[Manbo Jeongdam] Jeon Gwang-woo, Former Financial Services Commission Chairman, "Prolonged Tariff Shock... Public, Private, and Government Must Unite to Survive"

Interview with Jeon Gwangwoo, Chairman of the World Economy Institute (Former Chairman of the Financial Services Commission)
Direct and Indirect Damages to Korea Unavoidable from the U.S.-Originated Tariff Shock
The Ultimate Target of Trump's Tariff Policy Is China; The U.S. Must Block China's Rise
The Next Administration Must Make Serious Efforts to Raise Korea's Potential Growth Rate

Jeon Gwang-woo, Chairman of the World Economy Research Institute, is walking in the Star Light Library at COEX, Gangnam-gu, Seoul. Chairman Jeon said that consistent walking is the secret to health and that he walks near his home and office whenever time permits. Photo by Yoon Dong-ju

Jeon Gwang-woo, Chairman of the World Economy Institute (the inaugural Financial Services Commission Chairman, former National Pension Service Chairman, age 75), starts his day earlier than anyone else. He usually arrives at his office in the Trade Tower in Samseong-dong, Seoul before 7 a.m. Very few people in that massive building arrive earlier than Chairman Jeon.

The background to his decades-long diligence is health management. One of the major secrets to maintaining his health is walking. Chairman Jeon said, "Even now, I walk holding my wife's hand around the nearby park and riverside every day." He also mentioned that he keeps healthy by walking around the vicinity whenever he has a chance after arriving at the office.

Recently, his days have become even busier. This is because the U.S.'s high tariff policy has thrown the global economy into turmoil. As more places seek his opinions on world affairs, he spends busy days from morning to evening giving lectures and interviews.

In an interview with Asia Economy at the World Economy Institute in Samseong-dong, Seoul on the 16th, Chairman Jeon diagnosed that the shock from U.S. tariffs is likely to be prolonged. He emphasized that to overcome the crisis, the private sector, government, and politicians must unite as one team. He also analyzed that the ultimate target of the U.S. tariff war is China. The U.S. has used tariffs as a weapon to check China in the race for global superpower status.

Chairman Jeon analyzed, "Broadly speaking, the U.S. high tariff policy has four main goals." The first goal he mentioned is to resolve the U.S.'s cumulative deficit and balance the trade account. The second is to supplement the tax revenue lost due to tax cuts with tariffs. The third is to promote investment by global companies like Samsung and Hyundai Motor within the U.S. The fourth and final goal is the weaponization of tariffs. For example, using tariff policies to block illegal immigration through Canada and Mexico, or using tariffs as a means to check the expansion of China and Russia, as seen in the Panama Canal and Greenland controversies.

However, he said the ultimate goal of the U.S. tariff policy is China. Chairman Jeon stated, "From the U.S. perspective, it must remain the world's sole superpower, G1, but China's challenge is a significant threat, so it uses tariffs as a weapon to check China," and predicted, "Considering this situation, U.S.-China relations are likely to worsen further."

He saw the negative impact of U.S. tariff policies on the Korean economy as unavoidable. Chairman Jeon explained, "The direct impact is that our exports are immediately contracted due to tariffs," and "The indirect impact is that as China suffers from domestic demand sluggishness due to U.S. high tariffs, it expands low-priced dumping exports overseas, which will shock us."

To overcome this difficult situation, he emphasized that companies (private sector), government, and politics must respond as one team. He said, "The tariff war is not a problem that private companies can solve individually," and "The government and political circles must unite as one team to help." He added, "Negotiations are underway under Acting President Han Duck-soo's administration, but no matter which government comes next, they must hand over the baton in an environment favorable to us."

He also mentioned the need to refer to Japan's strategy. Chairman Jeon said, "Japan's companies, government, and politicians united as one team to announce investments worth trillions of dollars in the U.S.," and argued, "We should also do a package deal like Japan rather than individual companies like Hyundai Motor or Samsung Electronics announcing investments directly."

He advised that the next government should strive to raise Korea's potential growth rate. Chairman Jeon emphasized, "The biggest problem of the Korean economy is that the potential growth rate keeps falling toward zero growth," and "To raise the potential growth rate, labor productivity must be increased, and technological innovation such as artificial intelligence (AI) and capital innovation are necessary."

Jeon Gwang-woo, Chairman of the World Economy Research Institute, is being interviewed by Asia Economy. Photo by Yoon Dong-joo

The following is a Q&A with Chairman Jeon

-The tariff shock from President Trump is bigger than expected. How much impact will the U.S. tariff imposition have on our country's economy?

▲The U.S. tariff imposition delivers both direct and indirect shocks to our country. The direct impact is that export prices rise immediately, causing export contraction. U.S. exports may decrease, and if the global economy shrinks as a result, the total global trade volume will decline, which can also reduce our exports to third countries. Indirectly, it is affected by China's economic downturn. China faces tariffs up to 145%, and if China is shocked, negative effects will come to us as well. With China's domestic demand shrinking, under pressure from U.S. high tariffs, China may expand low-priced dumping exports overseas to overcome this. Currently, our steel and chemical industries are struggling partly because of China's policies, and the situation may worsen.

