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(EDITORIAL from Korea Herald on July 9)

All News 07:03 July 09, 2018

Trade war is on
Korea must brace for fallout as US slaps tariffs, China retaliates

The US imposed 25-percent tariffs on $34 billion worth of Chinese goods on Friday. Another $16 billion are expected to go into effect in two weeks.

China retaliated immediately with the same tariffs on $34 billion worth of US goods. US President Donald Trump said he would consider imposing additional tariffs on $500 billion -- $200 billion first and $300 billion next -- in Chinese goods, should Beijing retaliate.

Finally, a trade war kicked off.

Trade conflict between the two superpowers threatens the global free trade order which has been in place for over seven decades after the General Agreement on Tariffs and Trade system was launched in 1947 to abolish tariffs and promote trade.

Some analysts such as John Doody, founder of Gold Stock Analyst, went so far as to predict that an escalating trade war could bring the world to the brink of an economic collapse on the scale of the Great Depression of the 1930s.

Worrisome is that the trade tit-for-tat between the US and China takes on a tone of a fight for global hegemony. China bucks the US pressure, while the US cannot simply look on as China rises rapidly. Against this backdrop, their trade conflict does not seem to end soon. Even if they compromise to end it, concern about its recurrence will not disappear easily.

The problem is the Korean economy which is in for fallout from the trade war.

Korea institute for Industrial Economics & Trade estimated the US and China's reciprocal tariffs on $34 million worth of goods will curtail Korea's exports to China and the US by $190 million and $50 million, respectively.

An analysis by Singapore-based bank DBS shows that South Korea is among the economies most at risk in Asia based on trade openness and exposure to supply chains. South Korea could see a drag of 0.4 percent on growth in 2018, and the impact would be roughly double in 2019.

Two thirds of the world's trade is interconnected with global supply networks. Intermediate goods or parts make up 80 percent of Korea's exports to China. Hyundai Research Institute forecast Korea's annual exports to China to decline by $28.26 million or 6.5 percent if China exports 10 percent less to the US.

Pictet Asset Management in London ranked South Korea as the sixth most vulnerable country to Sino-US trade dispute. According to its analysis, Korea's major export items such as electric appliances, cars, steel and ships will come under direct threat from the trade conflict. Even its world-leading semiconductor industry will be damaged in the long term.

To add insult to injury, Korea is showing clear signs of economic downturn. Domestic sales are sluggish and investment is losing steam. If exports back away in a situation like this, it will stunt growth.

A trade war between the US and China will not likely end in a short period of time, and Korea cannot circumvent it, considering its trade dependence on them.

The government needs to hedge against the worst-case scenario. It must prepare contingency plans to minimize damage to the national economy. Export competitiveness must be strengthened to prevent industries from collapsing in a storm of trade war.

Dependence on the US and China must be lowered through market diversification. Much of trade war impact can be absorbed through efforts to cut costs and develop new technology.

The long-term measure to survive a trade war is to strengthen economic fundamentals -- stronger industrial restructuring, labor reforms and bold deregulation are needed.

But the government has poured out policies to raise taxes and spend more to deal with the side effects of its economic policies. Labor reforms are going backward. Deregulation is all talk and no action.

Minister of Trade, Industry and Energy Paik Un-gyu said, "The effects (of Sino-US trade conflict) on our exports will be limited in the short term." He may have meant to avoid arousing anxiety needlessly, but seems to be easygoing.

A tsunami of trade war is coming. It's time to brace for it.


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