Peter S. Kim is a managing director at KB Securities.
Korea-US tariff deal reached — now for main event
Peter S. Kim
By Peter S. Kim
Last week, South Korea and the U.S. finally agreed on a tariff deal that will see the U.S. impose 15 percent tariffs on all Korean imports, whereas American products will not be charged a tariff.
U.S. President Donald Trump said on social media that South Korea pledged $350 billion for investments "owned and controlled" by the U.S. and a further $100 billion in energy purchases from the U.S. The 15 percent is in line with recent U.S. agreements with the EU and Japan. The Korean stock market gave a lukewarm response, likely due to the high base effect from a strong performance for the Korean market, and also because global markets in general have already rallied hard since President Trump's "Liberation Day" market panic.
There was visible disappointment that hopes for achieving something better than the EU and Japan were unfulfilled. Despite all the fanfare for the past months about how major chaebols such as Samsung and Hyundai lobbied hard and publicly for U.S. concessions, the final result was, frankly, anticlimactic. As we have seen many times this year, there is no guarantee that Trump will not ask for additional concessions over the remainder of his term. The latest news, therefore, can hardly be assumed to be the end of the trade issue.
Korea must now hope that it does not upset Trump on any issues outside of trade that could prompt him to rescind the tariff agreement. We have recently seen this with Brazil, when Trump suddenly raised the tariff from 10 percent to 50 percent — he is not above changing the terms of an agreement for reasons only known to himself. Trump has characterized these tariffs as retaliation in response to the prosecution of his ally, former Brazilian President Jair Bolsonaro. In fact, Trump has shown a tendency to seek maximum political leverage via tariffs for reasons outside of trade or the economy.
Perhaps the most important trade agreement for Korea was not done last Wednesday, but is coming up in the U.S.-China talks. As the U.S. and China equally important trade partners for Korea, the long-term ramifications of the Korea-U.S. deal can be put in true perspective only after the U.S.-China agreement is completed. For all exporters, the tariffs in absolute terms matter for macro implications. But for Korean exporters, the relative tariff differences with their direct competitors matter more. For instance, Korean auto companies have been reasonably neutral, given their diversification of manufacturing and the fact that tariffs for their direct competition (EU and Japan) are on equal terms.
However, with the global market share under assault from Chinese producers like BYD for electric vehicles, how the U.S. settles with China on tariffs will be of utmost strategic significance to the Korean auto industry. Also, once China finalizes its own tariffs with the U.S., it could possibly turn its attention to Korea and other trading partners with trade demands of its own. With exports increasingly becoming an important "safety valve" in supporting the struggling Chinese economy, China may be keen to continue to promote its exports into countries with which it has a trading relationship.
The latest buzzword from China is "involution," which describes excessive price competition among local producers who are fighting for survival. The competition for domestic market share has led to China's nominal gross domestic product being lower than its real GDP, an indication of worrisome deflation in the struggling domestic economy due to issues like demographic decline, a property market slump and anti-corruption clampdowns.
Most recently, shocks are increasingly coming from the supply side of the economy, where overcapacity is leading to mainland companies engaging in bloody price wars to survive. In recent years, the slowdown in consumption has amplified China's excessive dependence on manufacturing investment, with the central government voicing rare concern. Clearly, a market consolidation is required to balance the overcapacity, but, as we have seen from the prolonged struggle with oversupply in the mainland property market, the instability to the economy and possible social unrest make the process hard to achieve.
I have warned that China's turn from Korea Inc.'s customer to its competitor is the greatest challenge to Korea since its financial crisis 25 years ago. With China racing through its "import substitution" phase, price competition among the local players has become its own battle royal. The main event of the trade war was always the U.S.-China talks, and while the rest of the world is trying to get used to the "new normal" of 15 percent tariffs from the U.S., how the U.S. treats China is going to have a seismic impact on its other trading partners.
For Korea, its evenly balanced trade with both countries and the uncertain geopolitical landscape surrounding East Asia means its position is even more tenuous. The stellar performance of the Korean stock market thus far is driven by market reform initiatives and a business-friendly approach by newly elected President Lee Jae Myung. In the coming months, the just-announced summit with Trump, followed by possible talks with China, could be Korea's first true test on the global stage under the new administration.
Peter S. Kim is a managing director at KB Securities. The views expressed in this article are his own.