By Yoon Ja-young
With the United States and China threatening to throw tariff bombs at each other, experts say Korea, which heavily relies on trade and is stuck geopolitically between the two heavyweights, is especially vulnerable.
Reflecting the concerns over a trade war, the main index KOSPI dropped 3.18 percent Friday.
Following U.S. President Donald Trump's signing of an executive memorandum to levy $50 billion tariffs on Chinese imports, China unveiled plans of levying reciprocal $3 billion tariffs on U.S. steel and pork.
While a trade war between two countries might in theory benefit a third country through “trade diversion,” with its exports gaining price competitiveness, this isn't the case with Korea. The country's main exports to the United States are intermediate goods and cars, while China mostly exports consumer and capital goods. Their export items don't overlap much.
Yoon Yeo-joon, an associate research fellow at the Korea Institute for International Economic Policy, said the trade conflict between the superpowers will have a huge impact on the Korean economy.
Most of all, the trade war will decrease the two countries' own exports. The United States is China's biggest exports market, taking 18 percent of its exports as of 2016. Decreasing exports means industrial production in China will fall. Yoon said Korea's export of components and materials to China will be hurt.
“When we look at the trade structure, consumer goods take a huge portion of China's exports to the United States. They are produced with intermediate goods imported from Korea,” he said.
Korea exports 29 percent of its intermediate goods to China. It also takes 23 percent of Korea's capital goods exports. Yoon said electronic intermediate goods such as semiconductors will be especially damaged.
Also worrisome is that the trade war between the two countries will lead to increased tariffs all over the world, expanding to a global trade war. This means global trade will contract, as countries substitute imports with locally produced goods.
According to Hyundai Research Institute, a 1 percentage point rise in global average tariff rates will decrease global trade by 0.48 percent. If the global average tariff rates rise to 10 percent from the current 4.8 percent, global trade will contract by 2.5 percent.
“Korea's exports will decrease. The shock on the real economy is inevitable for countries like Korea which depend highly on overseas factors,” said Oh Jun-beom, a researcher at Hyundai Research Institute.
He said Korea's exports will drop by $17.3 billion if average tariff rates rise to 10 percent. That will pull down the economic growth rate by 0.6 percentage points and slash 158,000 jobs.
Experts point out Korea's overdependence on the United States and China make it especially vulnerable.
“The Moon Jae-in administration's New Northern Policy and New Southern Policy, which seek to diversify markets to Eurasia and Southeast Asia, may be a good starting point to solve these problems,” Yoon said.