As U.S. President Donald Trump's 'tariff war' intensifies, if inflation materializes in the United States, volatility in domestic prices and exchange rates is also expected to increase. Even if President Trump does not impose tariffs targeting Korea, a rise in U.S. prices will naturally lead to a decline in the value of the Korean won. In this situation, there are concerns that indiscriminate 'money-printing' style supplementary budgets, which could rather fuel inflation, should be avoided.
Since President Trump signed an executive order related to tariffs on the 1st, there have been forecasts that the won-dollar exchange rate will continue to rise. On the 3rd (local time), a day before the implementation of a '25% full tariff' on Canada and Mexico, Trump abruptly decided to postpone it for a month. However, this measure is temporary, and since he has also expressed intentions to impose tariffs on the European Union (EU), concerns stemming from the tariff war are expected to persist.
If the tariffs Trump promised are actually imposed, price increases in the U.S. will be inevitable. According to the U.S. media outlet The Washington Post, U.S. companies had already prepared to raise prices last year to offset costs caused by tariff increases. Most companies in sectors such as clothing, footwear, baby products, hardware, and auto parts have formalized such response plans. Executives of AutoZone, a retailer of auto parts, officially stated during an earnings conference call that "if tariffs are imposed, costs will be passed on to consumers."
Even if Trump does not actually impose tariffs, the financial markets fluctuate just on the possibility. The U.S. Federal Reserve (Fed) may delay or reduce the scale of interest rate cuts due to inflation concerns, which naturally increases the preference for the dollar as a safe asset. This is, of course, a factor that drives up the won-dollar exchange rate.
"We must prevent the decline of the won's value... Focus on retaining advanced technology talent and strengthening industrial competitiveness"
If the won-dollar exchange rate rises further due to the dollar's appreciation, domestic inflationary pressures will inevitably intensify. The problem is that discussions on supplementary budgets (chugyeong) are gaining momentum at such a time. On this day, the second working-level meeting of the National Assembly's State Affairs Council is scheduled, and it is known that the supplementary budget will be on the discussion table.
Professor Kim Sang-bong of Hansung University said, "Now is the time to focus desperately on preventing the decline of the won's value, and to do so, it is rational to choose to reduce the money supply in circulation," adding, "However, focusing on money-printing policies that rather encourage the depreciation of currency value is an uneconomical choice." This means that a nationwide cash handout-style supplementary budget that could significantly stimulate inflation should not be implemented.
Even if a supplementary budget is formulated, the focus should be on strengthening industrial competitiveness. Professor Kim said, "Fiscal policy should not be implemented to stimulate consumption, but rather efforts should be concentrated on retaining advanced technology talents to prevent their outflow overseas." He continued, "Investment in technology should be strengthened enough so that technical personnel who have left Korea can return." A senior official from the Ministry of Economy and Finance also said, "If the government is to spend money intensively, it should focus on enhancing the competitiveness of advanced industries, including artificial intelligence (AI)," adding, "Consumption stimulation policies such as local currencies need to be examined carefully to see if they actually have meaningful economic effects."
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