Why S. Korean economy is especially vulnerable to ‘Trump storm’

The second term of U.S. President-elect Donald Trump is still two months away, yet its impact is already shaking the South Korean economy. The won-dollar exchange rate, reflecting economic fundamentals, is fluctuating around 1,400 won per dollar, and the KOSPI index, an indicator of the performance of South Korean companies, briefly rebounded after getting close to falling below the 2,400 mark. South Korea’s economic decline has been steeper than China’s, which is regarded as the main victim of Trump’s trade wars. Samsung Electronics, a major South Korean company, saw its stock price plummet to the 40,000-won range, prompting an announcement of a 10 trillion won buyback of its shares. Rather than being an exaggerated “Trump phobia,” these events expose the vulnerabilities of South Korea’s economy, which heavily relies on the two major markets of the U.S. and China, as well as on specific industries.

Amid U.S.-China tensions and the global supply chain reshuffle, South Korea’s reliance on U.S. exports has grown. For the first time in 21 years, the U.S. became the country’s largest trade surplus partner, with the surplus increasing from 16.6 billion dollars in former President Trump’s final year to 45.5 billion dollars last year. From the U.S. perspective, however, South Korea ranks as its eighth-largest trade deficit country, which could invite overt trade pressure or even destabilization of the Korea-U.S. Free Trade Agreement (FTA). If laws such as the Inflation Reduction Act (IRA) or the CHIPS Act are repealed or scaled back, South Korean companies that have heavily invested in the U.S. based on the U.S. government’s subsidy promises could suffer significant losses. These industries primarily include semiconductors, automobiles, and batteries, which are South Korea’s core sectors.

The International Monetary Fund (IMF) and other domestic and international organizations have lowered South Korea’s growth forecast for next year to around two percent, warning that it could fall below two percent under more adverse conditions. The Korea Development Institute (KDI) projects that export growth will slow from seven percent this year to 2.1 percent next year, despite its assumption that U.S. tariff increases will be delayed until 2026. If tariff actions are expedited, exports could shrink further, making it difficult for South Korea to achieve even its potential growth rate. Meanwhile, the U.S. designated South Korea as a currency monitoring country, making it harder for South Korea to defend against exchange rate fluctuations. High exchange rates could drive inflation, obstruct interest rate cuts, and exacerbate sluggish domestic consumption.

Despite these challenges, the South Korean government does not seem to feel urgent. During a call between the leaders of South Korea and the U.S. after the U.S. presidential election, President-elect Trump requested cooperation in the shipbuilding sector. South Korea’s failure to propose such initiatives proactively underscores its lack of preparation. With numerous “Trump bills” likely to come, South Korea must emphasize its substantial investments in the U.S. and contributions to job creation to propose mutually beneficial deals. To navigate the environment of protectionism, South Korea needs to diversify its export markets and overseas production bases to reduce dependence on specific regions and industries. Additionally, the government must accelerate regulatory reforms and structural transformation to enhance growth potential.