The South Korean economy is in danger as the trade war between the United States and China is showing no signs of easing. With 40% of South Korea’s total exports relying on the two superpowers, a worst-case scenario may lead to a drop in exports of no less than US$36.7 billion.
On July 10, the Donald Trump administration officially announced that it would impose additional 10% tariffs on Chinese imports worth US$200 billion. According to the Korea International Trade Association, a tariff increase of 10 percentage points by the U.S., China and the EU leads to a 6% decline in global trade volume and a 6.4% decline in South Korea’s exports. The latter, US$36.7 billion, is equivalent to 2.2% of South Korea’s nominal GDP.
Earlier, the U.S. decided to impose tariffs on Chinese imports worth US$50 billion. In all, U.S. import tariffs will cover Chinese imports worth US$250 billion. The combined amount is close to half of China’s exports to the U.S., which totaled US$505.5 billion last year. As of 2016, the average import tariff rate of the U.S. was 3.5%.
China is likely to impose a tariff on every product imported from the U.S. while raising non-tariff barriers at the same time. Last year, China’s imports from the U.S. totaled US$149.7 billion.
The EU, in the meantime, is considering imposing retaliatory tariffs if the U.S. pushes ahead with its plan to restrict the import of cars. The U.S. investigation on imported cars’ impact on national security is likely to be wrapped up in September.
South Korea is taking a direct hit under the circumstances. At present, its exports to China and the U.S. account for 24.8% and 11.9% of its total exports, respectively. Intermediate goods account for 78.9% of South Korea’s total exports to China, and some of the goods are used for exports to the U.S. China may import less from South Korea if the trade war goes on, causing a decline in domestic consumption.
The Hyundai Research Institute recently said that a 10% decline in U.S. imports from China is estimated to cause South Korea’s exports to China to drop by US$28.26 billion, which is equivalent to 19.9% of South Korea’s exports to China for last year. It also points out that the trade war will compromise financial stability. “The won may appreciate by moving in the same direction as the yuan with uncertainties mounting in financial markets,” the institute explained.