"Trump's Second Term Trade Reciprocity Prelude... Difficult for Third Countries to Bypass China for Export" [Chatham House Discussion]

Golden Time at the Start of the Second Trump Administration
Delay Is Fatal If Political Turmoil Persists
Shipbuilding, Semiconductor, and Automobile Associations Must Engage in Dialogue
Korea as the Top Alternative to China... Opportunities in LNG Carriers and More

Editor's NoteWith the inauguration of Donald Trump's second administration on the 20th (local time), uncertainty in trade and corporate management has increased. Existing policies such as the U.S. Inflation Reduction Act (IRA) and semiconductor subsidy support are likely to undergo significant changes, which could also increase management risks. The second Trump administration appears to apply the principle of reciprocal trade rather than multilateral free trade. This means that it is inevitable to increase imports as much as exports. On the 16th, Asia Economy held a 'Chatham House Roundtable' at its headquarters in Jung-gu, Seoul, to discuss the impact of the reciprocal trade principle on Korean companies following the inauguration of the second Trump administration. The Chatham House is a nickname for the Royal Institute of International Affairs (RIIA) in the UK, regarded as a top-tier research institution in diplomacy and security. The roundtable was attended by Professor Kang In-su of the Department of Economics at Sookmyung Women's University, Director Kwon Nam-hoon of the Korea Institute for Industrial Economics and Trade, Director Jang Sang-sik of the Korea International Trade Association's International Trade and Commerce Research Institute, and Professor Emeritus Choi Byung-il of Ewha Womans University (in alphabetical order). The roundtable followed the Chatham House Rule, disclosing the list of participants but keeping each discussant's remarks anonymous.

Asia Economy January 2025 Chatham House. From the left, Jang Sang-sik, Director of the Korea International Trade Association International Trade and Commerce Research Institute; Choi Byung-il, Honorary Professor at Ewha Womans University Graduate School of International Studies; Choi Il-kwon, Head of the Asia Economy Industrial IT Department; Kwon Nam-hoon, President of the Korea Institute for Industrial Economics and Trade; Kang In-soo, Professor of Economics at Sookmyung Women's University. Photo by Heo Young-han

▶Moderator=Choi Il-kwon, Head of Industrial IT Department

What is the essence of Trump's trade policy? Can the principle of reciprocity be practically reflected in trade policy?

Since the Great Depression in 1930, no U.S. president had threatened to raise tariffs until President Trump was elected in 2016. Trump has returned to the White House, and now tariffs seem to be the biggest issue among almost all policies. The universal tariff message is "pay an entrance fee to the U.S." For China, he imposed an additional 60% tariff, signaling an intention to decouple from China over his four-year term. Last month, when appointing cabinet members, he specifically mentioned imposing tariffs on Canada, Mexico, and China.

Trump seems to interpret the reciprocal tariff law according to domestic circumstances. He has revived the reciprocal tariff law as a means to protect the U.S. by linking trade deficits, unfairness, domestic jobs, and manufacturing. The U.S. is a country that exports a lot of agricultural products and services. If trading partners express resentment over the application of the reciprocal tariff law, opposition may arise from states or groups concerned about agricultural products and services.

Reciprocity can be interpreted as focusing trade policy on areas and countries of interest to obtain desired outcomes through dialogue, threats, and deals. The reciprocal tariff law imposes tariffs at the same level as the counterpart. We need to closely examine which industries and countries Trump is interested in to find appropriate countermeasures.

Would raising tariffs also increase inflationary pressure in the U.S.?

Trump says it will be fine, but most economists think otherwise. If Europe and China start imposing retaliatory tariffs, the global economy, especially countries like Korea that trade extensively, will face deteriorating conditions. Imposing tariffs on all fronts will inevitably create some inflationary pressure.

From a trade perspective, is Korea a priority target for urgent U.S. adjustments?

In reciprocal trade, a large tariff gap between the U.S. and the partner country must exist to create demand for changing the partner's tariffs. For example, the U.S. tariff on automobiles is 2.5%, while the European Union (EU) tariff is 10%. Korea has already eliminated many tariffs through the Korea-U.S. Free Trade Agreement (FTA). The tariff gap between the two countries is not large. Unless the Korea-U.S. FTA is revised, Korea is far from being a priority for applying reciprocal trade. Canada, Mexico, China, and the EU come first, followed by Korea and Japan. However, since over 60% of Korea's trade surplus with the U.S. comes from automobiles, there is a high possibility of applying tailored tariff policies on automobiles.

Last year, Korea's trade surplus with the U.S. increased to $55.7 billion (about 81.2 trillion won). Trump will focus on such areas. He will not overlook the automobile deficit while trying to balance the trade deficit. He will demand corrections by any means. Managed trade at a certain level may be required. For example, he could demand Korea to buy one million U.S. cars unconditionally. It will be difficult for Korea to ask to be excluded from universal tariffs based on the Korea-U.S. FTA. A bigger problem is the deepening hollowing out of Korean manufacturing. If semiconductor, secondary battery, and automobile companies move to the U.S., domestic employment will not be properly maintained. The Yongin semiconductor cluster development should be expedited, and the Korean government should provide subsidies.

Do you think the second Trump administration will renegotiate the FTA?

Yes. Since the deficit caused by the FTA is large, rather than changing it unconditionally, attempts will be made to make third-country rerouting exports difficult from the perspective of containing China. Strong pressure may be applied to buy more U.S.-made products.

How can Korea present strong cards within the supply chain excluding China?

