© YONHAP News

Last spring, the U.S. erected a wide range of tariffs on imports from China, launching the opening salvos in a trade war between the two nations. A year later, and the dispute between Washington and Beijing has evolved into a battle for hegemony between the world’s two largest economies, with the rest of the global economy hurt in the crossfire. For the Korean economy, in particular, the outlook looks dim.

Today, we’ll discuss the deepening trade tension between the U.S. and China and its ripple effects on the Korean economy with Professor Kim Gwang-seok at Hanyang University Graduate School of International Studies. 

On March 22, 2018, U.S. President Donald Trump, citing intellectual property infringement, signed an executive order calling for the imposition of stiff tariffs on imports from China, igniting the U.S.-China trade war. In July, the two countries took their trade battle to the next level by imposing additional tariffs on one another. However, after the U.S. slapped a 25 percent tariff on Chinese tech products, some industry watchers interpreted the move as an attempt to hold Chinese technology back and ensure it doesn’t catch up with U.S. tech.

Washington decided in September to expand tariffs again, levying 10 percent on additional Chinese imports. China immediately hit back at the U.S. with retaliatory tariffs on American products, intensifying the trade war further.

Starting from complaints of a trade imbalance with China, the trade feud between Washington and Beijing has turned into a battle over economic and industrial hegemony. While the two largest economies vie for tech supremacy, however, dark clouds loom over the rest of the global economy.

In January this year, the World Bank predicted that global growth would slow to 2.9 percent in 2019, down from its previous projection of 3.0 percent. The International Monetary Fund and the Organization for Economic Cooperation and Development have also downgraded their 2019 outlook, as has the European Union and China. The pessimistic outlooks are attributable partly to forecasts that peg growth in the first three months of the year at the slowest rate since the global financial crisis in 2009. But the U.S.-China trade war is certainly a factor as well. 

Like last year, the U.S.-China trade row is expected to negatively impact the global economy in 2019. The U.S. shift towards protectionism and high-barrier trade is influencing the way other countries do business as well. In other words, the trade war will likely lead to significant contractions in global trade, slowed economies and unstable financial markets. The risk for Korea is especially great.

Korea is placed in a tough position as the world’s two largest economies battle it out on the trade front. If China offers to buy more American goods, including semiconductors, to eliminate its trade imbalance with the U.S., Korea’s exports to China will be hit hard as China accounts for a quarter of Korea’s total exports. 

President Trump, meanwhile, is considering high tariffs on car imports, as the U.S. reportedly concluded that imported vehicles pose a threat to national security. Such a strong protective trade measure by the U.S. will strike a blow to Korean automakers that export cars to the U.S. 

Korea’s exports remained strong last year, surpassing 600 billion US dollars in value. But it does not appear it will be easy to replicate those numbers in 2019. Overall exports began to decline from late last year, starting from shipments to China. In a worrying sign, semiconductors, which represent a huge chunk of Korean exports, are seeing sluggish overseas demand.

Moreover, geopolitical risks continue to weigh on South Korea, which is under the U.S. security umbrella on the one hand but relies heavily on the Chinese economy on the other. Therefore, the longer the U.S. and China trade war drags on, the worse it is for Korea. The already struggling Korean automobile industry, in particular, will be hit hard if the U.S. decides to place more tariffs on imported vehicles. Unfortunately, a swift resolution between the U.S. and China remains doubtful.

The U.S. and China continue to hold trade negotiations without any fixes in sight. It is difficult at present to predict when the dispute between them will be completely settled. China seeks to gain technological supremacy, while the U.S. is strongly determined to defend its dominance. So, it is not about a mere trade deficit but a fight for global hegemony in future growth engines. Given this, the dispute is unlikely to end anytime soon. That means Korea will face higher downside risks in exports. 

Late last year, Washington and Beijing agreed on a 90-day truce period in which no new tariffs would be levied on the other. The end of the period came and went on March 1^st, and a deal between the two sides remains elusive, even as face-to-face negotiations continue. Indeed, even if the two sides manage to reach an agreement, their economic and tech rivalry will continue. 

Whatever the case, Korea must brace for an uncertain future and find ways to weather the storm ahead.

One positive development amidst the trade dispute between the U.S. and China is that it has bought time for Korean companies who are worried about Chinese firms narrowing the technological gap between them and their Korean counterparts. However, the advantage of doing is unclear as more and more countries have enacted or strengthened their protective trade measures during the same time. There are even concerns that protectionism may be the new normal in international trade regardless of what shape and form a trade deal between the U.S. and China may take.

Thus, many experts believe Korea needs to lessen its decades-old dependence on the exports of large companies to better cope with the fast-changing global trade environment.

The U.S.-China trade war has prompted other countries to close their doors to trade. To overcome these challenges, Korea needs to diversify its exports and support smaller companies in a way that strengthens their technological edge and competitiveness.