South Korea’s economy faces a more significant threat from President-elect Donald Trump’s impending trade policies than from its recent internal political instability, according to Bank of Korea Governor Rhee Chang-yong. While the unsuccessful attempt by President Yoon Suk Yeol to impose martial law this week will undoubtedly delay crucial structural reforms and impact the financial markets, Governor Rhee believes the long-term economic consequences will be comparatively limited.
In an interview reported by the Financial Times, Rhee emphasized the heightened uncertainty stemming from external factors, particularly Trump’s proposed tariffs. He stated, “There is a lot of uncertainty. But compared with domestic factors, the external factors are giving us a lot more uncertainty at the moment.” This concern is a primary reason for the Bank of Korea’s revised, downgraded growth forecast for both this year and the next.
South Korea’s economy, the fourth largest in Asia, is already grappling with challenges including weak domestic demand, high household debt, and intensifying competition from Chinese exporters. The central bank’s unexpected interest rate cut last week further highlights the economic vulnerability. Governor Rhee directly linked this decision to concerns surrounding Trump’s victory and the Republican gains in the US elections.
Despite the recent political upheaval, the South Korean financial markets have shown remarkable resilience. Governor Rhee attributes this stability to “swift and comprehensive prevention measures” implemented by the government. The Kospi stock benchmark, while down 6% from Tuesday’s close by Thursday’s trading end, demonstrates a level of market calm considering the circumstances.
However, the potential impact of Trump’s protectionist trade policies extends far beyond South Korea. A Goldman Sachs report predicts significant economic costs for several nations, especially Canada and Mexico, estimating a potential GDP contraction of up to 4% under a full 25% tariff implementation. Concerns are also mounting regarding the ripple effects on the US economy itself, with analysts highlighting potential damage to the defense sector. A senior advisor from Beijing issued a stark warning that Trump’s tariffs on Chinese goods could severely harm American manufacturers and potentially cut US GDP growth in half.
The situation underscores the complex interplay between domestic politics and global economics. While South Korea navigates its internal challenges, the looming shadow of Trump’s trade policies casts a far-reaching and potentially more impactful threat to its economic future. The coming months will be crucial in determining how South Korea, and indeed the global economy, adapts to this new era of trade uncertainty.
