[THE VIEW] Korea Must Prepare for a Decline in Exports to the U.S.

Low Probability of Korea Being Excluded from Tariff Hikes
U.S. Exports Expected to Drop by 12-24%
High Tariffs on China to Have Indirect Effects

Donald Trump, the Republican candidate, was elected in the 2024 U.S. presidential election. What impact will the economic policy promises put forward by the Trump administration have on the global economy, including South Korea?

If we were to describe the economic policy proposed by President-elect Trump in one word, "America First" would be the most appropriate. At the core of this policy is high tariffs aimed at protecting domestic industries. Trump has stated his intention to impose tariffs on all imports and on most countries with which the U.S. has trade relations. This is one of the strategies to protect domestic manufacturers and revive American manufacturing.

During his first term, Trump also implemented a strategy of raising tariffs against China. However, the U.S. did not only raise tariffs at that time. The current Joe Biden administration has also increased tariffs on energy-related products.

While high tariffs can have a positive economic effect domestically by boosting internal demand, they raise the prices of imported goods, which is detrimental to consumers. For example, during Trump's first term, the price of washing machines in the U.S. rose by about 12% due to increased tariffs. If the second Trump administration raises tariffs again, it will be difficult to avoid inflation, or rising prices, in the U.S.

Ironically, however, the Trump administration has pledged to end inflation. Their stance is to curb price increases by lowering interest rates. But in practice, interest rates are determined not by the president or the administration but by the Federal Reserve (Fed).

High tariffs are expected to have a negative impact on South Korea's exports. However, if, as in Trump's first term, South Korea is excluded from the list of countries facing tariff increases and only China is targeted, South Korea's exports could actually increase. According to recent data published by the Korea Institute for International Economic Policy, when tariffs on China rose by 1 percentage point during Trump's first term, South Korea's exports to the U.S. increased by about 2.2%. Exports of semiconductors and solar cells, which compete fiercely with China, increased even more. This is because as Chinese products became more expensive in the U.S., demand for Korean products rose.

However, experts say it is unlikely that South Korea alone will be excluded from tariff hikes. Although South Korea and the U.S. have a Free Trade Agreement (FTA), Trump's promises suggest that additional tariffs could be imposed even on FTA partner countries. This means that while the U.S. may raise tariffs on all countries, it is highly likely that China will face relatively higher tariffs.

In such a case, the Korea Institute for International Economic Policy predicts that South Korea's exports to the U.S. could decrease by 12 to 24%. At the same time, it is important not to overlook the possibility that South Korea's exports to other countries could also decline. For example, if China's exports to the U.S. decrease, China will reduce production accordingly. This will reduce demand for Korean raw materials and intermediate goods used in that production, leading to a decrease in South Korea's exports to China. Due to these indirect effects, South Korea's exports excluding those to the U.S. could decline by about 4 to 9%.

Seo Boyoung, Professor at Indiana State University, USA