-Can you quantify the negative impact of the Trump administration's tariff shock on our economic growth rate?

▲Growth is likely to slow, but it is difficult to quantify how much it will fall at this point. There is a possibility that tariffs will be adjusted through negotiations, and President Trump may change tariff policies again. However, some investment banks (IBs) have forecasted Korea's economic growth rate this year to be in the 0% range, indicating significant downside risks.

-There is criticism that tariff policies fluctuate depending on President Trump's mood. Despite international criticism, should we expect President Trump to continue a tough tariff policy?

▲We need to consider the true goals of President Trump's high tariff policy. I see four main goals. The first is to resolve the U.S.'s cumulative deficit and balance the trade account. The second is to supplement tax revenue lost due to tax cuts with tariffs. The core tool of the U.S. Republican Party's economic revitalization policy is tax cuts. Tax cuts stimulate the economy and allow the private economy to move strongly, but the lost tax revenue is a problem, so high tariffs are used to offset this. The third is to promote investment within the U.S. President Trump imposes high tariffs whenever he has a chance, saying if companies don't like it, they should come and produce in the U.S. Hyundai Motor and Taiwan's TSMC are already building production bases in the U.S. The fourth is the weaponization of tariffs. The U.S. uses high tariff strategies as a means to achieve its goals. For example, using tariff policies to block illegal immigration through Canada and Mexico. Also, as seen in the Panama Canal and Greenland controversies, tariffs are used to check the expansion of China and Russia.

-The conflict between the U.S. and China is becoming increasingly intense. Do you expect relations between the two countries to worsen further?

▲The ultimate target of U.S. tariff policy is effectively China. It is a global hegemony competition. From the U.S. perspective, it must remain the world's sole superpower, G1, but China challenging to become G2 is a major threat. Since military force cannot be used, the tariff war is waged. Considering this, U.S.-China relations are likely to worsen further. Regarding tariff policies, the U.S. may impose tariffs on other countries as well because targeting only China would be too blatant. Most countries resolve the U.S. tariff policies through negotiations without retaliation, which the U.S. welcomes. However, China retaliates with counter-tariffs, giving the U.S. a reason to confront China.

Why is China tough? Internally, China's economy is not good. But politically, it is unacceptable despite economic damage. The whole world is watching, and Chinese President Xi Jinping will not show weakness just because the U.S. imposes tariffs. So who wins? Frankly, there is no winner in the tariff war. Everyone loses. But relatively, who finds it harder to endure? China will struggle more. Until last year, the U.S. economy was booming alone, but China was struggling. In recent years, China's real economy and finance have been suffering. If high tariff pressure continues this year, China's growth could be halved. A 1-3 percentage point drop in growth rate would be a serious problem. Lower growth leads to youth unemployment and social instability under the communist regime. This is why President Xi is showing a tougher stance. It will be even harder for China to bear this pressure alone, so it is expected to seek allied fronts with the European Union (EU), Australia, India, and others. President Xi's recent surprise visit to Southeast Asia is for this reason.

-How do you view the possibility that the U.S. will weaponize exchange rates linked to trade and monetary policies?

▲I don't think the U.S. will use exchange rates to pressure tariffs like the Plaza Accord in the past. Recently, the yuan has fallen to its lowest value in 20 years, leading to speculation that China is weakening the yuan to reduce tariff damage, but currently, exchange rates are not the U.S.'s primary target.

-Should we consider the global free trade regime to be over?

▲I don't think free trade is over. The free trade regime has been a global trend since World Wars I and II, but there have been ups and downs in the past. In some ways, it is similar to decarbonization. Just because President Trump increases oil production doesn't mean decarbonization policies disappear. We shouldn't view the trend too simplistically. There are concerns that protectionism and nationalism have prevailed more than free trade after President Trump, but fundamentally, considering free trade's contribution to the global economy and shared global growth, its advantages are clear.

Jeon Gwang-woo, Chairman of the World Economy Research Institute, is being interviewed by Asia Economy. Photo by Yoon Dong-joo

-How should our government and companies respond to the U.S. tariff policy?

▲The private sector, government, and politics must definitely move as one team. Currently, the tariff war is not a problem private companies can solve alone. The government and political circles must help. Negotiations are underway under Acting President Han Duck-soo's administration, but no matter which government comes next, they must hand over the baton in an environment favorable to us. The opposition party must cooperate well with Acting President Han for national interests. Considering the high possibility of the opposition party coming to power, they should not inherit a difficult situation.

