By Kim Jae-kyoung
With the tit-for-tat trade dispute between the United States and China intensifying, there are growing fears that the world will slip into an economic recession.
Chances are still low that a full-flown trade war will take place but escalating confrontations are highly likely to dampen global trade, severely hurting economic growth across the world.
“The trust between the two is broken. The potential for further escalation will lead multinational companies to bring the supply chain to home as much as possible,” Andy Xie, former Morgan Stanley economist, told The Korea Times.
“Global trade will likely be sluggish for a long time to come, likely below GDP growth rate,” he added. “East Asia is export oriented and will be affected most. The growth rate could come down by more than one percentage point.”
Xie's concern comes as Trump has heightened tensions by threatening another round of tariffs targeting China and the European Union (EU).
U.S. President Donald Trump recently directed the U.S. Trade Representative's office to begin drawing up a list of $200 billion worth of Chinese goods. China has vowed that it will respond with a sharp rejoinder.
On Friday, in a tweet, