unit.

Agricultural job lossesAutomotive Job losses

Korea conflictscenario

1.0%

TX

NE

CA

MI

IL

AL

IA

GA

-9,261

-3,673

-3,336 -2,182 -1,935 -6,425

-11,254

-6,902

Executive summaryA war on the Korean peninsula would substantially depress the US’s economic performance. The EIU forecasts that the resulting disruption to trade, and dampening impact on business and consumer confidence, would push real GDP growth down to just 1% in 2018 (the weakest rate of expansion since the economic crash of 2009).

The agriculture and automotive sectors would be especially hard hit by a Korean war. South Korea is the sixth-largest export market for US agricultural and food exports globally, while the East Asian country is a vital source of specialized intermediate goods for the US auto sector (ranging from engines all the way down to brakes and axles).

Automotive firms in Alabama, Georgia and Michigan would see the bulk of job losses owing to a Korean war. Taken together, the EIU forecasts that almost 25,000 direct and indirect auto jobs would be lost in the first year of a Korean war, with the impact on the broader state economy exacerbated by the fact that annual salaries in the sector are typically higher than the state average.

Agricultural producers in California, Texas, Nebraska, Iowa and Illinois would be among the most affected by a Korean war. Overall, we forecast that more than 20,000 direct and indirect agricultural jobs would be lost in these five states, as US food exports are hard hit by the collapse in Korean demand.



The relationship between the US and North Korea has long veered between tension and outright hostility. North Korea’s commitment to the development of ballistic missiles, sponsorship of terrorist acts and pursuit of a nuclear weapons program has spurred sanctions and warnings from the US in the past. Nonetheless, until very recently North Korea has remained defiant, frequently carrying out missile launches (on occasion fired over Japanese territory) and nuclear weapons testing. In 2017, North Korea conducted its largest ever nuclear test, which was followed by an unusually personal war of words between the US and North Korean leaders—adding a greater layer of uncertainty to the already fraught situation on the Korean peninsula.

Yet, in recent months the diplomatic mood between the two countries’ leaders has been transformed, culminating in the historic meeting between them in Singapore in June (which followed a similarly high-profile meeting between the South Korean and North Korean leaders in the demilitarised zone six weeks earlier). The drivers of this transformation are much debated, but theories range from the desire of North Korea to see sanctions eased to a yearning on the part of both Kim Jung-un and Donald Trump to boost their profiles back home with a major—and telegenic—foreign policy success.

However, the vaguely worded joint statement that came out of the meeting confirmed the EIU’s view that, beyond the positive optics, real progress towards normalization on the Korean peninsula remains far off. In particular, with no details on the process or the timetable for denuclearization having been provided so far, the gap in expectations

between the US and the North has yet to be bridged, even temporarily. In reality, the levels of bilateral trust and long-term commitment required for a phased denuclearization scenario are unlikely to be achieved under the current US administration, given decades of prior animosity. In addition, the likelihood of North Korea completely giving up its nuclear arsenal is low; economic incentives will not outweigh the strategic value for the Northern leadership of its nuclear weapons, the “mighty sword for defending peace”.

Should the diplomatic talks fall apart, owing to misaligned expectations and distrust, which we think is the likeliest scenario in the medium to long term, the US will revert to the containment strategy in place previously (namely, combining sanctions, active efforts to isolate North Korea and a heightened US military posture in the region). However, it could also justify escalating towards a more aggressive stance that would include strategic strikes on the North. This option has been publicly favoured by some of Mr Trump’s close advisers, such as the national security adviser, John Bolton, who was at the June 12th summit. However, the US defense secretary, Jim Mattis, has highlighted the horrors that would be unleashed by the “hundreds of [North Korean] artillery cannons and rocket launchers within range of one of the most densely populated cities on Earth [namely, Seoul]”.

Although aware of the enormity of the human suffering that would result from a Korean war1, The

1 The Department of Defense estimates a potential loss of 250,000 lives in Seoul alone as a result of artillery fire; https://www.rand.org/pubs/perspectives/PE262.html

Introduction



Economist Intelligence Unit does not propose to seek to attribute a dollar value to human lives. Instead, for this report we will focus on the economic fallout of a war, and, in particular, the impact on the US economy of a military escalation during which trade with South Korea and other trading partners in the Asian region is affected.2 With this in mind, the report will cover three areas:

The broader US macroeconomic impact. In order to understand the implications of a war for the US’s economic fundamentals, this report will compare the country’s economic performance under a conflict scenario against the EIU’s present baseline US economic outlook.

2 The Korean conflict scenario is predicated on 2017 data, and therefore does not reflect the post-tariff/trade war status quo.

Potential job losses within agriculture and food production. South Korea is a hugely important market for the US agricultural sector, buying US$6.6bn of its products in 2017—making it the sixth-largest export market for US agricultural and food exports globally. Clearly, any interruption to that trade will have major ramifications for employment.

