Amid growing trade uncertainty caused by the U.S.-led tariff war, there is a warning that South Korea's gross domestic product (GDP) growth rate could fall by about 1 percentage point.
On the afternoon of May 26, at the 'Impact of the Trump Administration's Foreign Economic Policy and Response Strategies' seminar held at Bulls Hall, Korea Financial Investment Association Center in Yeouido, Seoul, Jang Boseong, a research fellow at the Capital Market Institute, stated, "It is analyzed that the domestic growth rate could decline by about 1 percentage point due to both the direct and indirect effects of U.S. trade policy."
Jang first pointed out that the Trump administration's repeated threats and suspensions of high tariffs have raised global trade policy uncertainty to unprecedented levels.
He noted, "The United States is our second-largest export destination, accounting for about 19% of South Korea's exports as of last year." He estimated, "With the imposition of U.S. tariffs, the size of Korea's GDP would decrease by about 0.5%, and the GDP growth rate would decline by about 0.5 percentage points." This estimate assumes a 25% tariff on Korean automobiles and steel, and a 10% tariff on other items.
Furthermore, if country-specific reciprocal tariffs, which have been deferred for 90 days, are implemented, the economic shock is expected to be even greater. Jang emphasized, "Not only the imposition of tariffs, but also the quantitative effects of trade policy uncertainty are significant," adding, "They are at a level similar to the direct effects of tariffs." He explained that even without the imposition of tariffs, the mere expansion of uncertainty has a negative impact on real economic activity in Korea, leading to a decrease in GDP.
Jang stressed that, due to both direct and indirect effects such as trade policy uncertainty, South Korea's growth rate could fall by about 1 percentage point. He stated, "Ideally, a smooth trade agreement should be reached before the deadline for reciprocal tariff suspension, and it is necessary to buffer the effects of tariffs and uncertainty through accommodative monetary and fiscal policies."
On the same day, Lee Seungho, a senior research fellow at the Capital Market Institute, commented on the Trump administration's tariff and currency policies, predicting, "(The United States) could pressure countries to appreciate their currencies and pursue currency agreements to induce a weaker dollar." He observed that, in the process, the U.S. may link tariff pressure and defense cost-sharing to bring countries to the negotiating table. He said, "South Korea is suitable as a priority negotiation partner due to its trade surplus with the U.S., weak won, and defense cost-sharing burden," and anticipated that, "Along with pressure to appreciate the won, the U.S. could demand increased direct investment by Korean companies in the U.S., reduced dependence on Chinese supply chains, and increased defense spending."
Accordingly, Lee advised, "When there is a demand to appreciate the won, efforts should be made to ensure that the scale and speed of the won's appreciation are not excessive compared to the currencies of export competitors." He also suggested, "Authorities should persuade the U.S. that structural factors?such as external uncertainty and increased overseas securities investment by the private sector, which increase dollar demand?make artificial exchange rate adjustments difficult." He added that, if necessary, market stabilization measures should be taken to prevent excessive short-term exchange rate volatility.
However, Lee assessed that the possibility of a so-called 'Mar-a-Lago Agreement'?similar to the 'Plaza Accord' in the past, which artificially depreciated the dollar?was low. This is because the current value of the dollar does not deviate significantly from its long-term equilibrium level, and the global political and economic environment is different from the past. He emphasized, "If there is strong opposition from China or Europe, it will be difficult to achieve policy coordination on exchange rates."
He further stated that if the U.S. pursues a multilateral currency agreement, "joint response measures should be sought through regional and Korea-China-Japan cooperation," and stressed, "We must remember the lesson that the sharp appreciation of the Japanese yen after the Plaza Accord was the starting point of Japan's lost three decades."
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