A ‘global trade war’, not a ‘shell war’… Worries about Korea’s economic ‘missile’

‘Trump again’ 3 major risks

Universal tariffs and FTA revisions with allies Trade pressure and won-dollar exchange rate uncertainty
Ministry of Strategy and Finance “Preparing multiple scenarios in preparation for the realization of Trump’s promises” cautious mode

With the re-election of former U.S. President Donald Trump, downward pressure on the Korean economy is increasing. Korea faced three major risks: the imposition of universal tariffs by the United States, pressure to improve the trade balance, and increased exchange rate uncertainty. In particular, President-elect Trump’s universal tariff policy could inflict a major blow to the Korean economy, which is highly dependent on exports.

■ Universal tariff risk

Each country is closely watching whether the second Trump administration will resume the ‘global trade war’. President-elect Trump pledged to impose universal tariffs of up to 60% on China and 10-20% on other importing countries. There is a possibility that the Trump administration will engage in a tariff war with allies such as the European Union (EU). In fact, the EU imposed retaliatory tariffs on US imports such as Harley-Davidson motorcycles, bourbon whiskey, and Levi’s jeans in 2019 after the first Trump administration imposed tariffs on European steel (25%) and aluminum (10%) in 2018. The tariff war is a negative factor for the global economy. The International Monetary Fund (IMF) said last month, “A large-scale trade war could result in a loss of close to 7% of global gross domestic product (GDP).”

Tariff barriers also have a negative impact on Korean exports. The Korea Institute for International Economic Policy predicted that if President-elect Trump’s universal tariff policy becomes a reality, Korean exports will decline by up to $44.8 billion (about 63 trillion won). It is predicted that if Korean companies do not find alternative demand or other export channels, real GDP could fall by about 0.29-0.67%.

■ Normal pressure risk

The Trump administration is expected to demand that Korea improve its trade balance. Korea’s trade surplus with the United States has increased every year, reaching an all-time high of $44.4 billion (KRW 62 trillion) last year. There is a possibility that the United States may demand additional opening of agricultural and livestock products such as U.S. beef or request renegotiation of the Korea-U.S. Free Trade Agreement (FTA). Jeong Dae-hee, associate research fellow at the Rural Economic Institute, predicted, “There is a possibility that the Trump administration will press for FTA revision in the agricultural sector to make up for the trade deficit with Korea.”

However, President-elect Trump’s top countries for FTA renegotiation are Canada and Mexico. President-elect Trump never mentioned re-renewing the Korea-US FTA during the election period.

The enactment of a bilateral trade law by the U.S. Congress could become another pressure card when the Trump administration demands Korea improve its trade balance. President-elect Trump announced his plan to enact a reciprocal trade law that would allow the United States to impose the same tariffs as the other country if the tariffs of a country trading with the United States are higher. If the Mutual Trade Act passes the US Congress, the US will have grounds to impose ‘retaliatory tariffs’ on Korea.

■ Exchange rate fluctuation risk

Uncertainty in the won-dollar exchange rate has also increased. President-elect Trump’s tariff wall and large-scale tax cut promises are causing a strong dollar. If a universal tariff of 10 to 20 percent is imposed on all imported goods, U.S. exports will decrease, the inflow of dollars into the country will decrease, and the value of the dollar will increase. If the issuance of U.S. Treasury bonds increases due to the tax cut policy, the interest rate on Treasury bonds rises and the value of the dollar also rises.

However, President-elect Trump has expressed his intention to pursue a weak dollar policy that contradicts his economic policy. This is because it is believed that the Rust Belt (declined industrial zone), which is a key support base, can be revived only by increasing the competitiveness of the United States’ exports through a weak dollar. The Korea Trade-Investment Promotion Agency stated in its report, ‘Candidate Trump’s Exchange Rate Policy, Local Reaction and Impact Forecast’, that in order to lower the value of the dollar, President-elect Trump: 1) intervened in the foreign exchange market using the U.S. Treasury Department’s “Foreign Exchange Stabilization Fund” and 2) intervened in the U.S. Federal Reserve System. It was predicted that there could be pressure to lower interest rates, ③ special taxation when foreign capital purchases assets in the United States, and ④ pressure to increase the value of foreign currencies using tariffs as leverage.

The Ministry of Strategy and Finance has decided to prepare measures for the impact of the second Trump administration’s policies on the Korean economy through a joint meeting of related ministries starting this week. However, the government took a cautious attitude, saying that it must be seen whether President-elect Trump will carry out all of his presidential promises. An official from the Ministry of Strategy and Finance said, “Even during Trump’s first term in office, only about half of all pledges were implemented,” and “We are preparing several scenarios in case President-elect Trump’s pledges become a reality, but we are unable to decide anything immediately regarding U.S. policy that has not yet been finalized.” “This is not correct,” he explained.