South Korea needs a well-calibrated response to tackle growth woes, US tariff-related shocks
South Korea confronts a growing list of economic challenges, as demonstrated by a series of warning signs about its growth outlook that reflect the intensifying trade war triggered by the US Trump administration.
One of the main factors that darkens the country’s economic outlook is the Trump administration's plan to impose country-by-country "reciprocal tariffs" next month, which is feared to deal a blow to South Korea’s exports.
On top of tariff risks, Korea needs to tackle the combination of ongoing political turmoil linked to the impeachment of suspended President Yoon Suk Yeol, sluggish domestic demand and the shaky financial market.
Given the risks both at home and abroad, it is hardly surprising that the Organization for Economic Cooperation and Development sharply slashed its growth forecast for the South Korean economy this year to 1.5 percent early this week.
The latest projection by the OECD, published Monday in its economic outlook report, is a 0.6 percentage-point decrease from its forecast in December. The OECD blamed the cut on trade barriers, as well as geopolitical and policy uncertainties.
The lower growth outlook aligns with projections in February by the Bank of Korea and the Korea Development Institute, which forecast 1.5 percent and 1.6 percent growth, respectively.
The OECD report also stressed that South Korea’s central bank should retain the capacity to respond to future economic shocks by maintaining its fiscal discipline. But the BOK, which cut its benchmark interest rate to 2.75 percent last month, may face bigger challenges to its monetary policy.
On Wednesday, the US Federal Reserve froze its benchmark interest rate in the 4.25 to 4.50 percent range, reflecting its close watch on the repercussions of Trump’s tariff policies and other economic challenges.
The Fed’s decision keeps the gap between the key rates of South Korea and the US at up to 1.75 percentage points.
Given the interest rate gap, the BOK could find it harder to preemptively cut rates in response to an economic slowdown. The problem is that if the US maintains elevated borrowing costs for an extended period, downward pressure on the Korean won will persist.
This underscores the need for the BOK to take a calibrated approach to rate cuts while actively defending the Korean currency’s value.
Adding to the risks are Trump’s damaging trade policies, which could slow down the US economy and inevitably hurt Korea’s exports. Industries with high exposure to the US market — such as semiconductors and automobiles — face greater uncertainty. On March 12, Trump’s 25 percent tariffs on all steel and aluminum imports went into effect, which hit South Korea as the fourth-biggest exporter of steel and aluminum products to the US.
The tariff shock is expected to spread further if the US begins to tax imports from South Korea by charging "reciprocal" rates starting on April 2.
Pressure from the US over tariffs is mounting. On Monday, Kevin Hassett, director of the US National Economic Council, identified South Korea, China and Europe as the partners with which the US has seen “persistent trade deficits" for several years, citing high tariffs and nontariff barriers. In 2024, South Korea’s trade surplus with the US came to $55.7 billion, which placed the country at No. 8 on the list of US trading partners that contribute to its trade deficit.
As South Korea’s economic growth outlook weakens, the impact of US-led trade and tariff negotiations could far exceed initial projections, posing a severe disruption to the country’s economy. Preparing for the worst-case scenario and formulating the most effective counterstrategies is imperative. Without a well-calibrated response, South Korea risks being left vulnerable to external shocks.
