"Trump-Driven Export Anxiety... CPTPP Membership as an Escape Route" [Issue Interview]

Park Ji-hyung, President of the Korean International Trade Association (Professor of Economics at Seoul National University) New Year Interview
"Korea's Multilateral Trade System More Important Than During Trump's First Term"
"Trump Much More Unilateral Than Biden... Relying Solely on US Trade Is Risky"
"Korea Will Play a Leading Role if Joining CPTPP"

As the official launch of the second Trump administration approaches on the 20th, the world is gripped by fear. Trump, who campaigned under the slogan ‘MAGA (Make America Great Again),’ threatened before his inauguration to impose universal tariffs on all importing countries. Countries around the world are striving to establish contact with Trump and secure advantageous positions.

This year, South Korea's current account balance depends on Trump's trade policies. From January to November last year, the cumulative current account surplus reached $83.54 billion, ranking third all-time and expected to far exceed the Bank of Korea's annual forecast of $90 billion. Last year's current account showed strong performance centered on IT products such as semiconductors, but this year remains uncertain. If the uncertainty in the trade environment increases with the launch of the second Trump administration, export growth is likely to slow. With Trump's ‘America First’ trade barriers strengthening, maintaining the same scale of trade surplus with the U.S. as last year seems difficult.

Park Ji-hyung, President of the Korean International Trade Association (Professor at Seoul National University), is being interviewed by Asia Economy at Seoul National University Gwanak Campus. Photo by Jo Yong-jun

On the 27th of last month, Asia Economy met with Park Ji-hyung, president of the Korean International Trade Association and professor of economics at Seoul National University, at Seoul National University in Gwanak-gu, Seoul, to discuss South Korea's response to the launch of the second Trump administration. Professor Park emphasized, “Compared to Trump's first term, South Korea's need to establish a multilateral trade system has increased,” and added, “In trade policy, CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) can be an important escape route.” He stated that the introduction of Trump-style universal tariffs effectively means the U.S. withdrawing from the WTO (World Trade Organization) system, and a WTO system without the U.S. could lead to collapse.

The CPTPP is a multilateral free trade agreement (FTA) formed by Asia-Pacific countries, led by Japan. The member countries are Japan, Canada, Australia, New Zealand, Mexico, Chile, Peru, Malaysia, Vietnam, Singapore, Brunei, and the United Kingdom, totaling 12 countries. Earlier in 2017, during his first term, President Trump decided to withdraw from the Trans-Pacific Partnership (TPP), and the remaining countries excluding the U.S., such as Japan, Canada, and Australia, formed the CPTPP.

Professor Park pointed out that South Korea needs to rely on places other than just trade policy with the U.S. He said, “South Korea is a country with high external dependence and must find its position within the global value chain, contributing and receiving help to achieve economic development,” adding, “Trump is likely to pursue a U.S.-centered approach rather than efforts to create stability in the new value chain, so relying solely on trade with the U.S. is risky.”

He continued, “The U.S. is likely to aggressively demand investment in the U.S. instead of raising tariffs, which could lead to investments concentrating in the U.S. and weakening domestic competitiveness,” and added, “However, CPTPP member countries do not have as strong a pull as the U.S., so a division of labor system is likely to be established.”

He emphasized that political leadership is crucial to pursuing CPTPP membership. He explained, “During the Moon Jae-in administration when the CPTPP was launched, diplomatic relations with Japan were poor, but now relations have significantly improved,” and added, “If our intention is firm, the environment has changed.” He described it as “a highly political leadership issue.”

He said that various strategies and scenarios must be prepared to minimize damage caused by leadership gaps. Professor Park suggested, “It is true that strong leadership is needed in trade policy,” and “In the current situation, it is important for the government to prepare strategies and scenarios considering what aspects need to be addressed and what interest adjustments are necessary for various scenarios.”

He added, “Leadership gaps are causing various costs for South Korea,” and said, “While it is important to resolve this quickly and appoint a leader, it should also be an opportunity to discuss constitutional vulnerabilities and the structural difficulties of resolving conflicts under a presidential system during a divided National Assembly.” He said that if the system stabilizes through this process, it will be a positive factor for the Korean economy in the long term.

Below is a Q&A with Professor Park.

Park Ji-hyung, President of the Korean International Trade Association (Professor at Seoul National University), is being interviewed by Asia Economy at Seoul National University Gwanak Campus. Photo by Jo Yong-jun

- The second Trump administration will launch on the 20th. How is it different from the first term?

▲During Trump's first term, tariffs on China were significantly raised, and everything was resolved through bilateral negotiations based on U.S.-centered policies. The second term is similar but increases uncertainty much more. A red sweep occurred in the U.S. presidential election, with the Republican Party controlling both the House and Senate, enabling Trump to pursue aggressive policies. The possibility of introducing Trump-style universal and reciprocal tariffs has increased. If introduced, it would be equivalent to the U.S. withdrawing from the WTO system. A WTO system without the U.S. could collapse, so the importance of a multilateral trade system for South Korea will be on a different level than during the first term. Even if the U.S. Congress does not implement tariff policies, the discussion process could increase U.S. bargaining power, posing a threat.

- Which industry is expected to be hit the hardest?