Potential job losses in the motor vehicle and parts production sectors. In contrast to the agricultural sector, South Korea’s importance for the US’s automotive producers lies primarily in its role as a source of specialized intermediate goods (ranging from engines all the way down to brakes and axles). Given the fact that the US auto sector is more reliant on imported intermediate goods than any other manufacturing industry in the country, any disruption to this supply chain would have a huge impact on production and, ultimately, jobs.



Underlying assumptions

In order to ascertain the economic and sectoral outcomes of a conflict on the Korean peninsula, the EIU has generated a series of underlying assumptions regarding the nature and severity of the war.

• First; the baseline forecast envisages an outright military confrontation on the Korean peninsula following a pre-emptive US strike, a North Korean attack, or a combination of both.

• Second; this report will focus on just the first year of conflict (although, in reality, there is potential for the war to be either shorter or longer than this).

• Third; this report assumes that the war will be contained within the Korean peninsula—although the likelihood is that other countries, including notably Japan, would be caught in the firing line—with South Korea heavily bombarded and the loss of civilian life high.

• Fourth; this scenario does not envisage the usage of nuclear weapons by any side.

In terms of the South Korean economic fallout, our scenario assumes that South Korea’s manufacturing capacity is severely diminished across 2018. In the face of high levels of civilian casualties, massive

1 Macroeconomic impact of Korean conflict scenario

Under a Korean conflict scenario, the US would witness a sharp slowdown in annual real GDP growth, to just 1%, as the uncertainty of war and trade disruptions depress domestic demand and exports. This would be the weakest rate of expansion since the economic crash of 2009, and compares with the EIU’s current baseline forecast of 2.7% growth in 2018.

US real GDP growth(% real change per annum)

Source: The Economist Intelligence Unit.

2014 2015 2016 2017 2018

Current forecastKorean conflict scenario

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0



economic disruption, a sharp decline in the won, and a concurrent sell-off of South Korean equities and bonds, domestic demand is crushed and demand for imports is almost wiped out. This includes a 75% decline in imports from the US (as South Korea’s manufacturing sector comes to a standstill) and a similar fall in exports of goods from South Korea to the US as domestic output and shipping are disrupted.

In terms of the wider international economic fallout, we envisage that global financial markets would tumble, oil prices (briefly) spike and global consumer confidence decline dramatically amid the uncertainty of war in the Asia region. Meanwhile, the US dollar would appreciate markedly as capital flows to safe-haven assets. Even as it becomes clear that the conflict will be contained within the Korean peninsula, global manufacturing supply chains are affected through the loss of South Korean intermediate exports and via disruption to trade routes.

1.1 South Korea—A major global source of intermediate goods exports

US–South Korea trade relationship(US$bn)

Source: US Census Bureau.

71.4

48.3

South Korea’s trade ties with the US are close, deep and long-standing. South Korea is the US’s sixth-largest trade partner, with the US importing goods worth US$71.4bn from South Korea and exporting US$48.3bn of goods to that country in 2017.3 The composition of US exports is dominated by manufactured goods and commodities, with the main exports comprising machinery, electronic and technical equipment, organic chemicals, mineral fuels, vehicles and meat. Meanwhile, the main imports from South Korea are vehicles, electronic equipment, machinery, mineral fuels, iron and steel products, plastics and rubber.

However, in terms of the trade relationship, South Korea’s primary economic role for the US is as a provider of intermediate goods (which are essential in the final assembly of manufactured goods). South Korea is embedded in global supply chains, and the US is a major market for these intermediate goods, with 8% of all intermediate exports from South Korea going to the US in 2016. Indeed, the role of South Korea as a supplier of intermediate goods to the US is larger than the headline numbers suggest: South Korea is also integrated into the supply chains of China and Japan, and thus into those countries’ exports to the US.

The disruption to global supply chains caused by the loss of South Korean intermediate exports globally will be especially acute due to the nature of

3 US Census Bureau—USA trade data.



its exports, which are generally specialized and of higher value (such as semiconductors and car engines).4 Amid the enormously disruptive event of a conflict, the effect on global supply chains would thus be substantial and sustained, as sourcing alternative suppliers would prove difficult in the near term—a situation that arose following the disastrous 2011 earthquake and tsunami in Japan, which had a major knock-on effect on global technology and auto firms in particular.

Exacerbating the situation, the missile (and nuclear) threat posed by North Korea would, at the very least, add to insurance costs for freight into and out of the region, while the impact on consumer and business confidence in East Asia would cause at least a near-term slowdown across this hugely significant economic area. In 2017 China and Japan were the US’s third- and fourth-largest export markets, respectively, for goods (behind Canada and Mexico), and as such a slowdown in these economies would be bad news for some of the US’s biggest exporters (mostly companies in the vehicles, aircraft, and electronic products sectors). Meanwhile, although less dramatic in its effects, the concurrent forecast strengthening of the US dollar would weigh on US exports globally, harming their competitiveness in other major global markets such as the EU.

