KDI cuts growth outlook; Seoul should weather US tariff crisis through deals
The Korea Development Institute, a state-run economic think tank, slashed its growth outlook for the South Korean economy this year on Tuesday to 1.6 percent, down 0.4 percentage point from its previous projection three months ago.
It said in its latest report that domestically, political instability has weakened economic sentiment, while externally, policy shifts in the US have worsened trade conditions. It expected exports to slow significantly this year, as global trade tensions have intensified following the inauguration of US President Donald Trump.
South Korea came under the influence of Trump's tariffs 22 days after his second presidency began. The tariffs that he has both imposed and vowed are expected to have an impact widespread and strong enough to jolt the existing international trade order based on the spirit of free trade.
Trump signed proclamations on Monday, raising US tariffs on steel and aluminum imports to a flat 25 percent without exceptions or exemptions. These are the first in a series of tariffs he has vowed to impose, with universal tariffs also applicable to every exporting country to the US.
During Trump's first term in 2018, South Korea secured an exemption on steel tariffs through negotiations with the US. It restricted the annual duty-free steel quota shipped to the US to 2.63 million tons. But this time, expectations for such an exemption amounted to nothing. The quota will be abolished March 12. South Korea will be slapped with a 25 percent tariff. It has to bear a disadvantage in price competition with American steel. The US accepted the lion's share -- 13.06 percent, or $4.34 billion -- of South Korea's steel exports last year.
Trump has reportedly identified automobiles and semiconductors as potential targets for new tariffs.
Cars and chips are the mainstay products propping up South Korea's exports and economy. Tariffs on those items will have a more immense influence on the country than steel tariffs.
Automobiles and semiconductors accounted for 27 percent and 8 percent, respectively, of South Korea's exports to the US. The two items amounted to more than a third of South Korea's exports to the US. Out of South Korean car exports last year, 49.08 percent, or $34.7 billion in terms of amount, were sold in the US, while 7.53 percent ($10.68 billion) of South Korean semiconductor exports were shipped to the US.
Considering economic difficulties at home, US tariffs pose a serious problem. Damage appears to be inevitable. Individual companies have to devise self-help measures such as increasing production on US soil.
Trump's tariffs could be a strategy to make his intended deals after imposing them as a means to pile on pressure. Considering he utilized tariffs targeting Canada and Mexico to pressure them over the issues of illegal immigrants and the deadly drug fentanyl, South Korea needs to take a pragmatic diplomacy based on give-and-take negotiations.
For the moment, it is worth figuring out ways to reduce the trade surplus with the US, such as increasing imports of US crude oil and natural gas. It would help to highlight South Korean companies' brisk investments in the US semiconductor and automobile industries and their competitive edge in the fields of shipbuilding and ship repair where the US needs help.
In the long term, companies should try to expand alternative export markets, while developing product technologies that competitors can hardly catch up to.
The best scenario for South Korea would be to gain exemptions through negotiations as it did during Trump's first term.
However, this time, South Korea is short on time and in a hopeless situation where a proper counterpart to Trump is absent due to the ongoing impeachment and trial of the president. Nevertheless, Seoul has to try to increase contacts with Washington as much as possible through the acting president and trade minister. South Korea should seek its own practical interests along the way. Much of its growth this year depends on this.