▲Universal and reciprocal tariffs could affect exports to the U.S. Of course, South Korea might renegotiate the Korea-U.S. FTA through active trade negotiations, which could turn the introduction of these tariffs into an opportunity to strengthen Korea's preferential treatment in the U.S. market. However, since there is no guarantee that trade agreements will be successful, if these tariffs apply to South Korea, high tariffs would negatively impact the price competitiveness of Korean exports. The impact will vary by industry depending on whether the U.S. can easily find substitutes for Korean imports. Semiconductors are difficult to substitute, so the immediate impact may be small. However, the automobile industry will suffer more because it must compete with domestic U.S. competitors and Japanese competitors. Semiconductors are not entirely safe either; given enough time, they could also be replaced. Ultimately, Korea's export environment will be negatively affected in the long term. It is necessary to resolve uncertainty and risks as soon as possible.

- How might a high exchange rate affect the trade environment?

▲From an export perspective, there are positive factors. Companies related to raw materials and intermediate goods may benefit from increased price competitiveness due to a rising exchange rate, but depending on the situation, profitability could worsen. The bigger problem is that a prolonged high exchange rate will keep import prices high, causing domestic inflation concerns. Wages will rise, and corporate activities may contract, negatively affecting exports. While some companies may see short-term gains from exchange rate increases, the long-term impact on the Korean economy will be negative.

- Significant changes in the global value chain are expected.

▲South Korea is highly dependent on external trade. Unlike countries like the U.S. or China, which can resolve much internally, exports and imports are crucial. South Korea must find its position within the global value chain, contributing and receiving help to achieve economic development. Recently, there are signs of global value chain restructuring centered on the U.S. President Biden and former President Trump differ in trade policy approaches. Biden aims to check China through allies sharing values, while Trump is likely to apply unilateral pressure and policies even on so-called allies. Since the U.S. will focus on itself rather than efforts to create stability in the new value chain, relying solely on trade with the U.S. is risky for South Korea.

- What are South Korea's response strategies?

▲It is difficult for South Korea to stabilize the global supply chain alone. CPTPP could be a solution. CPTPP includes many developed and developing countries. The FTA level is very high, with tariffs abolished. CPTPP contains provisions demanding high transparency for state-owned enterprises and other high-level trade agreement contents. Countries such as Australia, Canada, New Zealand, the U.K., and Japan, which must cooperate within the global supply chain, are members. If South Korea joins CPTPP, it can take a leading role. CPTPP could become a new framework to maintain trade system stability. Since the overall trade system is close to collapse, besides trade negotiations with the U.S., South Korea needs other routes to secure stability on its own.

▲The U.S. is likely to demand aggressive investment in exchange for not raising tariffs. This could lead to South Korea becoming overly dependent on the U.S. If investments concentrate in the U.S., domestic competitiveness may weaken, and capital could be drawn into the U.S. However, CPTPP member countries do not have as strong a pull as the U.S. A division of labor system focusing on each country's strengths is likely to form, providing a framework to maintain and strengthen the core competitiveness of domestic industries.

- Why has South Korea not joined CPTPP until now?

▲CPTPP was launched during the Moon Jae-in administration. South Korea also expressed its intention to join at that time. However, since Japan was the leading country in CPTPP and diplomatic relations with Japan were poor then, it affected the decision. Relations with Japan have significantly improved under the current administration. Through various channels, we have heard that Japan is willing to actively consider South Korea's CPTPP membership. If our intention is firm, the environment has changed considerably. This is a highly political leadership issue.

- How can damage from leadership gaps be minimized in the future?

▲Not only CPTPP but also trade negotiations with the U.S. will involve Trump using various cards simultaneously to extract what he wants. He will also bring up renegotiations of the Korea-U.S. FTA and defense cost-sharing. From South Korea's perspective, efforts will be made to secure subsidies for aggressive investments under the Inflation Reduction Act (IRA) and the CHIPS Act. In this process, there will be complex stakeholders who benefit and those who suffer. Since trade involves adjusting interests, strong leadership is indeed necessary. Without leadership, there is no one to lead. Therefore, in the current situation, it is important for the government to prepare strategies and scenarios considering what aspects need attention and what interest adjustments are necessary for various scenarios.

▲Leadership gaps are causing various costs for South Korea. Foreign investors have begun to doubt South Korea's political stability. While it is important to resolve this quickly and appoint a leader, it should also be an opportunity to discuss constitutional vulnerabilities and the structural difficulties of resolving conflicts under a presidential system during a divided National Assembly. If the system stabilizes through this process, it will be a positive factor for the Korean economy in the long term.

- There are talks that South Korea is heading toward a ‘lost 30 years’ similar to Japan.

▲That possibility exists. Due to low birth rates and aging, fields where South Korea was previously competitive may shift to China. Considering whether South Korea has significantly developed the ability to create new growth engines through new investments and innovation, the answer is limited. It is not certain that South Korea will avoid a long-term recession. However, South Korea is clearly different from Japan. Unlike Japan, which was late to adopt smartphones after their invention, South Korea aggressively adopted them. Japan failed to keep up with global trends. Japan's stagnant innovation activities are linked to its long-term recession. South Korea, in this context, is relatively well aware of global trends. The stark difference in performance between Samsung and SK Hynix is because Hynix anticipated changes in AI-related trends and made aggressive R&D investments, while Samsung likely delayed investment.

- There are warnings that the potential growth rate could fall to the 0% range in 15 years. What trade policies are needed going forward?

▲South Korea is not a country large enough to create everything alone. It must specialize in what it does well within the global supply chain and create high added value. In trade policy, CPTPP can be the most important escape route. CPTPP includes both developing and developed countries. If South Korea participates, it will become a leading country in CPTPP. It needs to be actively utilized.