As a consequence, we forecast that US export volumes would fall by 6% owing to a conflict on the Korean peninsula. However, the negative impact on the overall trade balance would be almost completely offset by a 9% slide in imports, as imports from South Korea (and to a lesser extent China and Japan) tumble as a result of the war and in the wake of weaker US domestic demand. As a result, the trade deficit is little changed under the conflict scenario, at US$685bn (equivalent to 4.6% of GDP), as against a deficit of US$642bn in the baseline forecast.

4 http://www.imf.org/en/publications/cr/issues/2018/02/13/republic-of-korea-selected-issues-45626

1.2 Domestic demand would sink, but would ultimately recover

Under the conflict scenario, global demand would sink as war erupts on the Korean peninsula, with financial markets tumbling and consumer and business confidence stalling amid the crisis. Unsurprisingly, the US would not be immune to this financial market turmoil—the loss of a key market and uncertainty about the potential for nuclear escalation would probably drive a rush for cash (and possibly gold). Quickly this panic would be reinforced by the macroeconomic fallout of the conflict, as the disruptions to trade take effect in the shape of declining activity among US manufacturers (with resulting job losses and falling wages).

As markets realize, however, that the conflict will be contained within the Korean peninsula, we anticipate that global financial markets would begin to recover. With the stockmarket finding its feet and higher US government spending providing a measure of fiscal stimulus (notably for defense manufacturers), demand in the economy would be buttressed, culminating in a recovery in consumer and business spending. Overall, we thus expect growth in private consumption to slow to a still relatively comfortable 1.9% (against a baseline figure of 2.5% in 2018). The overall effect on US GDP, meanwhile, would be a 1.7-percentage point difference in GDP growth in 2018 against the baseline, with GDP growth slowing to 1% against our baseline growth forecast of 2.7%. Although remaining positive, this rate of growth would be the lowest in almost a decade, and would be equivalent to the US’s economic performance in 2001 (the year of the bursting dotcom bubble and, of course, the 9/11 attacks).

http://www.imf.org/en/publications/cr/issues/2018/02/13/republic-of-korea-selected-issues-45626

http://www.imf.org/en/publications/cr/issues/2018/02/13/republic-of-korea-selected-issues-45626



1.3 The US exchange rate would strengthen and inflation weaken

After initially tumbling as the war erupts, US bonds and other financial assets (such as equities) would benefit amid the global flight to safe-haven assets. This in turn would drive an appreciation in the US dollar, although the level of appreciation against the euro would be tempered to an extent by the EU’s remoteness from the conflict. In contrast, the yen—which is typically viewed as a safe-haven asset—would struggle as financial flows are directed out of the Asia region.

Perhaps unsurprisingly, given the softening in domestic demand, we expect US inflation to decline relative to our baseline (to 1.2%, compared with 2.4%). However, the impact of softening demand

would be partially offset by higher import costs, as upward price pressure from (briefly) higher oil prices, rising global transport costs and shortages of several key types of intermediate goods more than counterbalance the strengthening US dollar. Over time, these trends would begin to unwind. First, as capital flows to safe-haven assets increase, stimulating a recovery in US asset prices, domestic demand would begin to strengthen once again. Meanwhile, the temporary risk premium for oil prices would also steadily reverse: three of the world’s largest oil importers are located close to South Korea, and, with their economies weakening, so would demand for oil, precipitating a gradual decline in oil prices. Overall, although inflation will be volatile, we thus expect it to remain in positive territory.



South Korea is a major link in the US automotive sector’s supply chain, with vehicle and vehicle parts imports to the US worth US$23.9bn in 2017 (equivalent to 29% of total imports from South Korea in that year).5 Georgia imported the highest proportion of these in 2017, with 17% of all auto imports headed to this state. Michigan followed closely behind, with 15% of auto imports destined for the major automotive manufacturing state, followed by Alabama (8%).

Crucially, the US auto manufacturing sector is reliant on intermediate inputs (such as engines, brakes and axles, which are vital for the US auto industry in general but which, at least in the near term, are irreplaceable for the South Korean-owned auto manufacturers in the US). Indeed, the industry has the highest such requirement of any manufacturing industry, with 84% of intermediate inputs used in the manufacturing process. Of these, an estimated 30% are imported intermediate goods.6 In fact, of the 400 models sold in the US by domestic and foreign automakers, only five contain more than 55% domestic content and over half contain 10% or less.7

5 US Bureau of Economic Analysis (BEA), international Trade and Investment data.

6 Federal Reserve Bank of St. Louis, On the Economy Blog (2018).

7 American Automotive Council (2017).

2.1 Michigan—Job losses would be small relative to the total auto workforce, but the impact would be oversized

Total estimated job losses resulting from Korean conflict

Direct jobs 2,471

Indirect jobs 3,954

Total 6,425

Michigan is the US’s leading vehicle and vehicle parts manufacturing state. In 2016, Michigan was responsible for 19% of all vehicle production in the country.8 Meanwhile, despite decades of job losses, Michigan’s auto manufacturing sectors still provide 180,000 jobs within the state and 19% of all auto manufacturing jobs in the US. Michigan is home to 12 auto assembly plants, including facilities owned by the three largest automotive manufacturers in the US: General Motors, Ford Motors and FCA US (Fiat Chrysler Automotive). Overall, auto manufacturing activity contributes 6% of total state output.