We also need to refer to Japan's strategy. Japan's companies, government, and politicians united as one team to announce large-scale investments exceeding $1 trillion in the U.S. The U.S. firmly considers Japan the most reliable ally in all of Asia. We should also do a package deal like Japan rather than individual companies like Hyundai Motor or Samsung announcing investments directly. It may be difficult under the current acting administration, but strategically, it should be done after the presidential election.

-Please evaluate the domestic financial industry situation compared to when you served as Financial Services Commission Chairman.

▲The Korean financial market has made considerable efforts over time. However, compared to the global competitiveness achieved in manufacturing, the global competitiveness of finance is relatively weak. If the economy is the body, finance plays the role of the heart and blood vessels. For our body to be dynamic and strong, the heart must be strong and blood must be well supplied everywhere. Our financial industry needs to accelerate globalization.

-Finance faces many conflicts between regulation and autonomy. What balance point would you suggest?

▲Finance is fundamentally a regulated industry. If the financial system's stability is compromised, the whole body is immediately affected, so every country puts up protective barriers to maintain stability. However, the level, degree, and predictability of regulation must be consistently maintained. Frequently changing policies is not good. Even looking at the short-selling ban issue, when I was Financial Services Commission Chairman, our capital market was included in the Financial Times Stock Exchange (FTSE) developed market index, but we still have not been included in the Morgan Stanley Capital International (MSCI) developed market index. From a developed country perspective, regulations on short selling are too strict. Short selling has positive functions and should not be overly suppressed. It is desirable to block illegal trading institutionally, but it should not suppress market autonomy.

-Please evaluate the recent National Pension reform plan.

▲This reform was really difficult. It was very irresponsible not to reform properly for over a decade, so in that sense, it is well done. There is some backlash, but the fact that reform was done deserves high marks. The National Pension fund size is expected to increase from 1,800 trillion won to up to 3,500 trillion won, which is significant for the development of the domestic capital market. Without reform, the pension fund size would shrink, forcing sales of domestic stocks, which could devastate the domestic stock market. For the National Pension, it now has room to invest more actively in the domestic stock market with a long-term perspective. The reform creates an environment where the National Pension can invest with a more relaxed perspective, including in domestic stocks, which can greatly help the domestic capital market. It has become a situation that can act as a catalyst for the development of our financial industry and globalization of the domestic market.

-What advice do you have for the next administration to promote our economic development?

▲The biggest problem of the Korean economy is that the potential growth rate keeps falling toward zero growth. The next administration must reverse the potential growth rate. The components of potential growth rate are labor, technology, and capital. Labor productivity is the issue. Our labor productivity ranks among the lowest in the OECD, only about 60% of the U.S. To increase labor productivity, labor flexibility must be improved, but it is not happening. The 52-hour workweek system is an example. Those who want to work longer should be allowed to do so with proper compensation. With low birth rates reducing the working-age population, efficiency must be improved.

Technological innovation cannot be overemphasized. More innovation in AI and digital technology is needed. Capital must create an environment that boldly supports startups and such. These all raise the potential growth rate and strengthen the economic foundation.

The short-term problem is a serious economic recession. Many small business owners and vulnerable people are struggling. While avoiding populism, active economic revitalization through supplementary budgets is necessary. Also, the new government should have a more open attitude toward global environmental changes. Our politics is too focused on domestic issues, but we are greatly affected by external environments such as Trump's tariff issues. Leaders need a broader perspective and insight to view the world.

-Who is Jeon Gwang-woo, Chairman of the World Economy Institute?
▲Jeon Gwang-woo, Chairman of the World Economy Institute, served as the inaugural Financial Services Commission Chairman in 2008, playing a key role in overcoming the global financial crisis shock. From 2009 to 2013, he was also the longest-serving Chairman of the National Pension Service. During his tenure, he was credited with enhancing the competitiveness of the National Pension through diversification of domestic and overseas investments and modernization of fund management. After graduating from Seoul National University with a degree in economics and earning a Ph.D. in business administration from Indiana University, he built his theoretical foundation as a professor at Michigan State University's business school. He has also been active in the private sector as Vice Chairman of Woori Financial Group, Chairman of Deloitte Korea, and Chairman of the POSCO Board.

-Profile of Jeon Gwang-woo, Chairman of the World Economy Institute
▲Born in Seoul in 1949 ▲Bachelor's in Economics from Seoul National University ▲Master's in Business Administration and Economics and Ph.D. in Business Administration from Indiana University Graduate School ▲Professor at Michigan State University ▲Senior Research Fellow at the World Bank ▲Director of the International Finance Center ▲Vice Chairman of Woori Financial Group ▲Chairman of Deloitte Korea ▲Inaugural Financial Services Commission Chairman ▲Chairman of the National Pension Service ▲Distinguished Professor at Yonsei University Graduate School of Economics ▲Chairman of the World Economy Institute

Interview by Lee Seon-ae, Head of Economic and Financial Department

Summary by Lee Chang-hwan, Deputy Head of Economic and Financial Department