The volume of the MAGA (Make America Great Again) slogan that once drove the Korean economy into a corner is increasing again as former President Donald Trump is confirmed as the Republican candidate for the U.S. election.
The return of Trumpism, symbolized by nationalism and protectionism, is the utmost blow to the Korean economy. The timing of this year’s key issue, the interest rate cut, and the direction of inflation, trade, and energy policies could all be trapped at ground zero.
On the 7th, domestic and foreign economic experts unanimously said now is the time to take proactive risk management and prepare countermeasures considering the possibility of former President Trump’s return to power. If you look at Agenda 47, a collection of re-election policies from the Trump camp, most of the economic policies are in stark contrast to the Biden administration.
One of the notable agendas is the expansion of protectionism. This includes the introduction of universal basic tariffs, the enactment of mutual trade laws, and the strengthening of regulations against China. Universal tariff refers to imposing a tax rate that adds 10% to the existing tariff rate on all goods from all countries trading with the U.S.
The Korea Institute for International Economic Policy predicted that if a universal tariff is introduced, Korea’s exports to the U.S. will decrease by $17.38 billion annually (about 23 trillion won), and the real GDP will also decrease by up to 0.308%. The U.S. trade surplus, which was $23.2 billion before Trump took office in 2016, has shrunk by about 36% to an average of $15 billion per year after he took office from 2017 to 2020.
The shock caused by the Trump-triggered trade war aimed at containing China seems hard to avoid. China is our largest trading partner, accounting for 20% of our exports. If China’s export route to the U.S. is blocked, Korean semiconductor and display exports will also be hit.
There is a possibility of increased uncertainty over energy prices, including oil prices. This is due to the wars taking place in Ukraine and the Middle East, which may be ignored under the pretext of American priority. In the case of rising oil prices and supply chain disruptions, economies like ours that are highly dependent on foreign countries will be impacted first.
The most worrying part is the dissonance between inflation and interest rate policies. One of the slogans that former President Trump never misses in his speeches is “drill, baby, drill” implying lowering prices by increasing oil drilling and abolishing laws related to renewable energy such as the Inflation Reduction Act (IRA). At the same time, he publicly declares that he will raise external tariffs. An increase in the tariff rate is a factor in price increases.
He has emphasized that once he takes office, the current U.S. base rate of 5.50% will be lowered. He has also openly advocated for the replacement of Jerome Powell, the chairman of the Federal Reserve, who is leading a gradual interest rate cut. As the direction of domestic prices and interest rates in the U.S. become uncertain, the Bank of Korea’s monetary policy can only be passive. This comes as a surprise to low-income households who have been hoping for relief from domestic demand through interest rate cuts. to the 1% range of financial costs and a recovery of domestic demand through interest rate cuts.
“Trump’s return to power has a high possibility of reducing export growth and increasing geopolitical risks, stimulating price instability,” said Ahn Jae-kyun, a fixed-income analyst at Shinhan Investment Corp., pointing out that “it will damage the basic outlook of gradual interest rate cuts and be a factor in increasing interest rate volatility.”
“Many domestic large corporations have been actively establishing car, battery, and semiconductor factories in the United States. However, according to Lee Seung-seok, an associate researcher at the Korea Research Institute, if Trump’s policies are reversed, these efforts may prove to be ineffective. Therefore, he advises that investments made with Biden’s re-election in mind should be reviewed as early as possible.”
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