Although the value of Michigan’s auto imports from South Korea is high, at US$3.3bn annually, this

8 Detroit Regional Chamber (2017).

2 Vehicles and vehicle parts dominate imports from South Korea

The threat to the automotive sector from a war in South Korea is primarily centered on that country’s importance as a source of vehicle parts, notably for plants in Georgia, Michigan and Alabama. Georgia and Alabama are both bases for South Korean-owned manufacturing plants, while Michigan is the US’s leading vehicle and vehicle parts manufacturing state.



represents just 4% of total vehicle and vehicle parts imports into the state. Just over half of these imports from South Korea are finished vehicles, while the remainder are vehicle parts. In terms of value, however, Michigan is still the second-largest destination for imports of vehicle parts from South Korea. With a significant proportion likely to be intermediate imports supporting manufacturing activity within the auto vehicle and parts manufacturing sectors, the loss of these imports would have a far greater disruptive effect on jobs than final-vehicle imports (an assumption that underpins our calculations for all three states in this study).

Our job loss estimates reflect this combination of the state’s oversized automotive sector but its lesser dependence on South Korean imports. Taken together, we project that direct job losses in the auto manufacturing sector in Michigan under a Korean conflict scenario would reach 2,471 jobs (equivalent to a small 1.4% of all vehicle manufacturing jobs in the state, but the largest number of redundancies among the three states covered in this report). Further job losses in other industries connected to the import of vehicles and vehicle parts into this state (that is, losses of indirect jobs) would affect 3,954 workers.

Reflecting the sector’s high dependence on intermediate inputs, the associated production losses would result in heavy job losses in supporting industries such as metals, plastic and rubber manufacturing, machinery and electronic production, and the wholesale trade sector.

Job losses in Michigan have an oversized impact on the local economy and beyond, reflecting the fact that the average annual salary of an employee in the motor manufacturing industry (US$73,100/year) is some 40% higher than the state average salary (US$52,300/year). Admittedly, the rate varies between different subsectors, with vehicle manufacturing sector employees earning slightly more on average than workers in the motor vehicle bodies and trailer manufacturing and motor vehicle parts manufacturing sectors, but the average across all three subsectors still surpasses the levels in Alabama and Georgia (of US$56,100 and US$50,300 respectively). As a consequence, the potential for a substantial knock-on impact on the Michigan economy from even a relatively small number of job losses is high, as the job losses drive a sharp reduction in spending among the state’s better-paid employees.

Annual auto sector salaries, 2017(US$)

Source: US Bureau of Labor Statistics.

National Michigan Alabama Georgia

Average wage (all industries) Average wage (motor vehicle manufacturing)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000



2.2 Alabama and Georgia—The presence of South Korean-owned auto plants would leave the two states vulnerable

The impact of a conflict on the Korean peninsula is especially fascinating, and troubling, for Alabama and Georgia—both of which are home to South Korean-owned vehicle manufacturing plants (Hyundai and Kia, respectively). Alabama is a major vehicle and vehicle parts manufacturing state: its automotive manufacturing sector employs 43,600 workers, equivalent to 5% of the national total. As well as Hyundai, Honda America (Japan) and Mercedes Benz/Daimler (Germany) have manufacturing plants in the state. However, the Hyundai manufacturing plant currently has the largest capacity of the state’s car plants, producing just under 400,000 vehicles a year and employing 3,000 full-time workers.9 Georgia, in contrast, is home to a much smaller vehicle and vehicle parts manufacturing base, with 26,500 workers employed in these industries. The

9 https://www.hmmausa.com/3-millionth-vehicle/

state, however, is home to South Korean-owned Kia Motors’ US manufacturing plant, which has a production capacity of 360,000 vehicles a year and employs 2,700 workers.10

Compared with Michigan and Georgia, Alabama imports the lowest total value of vehicles and vehicle parts from South Korea (US$1.8bn, compared with US$3.7bn in Georgia and US$3.3bn in Michigan). However, 100% of Alabama’s vehicle imports from South Korea are in the form of auto parts, making it the biggest importer of South Korean auto parts in the country. With these auto parts imports mostly destined to support manufacturing activity in the state’s car plants, the impact of a conflict on the Korean peninsula thus pushes up direct job losses in the state to 2,380 workers—close to the estimated levels in Michigan. Output lost from other supporting industries would lead to an additional 4,522 jobs lost, with these concentrated in the industries supplying inputs for automotive production.

