"America First" Trump Blocks Export Funding... Direct Blow to Korean Economy [US Election Impact]

Universal Tariff Imposition and Strengthened Checks on China
Heightened 'Trump Risk'
Annual Export Value May Decrease by Up to $44.8 Billion
South Korea's Growth Rate Expected to Drop by 1%P

With former President Donald Trump successfully regaining the presidency in the 47th U.S. presidential election, it appears that our economy will suffer significant damage once again. Similar to his first term, Trump's strong America First policy and protectionism, along with the anticipated repeal of the Inflation Reduction Act (IRA) and the CHIPS Act (Semiconductor Support Act), have raised concerns that the 'Trump risk' will shake the backbone of our economy?exports?and drag down economic growth.

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Universal Tariff Implementation Could Reduce Annual Exports by Up to $44.8 Billion

The most notable issue with Trump's second term is the contraction of exports due to aggressive protectionism. During his campaign, former President Trump pledged to introduce a 'universal base tariff' imposing up to a 20% additional tariff on all imports entering the United States. According to the Korea Institute for International Economic Policy, if the universal base tariff is actually implemented, South Korea's total exports could decrease by between $22.2 billion and up to $44.8 billion annually. Real Gross Domestic Product (GDP) is projected to decline by as much as 0.67%.

High-intensity U.S. containment of China also poses a threat to our economy. Previously, former President Trump emphasized a decoupling policy to reduce trade with China across all industries, planning to revoke Most Favored Nation status for China and gradually phase out Chinese imports. He notably declared an intention to impose a 60% additional tariff on Chinese products. If exports of finished Chinese goods to the U.S. decline, this could negatively affect Korean companies exporting intermediate goods to China. According to the Bank of Korea's report titled 'Assessment and Implications of Exports to China Considering Supply Chain Connectivity,' if tariffs are raised as expected by former President Trump, South Korea's exports to China could decrease by more than 6%. The Bank of Korea's August economic outlook indicated that the tariff increases during Trump's first term in 2018 reduced exports to China by about 3%.

Particularly, industries representing South Korea's key exports such as semiconductors, batteries, and automobiles are expected to be heavily impacted. Former President Trump has hinted at nullifying subsidies for Korean companies investing in the U.S. by undermining the IRA and CHIPS Act, which were key economic policies of the Biden administration. Additionally, Trump's continued opposition to environmental policies is likely to negatively affect the electric vehicle sector.

The export environment during Trump's second term is expected to be worse than during his first term. Currently, South Korea's trade surplus with the U.S. has reached an all-time high, making South Korea the 8th largest deficit country from the U.S. perspective. According to the Korea International Trade Association, the trade surplus with the U.S. was $16.6 billion in 2020, the last year of Trump's first term, but steadily increased during the Biden administration, reaching a record $44.4 billion last year. The trade surplus for January to September this year was $39.9 billion, with many forecasts expecting a new annual record. However, from the U.S. viewpoint, South Korea ranks as the 8th largest deficit country as of January to August this year, following China, Mexico, Vietnam, Germany, Ireland, Taiwan, and Japan. Given former President Trump's announcement of tariff measures to reduce trade deficits, South Korea is highly likely to be targeted.

Global Economy to Contract by 0.8% Next Year... South Korea's Growth Rate Likely to Drop by 1 Percentage Point

With Trump's second term, South Korea's economy is expected to contract. The International Monetary Fund (IMF) projected in its 'October World Economic Outlook' report that if Trump's tariff policies affect global trade until mid-next year, the global economic growth rate will decline by 0.8 percentage points next year and 1.3 percentage points the following year. Investment bank Goldman Sachs also recently analyzed the impact of the U.S. election, forecasting that if a 10% universal tariff is imposed due to Trump's election, global economic growth will decrease by 0.4 percentage points, and South Korea's growth rate will fall by 1 percentage point.

Major domestic and international institutions expect South Korea's economic growth rate to be in the low 2% range next year. However, concerns are rising that growth could decline further if exports and other sectors are hit by the Trump risk. Currently, our economy faces multiple downside risks, including prolonged domestic demand weakness in private consumption and construction investment, as well as concerns over export peak-out (decline after reaching a peak), in addition to the Trump risk.

Professor Ha Jun-kyung of Hanyang University's Department of Economics stated, "Future growth rates will depend on the intensity of Trump's policies and changes in the global economic environment," but expressed concern that "given the increased downside risks, growth could fall below the 2% range in the worst-case scenario."

Experts advise diversifying export countries and products to mitigate export shocks. Professor Kang In-soo of Sookmyung Women's University’s Department of Economics said, "South Korea's trade dependence on specific countries (the U.S. and China) is excessive, making it vulnerable to external conditions, and the concentration of export items such as semiconductors and automobiles is also too high." He recommended, "We should provide full support for pioneering new export markets such as ASEAN, Europe, and India, and actively utilize sectors where we excel, such as artificial intelligence (AI) and biotechnology." Professor Ha added, "Even if the U.S. strengthens its containment of China, it is most important to negotiate policies favorable to South Korea," and emphasized, "To negotiate well, South Korea must maintain a unique position in technology and diversify exports."

There are also calls for measures to offset domestic demand weakness to prevent a decline in growth. Professor Kang said, "Most citizens have limited consumption capacity due to burdens from household debt and principal and interest repayments, leading to polarization in consumption expenditure," and stressed, "It is important to guide a soft landing of household debt and create conditions to stimulate consumption, even if only slightly."