[Column] How to Survive the Tariff War

Although tariff negotiations with the United States have been concluded, the aftermath of the tariff war is expected to be severe. This is because the imposition of a 15% reciprocal tariff is expected to raise retail prices in the U.S. market, leading to a decline in exports. In addition, there are concerns that price competition will intensify. For automobiles, a 15% reciprocal tariff will be imposed, just as it is for Japan and the European Union (EU). A decrease in exports not only slows economic growth but can also reduce corporate investment and jobs, making it urgent for both the government and businesses to formulate countermeasures.

First, it is necessary to prepare for a currency war. In response to the imposition of tariffs, countries exporting to the U.S. are highly likely to engage in a currency war by competitively devaluing their own currencies. If a country devalues its currency by 15%, the dollar-denominated sales price in the U.S. market remains unchanged despite the tariffs, so exports are not affected. In response, the U.S. is regulating such actions by designating currency manipulators and intervening in the foreign exchange market to prevent currency devaluation, that is, to prevent the exchange rate from rising. In particular, the Donald Trump administration has warned that if countries try to offset tariffs by raising exchange rates, it will impose additional tariffs. However, if export declines slow economic growth and cause the exchange rate to rise in the foreign exchange market, it will not be easy for policymakers to prevent this. Policymakers need to closely monitor exchange rate trends in Japan, China, and the EU and establish proactive exchange rate policies to ensure that our export competitiveness is not weakened.

It is also important to reduce the pass-through rate resulting from tariff imposition. When a country's currency appreciates or U.S. import tariffs rise, exporters tend to pass most of the burden onto sales prices. However, the higher the pass-through rate, the more sales volume decreases, resulting in a lower market share in the U.S. The hard-won foothold in the market may collapse, leading to sunk costs that are difficult to recover. Rebuilding sales networks would require significant additional investment, so exporters should adopt pricing strategies that do not raise sales prices despite tariff imposition, that is, strategies that lower the pass-through rate. It is important to recognize that the degree of pass-through among competing countries will determine the outcome of this tariff war.

To avoid passing tariffs onto sales prices, companies must either reduce production costs or accept lower profit margins, which is only possible for monopolistic firms or those receiving government support. During the Plaza Accord of 1985, Japanese automakers succeeded in maintaining high U.S. market share by adopting sales strategies that did not pass on the appreciation of the yen. Government support is essential to lower the pass-through rate. Only by maintaining tax systems, labor environments, and corporate investment conditions that are similar to or better than those of competing countries can profits and production costs be lowered. The government must improve labor-related systems and excessive regulations that do not meet global standards. In addition, the government should maintain a tax system similar to that of competing countries, creating an environment where exporters can lower the pass-through rate.

This year, the economic growth rate is expected to fall to 0.8%. With concerns over declining exports, boosting domestic demand is necessary to raise the growth rate, but available policy tools are limited. Additional fiscal spending is difficult due to two rounds of supplementary budgets, and interest rate cuts are not easy because of rising household debt and housing prices. Furthermore, the National Assembly is currently pushing for the Yellow Envelope Act related to labor disputes and amendments to the Commercial Act regarding corporate governance, while also raising corporate taxes to secure tax revenue. These conditions make it difficult for exporters to lower the pass-through rate. However, despite these challenges, policymakers must respond to the exchange rate policies and corporate investment environments of competing countries, and exporters must focus on lowering the pass-through rate to overcome the aftermath of the tariff war. Now is a time when cooperation between the government and businesses is more necessary than ever.

Kim Jeongsik, Professor Emeritus of Economics, Yonsei University