In terms of South Korean vehicles and vehicle

10 https://www.kmmgusa.com/about-kmmg/our-company/

Alabama’s automotive industry(Automotive assembly plants in Alabama)

Georgia’s automotive industry

Mercedes-BenzEmployment:

3,800

Kia MotorsEmployment:

3,100

Automotiveassembly

plant

AutomotivecompanyheadquartersCox AutomotiveEmployment: 3,300Genuine PartsCompanyEmployment: 1,800Mercedes-BenzUSA, LLCEmployment: 500NovelisEmployment: 500Exide TechnologiesEmployment: 250Porsche Cars NorthAmericaEmployment: 225Hyundai

Employment:3,600

ToyotaEmployment:1,300

HondaEmployment:4,500

Total estimated job losses under a Korean conflict scenario

Total automotive manufacturing employment 43,600

Direct Job losses 2,380

Indirect job losses 4,522

Total job losses 6,902

Total estimated job losses under a Korean conflict scenario

Total automotive manufacturing employment 26,500

Direct Job losses 1,876

Indirect job losses 9,378

Total job losses 11,254



parts, the biggest importer is Georgia (taking in imports worth US$3.7bn in 2017). However, 72% of these imports were completed vehicles, while only 28% were vehicle parts (most likely destined for the state’s Kia plant). Indeed, the value of vehicle parts imports into this state was lower than in Alabama or Michigan. With a lower value of intermediate goods imports, we thus estimate that Georgia would see a smaller jobs impact from a Korean war than Alabama or Michigan (owing to the fact that there is less associated manufacturing activity). As a result, we estimate that total direct job losses in the vehicle manufacturing sector in Georgia would reach 1,876 jobs (7% of total sectoral employment in the state). Although still suggesting a very considerable impact, the figure would be dwarfed by indirect job losses in other industries. We estimate that indirect job losses would reach a disproportionately large 9,378

workers, caused primarily by the interruption in the supply of finished vehicles to the state’s car dealerships and the fact that the state’s two main ports—Savannah and, in particular, Brunswick—are auto import hubs for the south-east of the US.

Although the projected numbers of job losses are somewhat different in Georgia and Alabama, the average annual salaries in the auto manufacturing sectors display similarities. Notably, the average annual salaries for workers employed in all vehicle manufacturing sectors in both Alabama and Georgia are lower than the national average for these industries, at US$56,100 and US$50,300 respectively (compared with the national average of US$62,000). However, the economic impact will be magnified in Georgia owing to indirect job losses in car dealerships (where the average annual salary is a higher US$57,200).



South Korea is a major market for the US agricultural sector, buying US$6.6bn of its products in 2017—making it the sixth-largest export market for US agricultural and food exports globally.11 The top agricultural exports to South Korea by value were livestock and animal products, dominated by beef and beef products, while pork and pork products, hides and skins, and dairy products all appeared in the top ten agricultural exports. Besides livestock and animal products, fresh fruit and nut exports were also prominent, dominated by exports of

11 https://www.fas.usda.gov/data/top-markets-us-agricultural-exports-2017

oranges (US$181m), almonds (US$165m) and cherries (US$105m).12

When broken down in detail, the importance of South Korea to the US’s livestock exporters (and thus also the importance of US farmers to South Korea) becomes even more apparent. South Korea is the fourth-largest beef importer globally, with the US the primary supplier of beef and beef exports to that country’s market. Perhaps not surprisingly, therefore, South Korea is the second-biggest export market for US beef and beef products, after Japan (with 17% of the total in 2016). On a smaller scale in terms of value,

12 United States Department of Agriculture (USDA).

3 Impact on key US agricultural exporting states

Given that South Korea is a significant market for key US agricultural exports, including a major proportion of high-value meat and animal exports, a conflict would see the loss of an estimated 20,387 sectoral jobs in the five main US states exporting agricultural products to that country.

Top US agricultural exports to South Korea(US$bn)

Source: US Department of Agriculture.

Beef and beef products

Corn Pork and pork products

Hides and skins Wheat Dairy products0.0

0.2

0.4

0.6

0.8

1.0

1.2

https://www.fas.usda.gov/data/top-markets-us-agricultural-exports-2017

https://www.fas.usda.gov/data/top-markets-us-agricultural-exports-2017



although still representing a significant market for US goods, South Korea is the fifth-largest export market for US pork and pork products and the largest market for US oranges (with 28% of all exported oranges shipped to South Korea in 2016), as well as a major market for US fresh cheese.13

The top US states supplying agricultural products to the South Korean market are:

• California (with 22% of total agricultural and food exports to South Korea in 2017),

• Texas (8%),

• Nebraska (7%),

• Iowa (5%), and

• Illinois (4%).

