S. Korea must brace for economic impact as Trump’s trade policies loom

As global inflation shows signs of easing after the prolonged COVID-era surge, a new wave of economic uncertainty is heading toward South Korea, driven by President-elect Donald Trump’s trade protectionism and expansive fiscal policies. These changes could revive inflationary pressures, leading to high prices and interest rates. Without adequate countermeasures, South Korea risks falling short of its goal to become one of the top five exporting nations and sliding into a complex recession.

On Wednesday, the Korean won opened at 1,410 against the dollar on the Seoul foreign exchange market—the highest exchange rate this year. If Trump's proposed tariffs of 10-20% on universal imports and up to 60% on Chinese goods take effect, South Korea could face severe economic repercussions, with its exports significantly impacted. Nearly 20% of South Korea’s exports target the U.S. and China, positioning the country to feel a compounded impact. Concerns over these changes have already led to a sharp depreciation in the won.

The Korea Development Institute (KDI) warns that if these tariffs materialize, South Korea's growth rate could slow to around 1% next year, falling below its potential. Moreover, the elevated exchange rate would drive up import costs, especially for energy, raw materials, and agricultural products, which could reignite inflation just as it stabilizes and further dampens consumer spending.

The U.S. government’s growing debt, fueled by expected tax cuts, could push up interest rates on American bonds. If the tariff plans proceed, the U.S. inflation rate, currently around 2%, could surge to 4% by next year. In response, the Federal Reserve may be forced to raise rates, compelling South Korea to maintain high rates for longer to stabilize its economy.

Adding to the concern is the slow adaptation of Korean industries to the global restructuring of key sectors. The U.S. leads in AI, China in electric vehicles and batteries, and even in fields like memory semiconductors, where South Korea has traditionally excelled, competition is intensifying.

Despite these warning signs, the South Korean government and ruling party continue to highlight recent successes, such as record employment, export achievements, and inflation stabilization. However, the effects of Trump’s policies are likely to hit within the next few months, potentially leading to export slowdowns, job losses, and price instability. The government’s perceived lack of urgency in preparing for this “perfect storm” of economic challenges leaves many anxious about the months ahead.