ⓒ YONHAP News

The U.S. midterm elections last week will mark a significant turning point in the nation’s politics and economy, influencing the current Trump administration’s future policies including its trade dispute with China. Here is Professor Kim Gwang-seok from the Graduate School of International Studies of Hanyang University to examine possible economic consequences of the elections. 

The division of the U.S. Congress into a Republican-controlled Senate and a Democrat-controlled House of Representatives will likely heighten uncertainties. Previously, it was relatively easy for the Trump administration to push ahead with its policies with full party control. Many are now skeptical President Donald Trump can pursue his policies without objection.

Rising uncertainties in U.S. economic policies will increase the possibility of more severe fluctuations in global financial markets and in macroeconomic indexes such as foreign exchange rates and international oil prices. Moreover, the Democratic Party may put pressure on Trump’s expansionary fiscal policy, possibly weakening American economic growth. 

In the midterm elections, the Democratic Party regained control of the U.S. House of Representatives for the first time in eight years. With the authority to review fiscal spending and legislation, it is possible that Trump’s aims for the domestic economy –such as additional tax breaks and greater infrastructure spending – may be significantly hamstrung. 

But Trump’s foreign policies are unlikely to change much, as the U.S. president can execute decisions in this space largely outside the realm of Congressional approval. Trump’s trade protectionism, thus far enacted through a series of Executive Orders, are especially likely to stick around as a divided Congress is unlikely to levy much pressure on the White House. Thus, many analysts predict that trade conflicts between the U.S. and China will continue. 

The midterm election results will not influence the U.S.-China trade war very much because the Republicans and the Democrats share similar views on trade policies. To be more specific, both parties take a hard-line stance on trade with China. Therefore, the Trump administration’s trade policies will be kept intact, regardless of the new power structure in Congress. Given that, it is highly likely that the trade row between the U.S. and China will be protracted. 

Trump held a telephone conversation with Chinese President Xi Jinping on November 1, raising expectations for some positive trade developments. But on November 7, a day after the midterm elections, the U.S. government announced it would impose additional 176 percent tariffs on China, this time to include common alloy aluminum product. The Democratic Party is unlikely to restrain the Trump administration from intensifying its trade offensive against China, as it is also critical of China’s trade practices and alleged intellectual property violations. 

This is unwelcome news for South Korea, which is likely to suffer from a prolonged U.S.-China trade dispute. 

The drawn-out trade war between the U.S. and China will pose a downside risk to the Korean economy, which relies heavily on the two countries for trade. Meanwhile, the U.S. economy may slow down if the Trump administration finds it hard to implement its fiscal policies aggressively. South Korea should consider the possibility of a setback in its exports to the U.S. in that situation. 

As I said before, growing uncertainties in U.S. economic policies will fuel various risks in the global financial environment. Of course, this isn’t a positive sign for the Korean economy, either. 

South Korea’s exports in 2017 were tallied at 573-point-7 billion US dollars. Among them, shipments to China amounted to 142-point-1 billion dollars, accounting for 24-point-8 percent of total exports. Given South Korea’s heavy dependence on China for trade, a prolonged trade conflict between the U.S. and China will inevitably worsen Korea’s export numbers.

Indeed, the International Monetary Fund has warned that a 1 percentage point decrease in China’s economic growth would pull down that of Korea’s by 0.5 percentage points. 

On the flip side, though, the U.S.’ tariff imposition on Chinese products may positively influence Korean exports, as price hikes in Chinese goods will increase the sale of Korean alternatives in the American market. Professor Kim explains another positive effect of the U.S. midterm elections on the Korean economy. 

Following the elections, the U.S. Federal Reserve may slow interest rate hikes. If the pace is not as steep as before, foreign capital will not flow out of the South Korean financial market very fast. The outflow of foreign funds and uncertainties in emerging markets could be less serious than expected.

In the past, a sharp rise in the U.S. stock market following a midterm election has positively impacted Korea’s bourse. On November 8, the benchmark KOSPI peaked at 2,120 during trading hours before closing at 2,092.63, up 0.67 percent from the previous day. This was likely tied to 2 percent rise in New York following the midterm elections, driven in part by a weakening dollar and stabilizing interest rates on U.S. government bonds. 

If the U.S. Fed raises its interest rate slowly, the Bank of Korea will be under less pressure to lift its own rate. In that case, it’s possible we may see strong stock performance on the market. But this is far from certain. In the meantime, South Korea should closely watch how the U.S. will implement its policies after the elections. 

Korea should watch how the U.S. Congress deals with the current government’s expansionary fiscal policy and infrastructure investment, the U.S.-China trade war, and the Korean Peninsula policy. In other words, it is necessary to see how relations between Congress and the administration may unfold and monitor every possible change in the process. If Korean companies use the change proactively and strategically, they could turn a crisis into an opportunity.

The much-hyped U.S. midterm elections are over. For Korea, it is necessary to keep an eye on how the divided U.S. Congress will interact with the Trump administration and to prepare for any changes to U.S. policies.