In terms of the product breakdown, the largest exporters of animal products are Iowa, the major pork-producing state; California, the largest dairy supplier; and Texas and Nebraska, the top beef-exporting states.14 Meanwhile, the top three exporters of crop products are California, Illinois and Iowa. California is also a leading exporter of vegetables, fruits and nuts, while Illinois and Iowa are top exporters of soybeans, corn and feeds.

Despite California’s ranking as the biggest agricultural exporter to South Korea, the vast size of its agricultural sector means that these exports represent a modest 7% of total agricultural and food exports from the state. For the other states, the proportions of their total agricultural exports represented by sales to South Korea are the following:

• Texas (9%)

• Nebraska (7%)

• Iowa (3%)

• Illinois (3%).

13 USDA (2017).

14 USDA data.

2.1 California—The largest agricultural exporter to South Korea and the highest number of potential job losses of any state


Direct jobs 4,492

Indirect jobs 4,769

Total 9,261

California is the US’s primary exporter of agricultural and food products. It consistently ranks as a top exporter of crops, including fresh fruits and vegetables, as well as a significant exporter of animal products (notably dairy products). Against this backdrop, it is little surprise that California is by some distance the largest US provider of agricultural and food exports to South Korea. Total agricultural and food product exports from California to South Korea are estimated at US$1.45bn in 2017, comprising 22% of total US agricultural exports to that country.

Of these exports, South Korea represents a crucial market for Californian oranges and orange products, rice, beef and beef products, and also walnuts. Indeed, South Korea is the largest export market for Californian oranges and orange products, with 28% of all oranges exported from California going to South Korea. It is also the second most important export market for Californian rice, purchasing 15% of the state’s rice exports. Just behind Japan, South Korea is also the second-largest market for beef and beef products, with 28% of the total. On a smaller scale, South Korea is the third-largest export market for Californian lemons, cherries and avocados, and the fourth-biggest for walnuts.15

As a major producer of agricultural and food products, California’s agricultural production and food-processing sectors are naturally important employers. The state employed 359,000 workers in these sectors in 2017, representing 15% of all national employment in these industries. Under the Korean

15 CDFA (2017).



conflict scenario (under which total US exports from California to South Korea fall by 75%), estimated job losses in the state’s agricultural production sector would reach 4,492—equivalent to 1.2% of total state agricultural and food production employment. Given that California is the largest exporter of agricultural and food products to South Korea by value, these job losses represent the highest number of losses in any state. A further 4,769 jobs would be lost in other industries connected to the production of these exports (ranging from packaging to freight transport), bringing total job losses associated with lower agricultural exports from California to 9,261.

In terms of the knock-on impact on the state’s wider economy, the fallout would be mitigated to an extent by the fact that average annual salaries of employees in the agricultural and food production industries are typically below the average for all industries—at US$36,100, compared with the average state salary of US$65,500. Nonetheless, it is worth noting that average annual salaries in the state’s crop and livestock production sectors are higher than the national average for these industries (US$34,300).

2.2 Texas, Nebraska and Iowa—Losses would be concentrated among beef and pork exporters


Texas

Direct jobs 1,562

Indirect jobs 2,111

Total 3,673

Nebraska

Direct jobs 1,392

Indirect jobs 1,943

Total 3,335

Iowa

Direct jobs 1,107

Indirect jobs 1,075

Total 2,182

The range of agricultural exports from Texas, Iowa and Nebraska is narrower than that of California’s exports, but the quantities—and the impact on jobs—are still substantial. Total agricultural and food exports to South Korea from Texas are estimated at US$539m in 2017, making it the US’s second-largest

Top agricultural exports from California to South Korea, 2017(US$m)

Source: California Department of Food and Agriculture.

Oranges and orange products 182.5

Almonds 174.6

Rice 106.6

Walnuts 93.4

Beef and beef products ( including hides and skins) 86.7

Dairy and dairy products 50.7

Lemons 17.6

Cherries 16.2

Avocados 4.2

Other 717.5



agricultural supplier to South Korea after California. Nebraska follows closely with US$487m in agricultural and food exports, with Iowa the fourth-largest provider (US$312m of exports to South Korea). Importantly, in Texas and Nebraska exports to South Korea represent a significant share of total state agricultural and food exports, at 9% and 7% respectively. In contrast, however, exports from Iowa to South Korea represent just 3% of that state’s agricultural and food exports.

In part as a consequence of Texas and Nebraska’s export success, 18% and 15% of all workers in the agriculture and food production sectors in these two states are in the livestock production sector. In terms of numbers, Texas employs 25,500 workers in the livestock sector (compared with 140,000 workers in the agriculture and food production sectors in total), while Nebraska employs 7,500 workers in livestock production (against 48,700 workers across the agriculture and food production sectors).16 However, as the total value of agricultural and food exports from these states is similar (despite Texas’s agricultural sector being far larger), clearly jobs in Nebraska are substantially more reliant on exports than those in Texas.

