On January 20, Washington Time, President Donald Trump was sworn in as the 45th President of the United States. With the businessman-turned president at the helm, the economic policies of the world’s largest economy are changing rapidly. In response, Korea held a Ministerial Meeting on International Economic Affairs on January 26 to work out its own policies. To take a closer look at the potential changes to be made by the launch of the Trump Administration and its new economic environment, we’ll talk with Dr. Kim Hyung-joo (김형주) of the LG Economic Research Institute. First, he walks us through the U.S. policy directions revealed through President Trump’s inauguration speech.
Not only for the economy, but from diplomacy to security and various other fields, the general keyword was “America First.” It means that when making any decision, he would first consider if it would be beneficial for America. He stressed that job creation is the most important and that business activities within the U.S. must flourish in order to create more jobs. To help American businesses make money he stressed two simple rules: Buy American and hire American. While these terms may sound acceptable to American people and American businesses, to the slew of developing manufacturing nations that view the U.S. as an export destination, including Korea, it is a very perplexing declaration.
The beginning of the Trump Era that supports America first-ism is aggravating the concerns of the Korean economy. Last year, Korea’s exports to the U.S. amounted to 66.5 billion dollars, and imports 43.2 billion dollars, logging a 23.3 billion dollar surplus. But if the Trump Administration strengthens protectionist policies against nations whose trades with the U.S. result in their favor, the future of Korea’s exports will be bleak.
If the U.S. builds up a wall of protectionism, Korean products shipped to the U.S. will be the first to be hit. For example, home appliances like refrigerators, air conditioners and washing machines made by American firms, such as Whirlpool Corporation and Carrier Corporation, will be in direct competition with Korean firms. Those that export to the U.S., such as Korean, Japanese or Chinese firms, would have to pay more taxes, and therefore will be dealt a huge blow. Even if tariffs aren’t added to Korean products or Korean firms, there are countries through which Korean companies export indirectly. For instance, some Korean electronics companies or automobile makers manufacture their goods in Mexico and then export to the U.S. There are also many instances where Korean goods and services are indirectly exported via China or Vietnam. Korea’s exports may suffer great damages if the U.S. enforces import restrictions on such countries as well.
On January 22, U.S. time, the Trump Administration has officially expressed its intention to renegotiate the NAFTA, a free trade agreement between the U.S., Mexico and Canada. The move is already affecting Korean exporters. Samsung Electronics and LG Electronics have been manufacturing home appliances such as washing machines and refrigerators in Mexico to take advantage of the NAFTA deal and export to the U.S. tariff-free. Now the two companies must overhaul their strategies. But that’s only just the beginning. President Trump also formally abandoned the Trans-Pacific Partnership on January 23, making the fate of the Korea-U.S. free trade agreement uncertain.
The launch of the Trump Administration is burdensome on the Korea-U.S. FTA. The trade pact is clearly beneficial for Korea, as it had helped increase our exports to the U.S. and it also aided the advancement of Korea’s systems. However, some experts as well as the Trump Administration appear to have suspicions that the bilateral deal is favorable for the Korean side only. The Korean government must clarify that this is not the case, making use of various documents proving that the Korea-U.S. FTA was signed through negotiations that made sure it would be a win-win deal for the both sides.
Throughout his campaign, President Trump criticized NAFTA, TPP and the Korea-U.S. FTA, claiming that the deals are to blame for the lost American jobs. If the Korea-U.S. FTA enters renegotiations with such a negative view, Korea’s tax benefits are bound to shrink, hurting the industries with high U.S.-bound export rates, such as the auto, electronics and steel sectors. Furthermore, if the FTA is scrapped altogether, Korea’s exports to the U.S. may shrink by as much as 3.8-billion won per year. On top of this, the Trump Administration has other means to pressure Korea as well.
A currency manipulator refers to a government that exercises pressure on its domestic currency as a policy with the intention of influencing the exchange rate, instead of letting its currency be evaluated fairly in the currency market. The U.S. states that if the currencies from Korea or China appreciate or depreciate too much at a certain point in time, it disturbs the market and therefore hurts American companies. If restrictions regarding such practices are actually put in place, there is a possibility that Korea may be hurt before China. I believe not only China but countries around the world should work together to prevent such measures from being put in place in the name of righting wrongs in the market.
It’s another urgent task for Korea to avoid being designated as a currency manipulator by the U.S. Washington has already placed Seoul on a currency watch list, and if it goes on to label Seoul as a currency manipulator in April, trade retaliation could commence immediately. The Trump Administration is speeding up its implementation of the campaign pledges. What kind of measures should Korea devise?
The government and the businesses must react differently. For example, the government has to remain official in its moves, so it should behave conservatively at least until the other sides’ strategies are made clear. At the same time, regarding the measures the U.S. has revealed, Korea’s authorities on economy and diplomacy should respond in a more active manner. Businesses, on the other hand, can behave more freely, and there is room for cost reduction via preemptive moves. So businesses should be more aggressive in their dealings with the U.S. These days, in particular, the U.S. has been making strong requests for investment, and instead of shutting them down citing protocols, the Korean firms may want to accept those requests and demand provisions in exchange. A multifaceted approach is needed.
The emergence of the Trump Administration and its America first-ism is clearly a challenge. Uncertainties in the Korean economy are growing in the process of the materialization of Trump’s policies. However, if the government and businesses are able to make a two-track proposal of a win-win model that benefits both Korea and the U.S., then the two nation’s economic cooperation may become stronger. Holding a double-edged sword of opportunity and risk, what Korea currently needs is a wise judgment.