Nam Hyun-woo has worked as a staff writer at The Korea Times since 2013, mostly covering business and politics. He currently belongs to the Business Desk where he covers topics such as emerging tech, AI, ICT and Korea's chaebol community. Prior to joining the team, he was the paper's correspondent for the presidential office of Korea during the Yoon Suk Yeol and Moon Jae-in administrations.
Trump tariffs likely to cause global economic downturn: IGE webinar
Ira Kalish, chief global economist at Deloitte Touche Tohmatsu, left, speaks during a webinar on U.S. tariff policies hosted by the Institute for Global Economics (IGE), Tuesday. At right is IGE Chairman Jun Kwang-woo. Captured from webinar
By Nam Hyun-woo
Deloitte economist advises Korea to diversify trade markets
Ira Kalish, chief global economist at Deloitte Touche Tohmatsu, warned that U.S. President Donald Trump’s sweeping tariff policies could trigger a global economic downturn, estimating a 50 percent chance of a U.S. recession within the next year.
During a webinar hosted Tuesday by Korea’s Institute for Global Economics, the economist said that Korea’s recent appeasement approach — potentially tabling the issue of cost-sharing for U.S. Forces Korea in upcoming high-level trade talks — “might work."
However, he stressed that Korea’s best strategy to offset the negative impact of the tariffs is to focus on innovation and productivity gains, as well as diversifying its exposure to Washington.
Traders work on the floor of the New York Stock Exchange in New York City, Monday (local time), during morning trading. The U.S. stock market continued a decline in points with the Dow Jones opening under 500 points as U.S. President Donald Trump's tariff provocations continue to have an impact on the market and his renewed attacks against Federal Reserve Chair Jerome Powell. AFP-Yonhap
Citing a recent sharp drop in the five-year breakeven inflation rate, which measures bond investors’ expectations of inflation over the next five years, Kalish said investors understand that prices will rise initially, but eventually, “the high tariffs will lead to an economic downturn, possibly a recession.”
“So now global investors don't see the U.S. as much as a set of safe assets as they used to,” the American economist said.
“We know there will be a decline in U.S. purchasing power, which should lead to a slowdown in economic growth. We also know that the majority of U.S. imports are intermediate goods used by U.S. companies to produce final goods, so that's an increase in production costs that will be passed on to consumers in the form of higher prices, but it also means a loss of global competitiveness on the part of U.S. producers.”
Kalish added that the impact could be more severe due to the uncertainties surrounding the Trump administration’s tariff policies.
“If you're a global company operating global supply chains, if you know for sure that tariffs will be high over a prolonged period of time, you might not be happy, but you know what kinds of investments you need to make to try to minimize the cost,” he said.
“But currently, because of the uncertainty over where tariffs will wind up, businesses might be putting investment on hold and waiting to see what happens, and we're now starting to see a decline in the dollar as a perceived safe asset. If that continues, then U.S. bond yields will rise further, which may cause difficulty for the U.S. in funding its budget deficit.”
The average U.S. tariff rate is shown in this graph from a presentation by Deloitte Chief Global Economist Ira Kalish, delivered during a webinar hosted by the Institute for Global Economics, Tuesday. Captured from webinar
He suggested three potential scenarios for U.S. tariff policies: retaining high tariffs while engaging in fiscal stimulus to address the domestic economy; negotiating lower tariffs with commitments from other countries to purchase more U.S. products; and remaining unpredictable by imposing tariffs, reversing some and making demands that “cannot be satisfied.”
He said the first scenario could lead to a 50 percent chance of a U.S. recession within the next year, along with higher inflation, putting the U.S. Federal Reserve in a difficult position.
The second scenario, which involves ongoing negotiations, is "the best option," but noted that there is "uncertainty about how successful this will be" due to U.S. criticisms of nontariff barriers and value-added taxes, which other countries are unwilling to lower.
Kalish said the third scenario, marked by continued uncertainties and fluctuating tariff measures, is the most likely. He warned that this would have a chilling effect on business investments and be damaging to the global economy in the immediate term.
A staff member at KEB Hana Bank examines dollar notes at the bank's counterfeit note detection center in central Seoul, Monday. The value of the U.S. dollar is dropping following investors' concerns on the economic impact of President Donald Trump's tariffs. Yonhap
Regarding Korea’s strategy to mitigate the impact, Kalish noted that acting President Han Duck-soo’s recent remarks — implying that defense cost-sharing could be on the negotiation table during the upcoming Korea-U.S. trade talks, including the two-plus-two consultation slated for later this week — “might work,” citing Trump’s previous statements.
“If a negotiation leads to more financial support for the U.S. troops, that might be one among other factors that would lead the U.S. to agree to minimize tariffs,” he said, adding that this is speculative.
Instead, Kalish emphasized once again that the best strategy for Korean industry is to focus on innovation and productivity gains to differentiate Korean products from competitors and reduce costs.
“There's no way to avoid the tariffs if the U.S. wants to impose them, but there is a way to avoid a ruinous price competition, and that is innovation that leads to differentiation,” he said.
He also noted that Korea and other Asian countries could seek further liberalization of trade within Asia, Europe and Latin America as a way to diversify their exposure away from the U.S., given that the current tariff measures are not just about tariffs but also about Trump's perception of trade deficits as a problem.
“The U.S. wants to find ways to reduce its bilateral trade deficits with other countries, by getting other countries to agree to purchase more U.S. goods, especially liquefied natural gas,” he said, adding that more investment in U.S. factories, especially automotive plants, could be a way to navigate through the uncertainties.