While Texas and Nebraska are focused on beef exports to South Korea, Iowa is a leading pork and pork products exporter to the country. In fact, Iowa is the largest pork and pork product exporting state in the US: some 19% of all agricultural and food exports

16 US Bureau of Labor Statistics.

from the state consist of pork and pork products.17 This export success is apparent in Iowa’s employment numbers: 11,400 people are employed in the livestock production sector, while 56% of the 54,800 workers employed in food processing are associated with the manufacture of meat products.18

In all three cases, therefore, the livestock production sector appears heavily exposed in the event of a war involving South Korea. Under the conflict scenario, we estimate that direct job losses in the agriculture and food production sectors would reach 1,562 in Texas, 1,392 in Nebraska and 1,107 in Iowa. The impact of these job losses on the local agricultural sector would be more pronounced in Nebraska and Iowa, with redundancies equivalent to 3% and 2% of total jobs in the sector in the two states respectively. For Texas, the impact on the industry would be lower, with job losses associated with the disruption to exports to South Korea representing 1% of total employment in this sector.

Expected job losses in supporting industries linked to agriculture and food production (that is, indirect jobs) in Texas, Nebraska and Iowa are high, notably in the areas of energy, chemicals, paper and plastic products, and transportation services. According to our estimates, as a result of reduced exports to South Korea a further 2,111 jobs would be lost from Texas, with another 1,943 and 1,075 jobs lost in supporting industries in Nebraska and Iowa.

17 USDA data.

18 US Bureau of Labor Statistics.



2.3 Illinois has the highest proportion of jobs lost per US$1m of exports


Direct jobs 1,071

Indirect jobs 864

Total 1,935

Although Illinois is surpassed by the other four states in terms of the value of its agricultural and food exports to South Korea, it is disproportionately vulnerable in the area of jobs. The reason for this is the nature of Illinois’s exports, which include an unusually high value of manufactured goods (which are more labor-intensive).

Total agricultural and food exports from Illinois to South Korea were worth US$278m in 2017, equivalent to 4% of total US agricultural and food exports to South Korea in that year. Illinois is a major exporter of soybeans, corn, feeds and other grains, soybean meal and processed grain products. However, Illinois also exports a high value of manufactured food exports,

with this industry employing 85% of all employees in the agricultural and food production sectors. In 2017, Illinois exported US$4bn of manufactured food products, with 3% of these going to South Korea. Illinois boasts the highest average annual salary in the food-processing sector of any state, at US$59,600, compared with the national average for the sector of US$47,600 and slightly above the average state salary for all jobs of US$58,400—thus magnifying the impact on the economy of job losses in this sector.

The EIU’s assessment is that, under a conflict scenario, direct job losses in Illinois associated with agricultural and food exports to South Korea would reach 1,071 workers. This is in line with the lower value of agricultural and food exports to South Korea from this state (at least compared with California, Texas, Iowa and Nebraska), but, in terms of jobs lost as a percentage of exports, it is a higher ratio than in the other four states (reflecting the greater preponderance of food manufacturing exporters in Illinois). For indirect jobs, however, the impact is less pronounced, with the potential for 864 indirect job losses in other industries.



case study: South Carolina

Over the past decade South Korea has become a key trade partner for numerous states across the US beyond those covered already in this report. However, the dynamics of these trade relationships can differ materially. In this regard, South Carolina and its auto sector (which employs 30,800 workers across the state) is a particularly pertinent example.

South Carolina has had tremendous success in exporting vehicles and vehicle parts to South Korea—in 2017, it exported more vehicles to South Korea than any other US state, with the exception of Michigan—in part reflecting its position as the primary exporter of finished vehicles from the US.19,20 Leading the export of vehicles from the state is luxury-car maker BMW. BMW’s manufacturing plant in South Carolina, with a production capacity of approximately 450,000 cars annually, exported more than 70% of its total production in 201721, making it the largest vehicle-exporting plant by value in the US last year.22

Besides finished cars, South Carolina is also the largest manufacturer and exporter of tires in the US, with the subsector employing 9,300 people in the

19 http://www.madeinalabama.com/2018/03/auto-exports/

20 https://www.sccommerce.com/industries/automotive-industry

21 https://eu.greenvilleonline.com/story/news/local/south-carolina/2018/05/31/what-trumps-german-auto-tariffs-means-upstate-south-carolina/659651002/

22 https://eu.greenvilleonline.com/story/money/2018/02/13/bmw-manufacturing-remains-leading-u-s-auto-exporter-despite-pros-2017-exports-decline-amid-overall-s/333490002/

state. In 2017 the state exported US$1.75bn-worth of rubber manufactured products (which includes tires), with almost 3% of these destined for South Korea. As a result, in contrast to Michigan, Georgia, and Alabama, the primary danger for South Carolina’s auto manufacturers from a Korean war rests less on the potential disruption to supply chains (see Chapter 2) and more on the possible loss of a key export market.

