U.S.-China ‘Phase One’ deal

The almost-two-year trade war between the U.S. and China has entered a truce with the Phase One agreement. Clouds over the global economy that had contracted and been unstable due to a battle between the world’s two largest economies are gone for now. However, all sensitive issues, including sanctions against China’s Huawei, have been deferred to Phase Two. In addition, a trade war can be resumed at any time in the event of a bumpy implementation of the Phase One agreement, which means uncertainties are still in place. More than anything, South Korea’s exports to China can be substantially affected as China has agreed to import a large volume of goods from the U.S.

The U.S. and China came to an agreement on Wednesday that China will import 200 billion U.S. dollars worth of “Made in USA” products for two years. In return, the U.S. will lower the 15-percent tariffs currently imposed on Chinese products to 7.5 percent and scrap its plan to impose additional tariffs on certain products from December 2019. The agreement also contains China’s commitments to protecting intellectual property rights, prohibiting forceful requests for technology transfer, and no longer deval‎uing the yuan.

An additional 200 billion dollars worth of goods and services to be imported by China from the U.S. are equivalent to 33 percent of South Korea’s total annual exports. China will import not only agricultural products but also industrial products, energy, and services. Unless China’s domestic demand increases as much, its import from other countries is bound to shrink accordingly.

The International Monetary Fund (IMF) analyzed how the U.S.-China trade deal will negatively impact other countries, including South Korea, Japan, and the European Union, in its report titled, “Managed Trade: What Could be Possible Spillover Effects of a Potential Trade Agreement Between the U.S. and China?” The report predicted that assuming China’s total imports to stay the same South Korea’s export can decrease up to 46 billion dollars or three percent of the country’s GDP.

South Korea’s exports to China are likely to be dealt a direct blow without a brief moment of relaxation for the country from the ending of trade tensions between the two powerhouses. As the behind-the-door agreement is to artificially reshuffle the global trade system, its impact on the future economy remains very high. Given that China accounts for 27 percent of South Korea’s total exports, South Korea needs to diversify its export destinations to reduce dependency on trade with China and urgently find niche markets amid the large volume of U.S.-China trade.