[Market Pulse] Two Variables Remain in the Impact of the Tariff Agreement

The overall assessment of the results of the Korea-US tariff negotiations is generally positive. If we compare our situation to that of Brazil, India, Canada, and Taiwan?which failed to reach an agreement by August 1 and are now subject to high tariff rates?the conclusion is clear: we achieved the best possible outcome under the circumstances. Of course, it is disappointing that we were unable to further lower tariffs on automobiles and steel·aluminum. However, it appears that Trump had set a kind of red line for tariffs on specific items. Even if we, Japan, and the EU had formed a united front, it would not have been easy to break through.

Now, we must anticipate and prepare for what lies ahead. Since only a broad framework agreement has been reached, it is necessary to examine the details. The most noteworthy point is the substance of the $350 billion investment agreement. Steve Milan, Chairman of the President's Council of Economic Advisers and known as the architect of Trump's tariff policy, once proposed using tariffs as leverage to force allied countries to purchase 100-year zero-interest US Treasury bonds. While many dismissed this as absurd, the current investment agreement could, in effect, turn out to be a variation of that idea. As Kim Yongbum, the Presidential Office Policy Chief, stated, efforts must be made to ensure that the agreement meets the standards of a normal, civilized nation.

Although the worst-case scenario was avoided, the impact of high tariffs on our exports and economy is inevitably negative. However, it is difficult to predict the extent of this negative impact. The Korea Institute for Industrial Economics and Trade estimated that the decline in exports to the US would be reduced by two-thirds as a result of the agreement. Nevertheless, two major variables remain in determining the overall effect. One is the outcome of the ongoing US-China negotiations, and the other is the response of the US market after the tariffs are implemented.

Personally, I do not expect the results of the US-China negotiations to be particularly shocking. The average US tariff rate on Chinese goods has exceeded 20% since before Trump took office. Therefore, even in the current situation, where a mutual tariff rate of 30% is being applied during the grace period, the average tariff rate reaches 55%. Considering that Trump pledged during his campaign to impose a 60% tariff on China and 20% on other countries, it could be said that the target has nearly been reached. It is also worth noting that, for now, there are not many cases where our products directly compete with Chinese products in the US market. Nevertheless, the outcome of the US-China negotiations will have a significant impact on the future of our industries, as it will serve as an opportunity to gauge the US’s policy stance toward China.

Opinions are divided on the impact tariffs will have on the US market, but two points are clear. First, tariffs will fuel inflation, economic contraction, or both. Second, it is still too early to fully assess the magnitude of the changes. So far, the impact has been limited, largely due to exporters’ caution and preemptive purchases to avoid tariffs. Once it becomes clear that the world has changed, it is uncertain how things will unfold. When Trump raised tariffs on Chinese goods during his first term, importers largely absorbed the costs, so American consumers and exporters were not affected. However, the outcome could be different this time, given the broad and aggressive nature of the tariff increases.

The effects of tariffs will vary by industry and company, and may appear in unexpected ways. For example, since steel accounts for only about 10% of exports to the US, one might think that even a 50% tariff would have a limited economic impact. However, many small and medium-sized enterprises in sectors that use a lot of steel, such as general machinery and electrical·electronics, are also subject to high tariffs and lack the capacity to absorb rising costs. This underscores the need for the government to strengthen its ability to quickly assess risks and respond appropriately in each sector.