However, South Carolina’s economic relationship with South Korea is deeper and broader than just the auto sector. In 2017, motor vehicle exports constituted less than 25% of the US$$1.06bn in total state exports to South Korea23 (other major exports included chemicals and non-electrical machinery). Meanwhile, investment ties are strengthening. Notably, in 2017 South Korean technology behemoth Samsung announced that it would establish a new home-appliance manufacturing site in South Carolina. In early 2018 production started at the manufacturing facility, and it has hired 540 employees thus far. At the opening of the plant, the South Carolina governor, Henry McMaster, remarked: “Today we celebrate a major milestone in Samsung’s journey here in South Carolina, and together, we look forward to a bright future.” However, as with many projects in many US states, this future will remain clouded as long as the prospects for peace on the Korean peninsula are uncertain.

23 US Census Bureau.

Tire manufacturing employment by state(% of total US tire manufacturing employment)

Source: US Bureau of Labor Statistics.

South Carolina 17%

North Carolina 10%

Illinois 8%

Tennessee 7%

Alabama 7%

Ohio 5%

Other 32%

Iowa 4%

Arkansas 4%

Indiana 4%

Georgia 4%

https://eu.greenvilleonline.com/story/news/local/south-carolina/2018/05/31/what-trumps-german-auto-tariffs-means-upstate-south-carolina/659651002/





Employment data

Employment data are sourced from the US Bureau of Labor Statistics. Data for vehicle and vehicle parts manufacturing and agriculture and food production employment include all jobs in the following North American Industry Classification System (NAICS) subsectors.

Vehicle and vehicle parts manufacturing employment includes employment within:

• Motor vehicle manufacturing (NAICS 3361)

• Motor vehicle body and trailer manufacturing (NAICS 3362)

• Motor vehicle parts manufacturing (NAICS 3363)

Agriculture and food production employment includes employment within:

• Crop production (NAICS 111)

• Animal production and aquaculture (NAICS 112)

• Food manufacturing (NAICS 311)24

Export and import data

Vehicle and vehicle parts importsState-level import data by NAICS commodity are sourced from the US Census Bureau.

24 Food manufacturing includes: animal food manufacturing (3111), grain and oilseed milling (3112), sugar and confectionery product manufacturing (3113), fruit and vegetable preserving and speciality food manufacturing (3114), dairy product manufacturing (3115), animal slaughtering and processing (3116), seafood product preparation and packaging (3117), bakeries and tortilla manufacturing (3118), and other food manufacturing (3119).

Agricultural and food exportsState-level data on exports of agricultural and food products are sourced from Trade Partnership Worldwide, LLC and the US Census Bureau. State-level export data for NAICS 311 (food manufacturing) are sourced from the Census Bureau. For NAICS subsectors 111 and 112, however, state-level agricultural export data available from the Census Bureau do not accurately reflect the state in which the agricultural commodity was produced, but rather show where the commodity was aggregated for export. In order to address this limitation, LLC has devised a methodology to allocate US raw agricultural exports to states based on state-level agricultural cash receipts data to create a state agricultural exports series consistent with NAICS sectors.

Methodology

This report seeks to estimate the immediate effect on job losses under a Korean conflict scenario in which trade with South Korea is severely affected. This is an analysis of short-term job losses in which we assume no labor market frictions, so that redundancies as a consequence of lower output are immediate in the face of lower output, and in which we also do not seek to understand the alternative employment that could be found in other industries that would indicate a lower net number of job losses. The job losses estimated within each industry reflect the immediate job losses in the production of agricultural and food products or in vehicle and vehicle parts manufacturing resulting from a

Data sources and methodology



reduction in trade for these sectors and assuming no changes to trade volumes in other industries.

Estimating jobs linked to automotive importsA proportion of total vehicle, vehicle body, and trailer and vehicle parts imports is assumed to consist of final consumer-goods imports destined for the auto parts market. The contribution of such imports to value added can be based on the additional costs required to transport and retail these goods. These additional costs are estimated using industry wholesale and retail margins. For the proportion of vehicle imports assumed to be intermediate goods imports, which will support domestic vehicle production, the contribution of these imports to value added is estimated through the use of input-output tables from the US Bureau of Economic Analysis which allow us to link the value of intermediate inputs to final output. To link employment to the estimated additional value added from vehicle imports we use information from employment requirement tables from the Bureau of Labor Statistics as well as from the Automotive Alliance to obtain direct and indirect job losses.

Estimating jobs linked to agricultural exportsEstimates of jobs linked to agricultural and food exports are obtained from Trade Partnership Worldwide, LLC, which provides estimates of direct and indirect jobs linked to its estimates of agricultural and food exports.

Direct and indirect job lossesDirect job losses are jobs lost in the vehicle manufacturing and agriculture and food production sectors, and are assumed to be within the particular state under discussion. Indirect job losses are job losses in industries that supply or contribute to production in the vehicle manufacturing and agriculture and food production sectors; these are not necessarily located in the state under discussion.



While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.

Open Society Policy Center commissioned this report.

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