Dark cloud cast over Korean economy amid U.S.-China trade war

Washington and Beijing held high-level trade talks in Washington, but failed to narrow differences and conclude talks. The two countries agreed to continue negotiations, and will likely seek to strike a deal right before the G20 summit in late June. However, chances are high that the trade dispute between the world’s two economic superpowers will resurface or get protracted since the conflict entails tough issues including not only resolution of trade imbalance in which the U.S. is incurring massive deficits but also their global hegemony.

For one, the U.S. has raised its tariffs on Chinese exports worth 250 billion U.S. dollars from 10 percent to 25 percent, effective at midnight Friday. President Donald Trump also instructed his administration to prepare measures to impose additional tariffs on Chinese products worth 325 billion dollars. If the U.S. imposes hefty tariffs on Chinese products, and China levies retaliatory tariffs to ignite a war of prohibitively high tariffs, the U.S. will see its GDP slump 0.31 percentage point, and China will see its DGP tumble 1.22 percentage point, according to an estimate by the International Monetary Fund.

If U.S. and China go into a full-blown trade war to cause global trade and economy to contract, it will deal a major below to South Korea, which is heavily relying on export for growth. The two countries account for about 40 percent of South Korea’s overall export. If China’s shipment to the U.S. declines, South Korea, which is exporting intermediate goods to China, will suffer double or triple damages. The Korean economy, which has been in a slump amid negative growth of export for five consecutive months since late last year with its GDP growth also turning negative in the first quarter of the year, is feared to plunge into a recession again even before seeing any signs of recovery.

The Korean financial market responded sensitively to the dark cloud cast over the global economy. When the news suggesting that trade talks between the U.S. and China were stalled spread on Thursday, the benchmark KOSPI index tumbled 3 percent, while the won-dollar exchange rate jumped more than 10 won to the dollar. These could be temporary bumps caused by an external shock, but the Korean economy cannot afford to disregard long-term concerns over its falling corporate profitability and deterioration of its economic growth potential.

Fortunately amid a challenging situation, Korea’s export to the U.S. increased by about 13 percent in this year’s first quarter amid the U.S.-China trade dispute that continued to intensify from last year. The trend is believed to reflect Korea’s gains stemming from falling Chinese export to the U.S. Korea needs to proactively target and expand its niche market to secure trade gains amid a “battle between the two economic superpowers.” As internal and external financial and foreign exchange markets can fluctuate at anytime, Korea should gear up to be prepared, while stepping up efforts by using all different measures including diversification of its export markets and shoring up of domestic consumption in order to help revive the slumping economy.