Shipbuilding can be proposed. From the U.S. perspective, Korea is the top partner needed to replace China. Opportunities should be sought in profitable areas such as maintenance, repair, and overhaul (MRO) of warships and liquefied natural gas (LNG) carriers. The U.S. is building terminals in Louisiana and Texas for natural gas, requiring equipment. Recently, natural gas prices have risen again due to the closure of the pipeline between Russia and Europe. For the EU, the options are the U.S., China, and Qatar. The only transportation means is ships. The U.S. cannot use Chinese-made LNG carriers. This is an opportunity for Korea. In the energy sector, small modular reactors (SMRs) can be produced in foundry (contract manufacturing) form. Korea is the only country besides China that can produce SMRs cheaply. Korea can also emerge as an alternative to China in biopharmaceuticals. In solar and wind power, excluding China, Korea is the top cooperation partner.

Before the Chatham House discussion held at the Asia Economy headquarters, from the left, Kwon Nam-hoon, President of the Korea Institute for Industrial Economics and Trade, Choi Byung-il, Honorary Professor at Ewha Womans University Graduate School of International Studies, Kang In-soo, Professor of Economics at Sookmyung Women's University, and Jang Sang-sik, Director of the Korea International Trade Association's Institute for International Trade and Commerce, are having a conversation. Photo by Heo Young-han

The IT sector has the variable of Elon Musk, CEO of Tesla.

Although Korea ranks third globally in AI investment scale, AI is a market dominated by the top player. Korea's investment scale is less than one-twentieth of the leading country. Generative AI like ChatGPT will be applied in all fields in the U.S., increasing productivity. For Korea, it is more important how well it uses AI made in the U.S. than creating generative AI like ChatGPT itself. Musk has great influence in framing this. He will continue to create global standards and apply business-friendly regulations. In this case, Korea must continuously request the U.S. to increase the H-1B visa quota for professionals.

During Trump's first term, the time for China to catch up in semiconductors was delayed.

The opposite situation may occur this time. Recently, there are talks that semiconductors resemble a d?j? vu of displays. Korea was dominant in liquid crystal display (LCD) technology. China took over the LCD leadership by producing cheap and small products and acquiring Korean personnel and technology. Korea's market share in organic light-emitting diode (OLED) is also declining. China has a national fund and supports promising companies indefinitely regardless of losses. Although U.S. sanctions on China create opportunities, they also stimulate China's self-reliance, making it difficult to judge whether the Trump administration's sanctions on China will be beneficial or detrimental to Korea.

There are concerns that political turmoil in Korea may waste the 'golden time' early in the second Trump administration.

It must be resolved quickly. Regardless of whether early impeachment is accepted, a representative figure must emerge. Trump reportedly only talks to people with authority. He is said to declare 25 executive orders within 72 hours of inauguration. Many will include economic provisions. Issues and matters should be organized in a 'package deal' format, giving and taking reasonably to persuade the U.S., but this work is not being done.

Ultimately, it is business. Korea's concerns and contributions to the U.S. economy should be communicated centered on shipbuilding, semiconductor, automobile companies, and associations. The private sector can do this more sophisticatedly than the government. Each industry association should engage in direct dialogue with the U.S. The early period of the second Trump administration is the golden time. Korea must continuously communicate with the U.S., clearly organizing how it can contribute to containing China's rise. It takes time until the confirmation hearings for cabinet nominees. It is better to contact senators from 'red states' (Republican strongholds) such as Michigan, Texas, Ohio, and Georgia rather than the nominees. Among 100 senators, 53 are Republicans and 47 are Democrats. To pass Korean opinions related to the IRA bill in the Senate, four senators must be swayed. These four will likely have longer political careers than Trump. They should be well utilized.

Companies wonder if it will end with 'Trump's 4 years.'

The major difference in Trump administration policies is environmental policy. It is practically being discarded. It is said that on the day of inauguration, the U.S. will withdraw from the Paris Climate Agreement. Environmental policies will change over the four years. However, in the long term, digital and green transitions will remain valid even 'after Trump.' AI has accelerated digital transformation. Preparations for a major transition should continue as planned.

I agree. In the long run, the trend of 'environmental friendliness' will not disappear. The public's resentment toward China or the hegemonic competition will continue regardless of which party governs. This is connected to 'America First.' This will be a constant. Caution is needed with clauses that last long after negotiation, such as tariffs and industry-specific quota allocations. The defense cost-sharing issue will be applied flexibly depending on which U.S. administration is in power. We must distinguish well between ongoing and non-ongoing parts and respond accordingly.

What about U.S. trade policy after Trump's 4 years?

When the Biden administration took office, it was expected that Trump’s first-term policies would be largely rolled back. The Biden administration's approach was to move forward with allies based on shared values, so trade measures against Korea were expected to ease, but that was not the case. The free trade system and the World Trade Organization (WTO) seem to belong only in textbooks now. Regardless of which party governs in the U.S., targeted trade policies against individual countries and hegemonic competition with China will continue.

Broadly speaking, the world changed around 2016. The dissatisfaction of ordinary people in daily life seems to have overwhelmed the 'macro view' seen by experts. Globalization is not disappearing but continuing in a different form. The term 'economic security' is used. When conducting sensitive transactions, one cannot avoid being conscious of the 'regime.' South Korea stands on the dollar side. It seems to be on the verge of a shift in the balance of power. Washington's power elites seem to intend to continue this 'game' until 2050. If not now, there will be no future opportunity. The gap between the U.S. and China is widening. China has passed its 'peak.' For Korea to maintain competitiveness in manufacturing for the next 10 to 20 years, it must achieve a 'win transition,' but the Korean government has not sent signals to either side (U.S. or China).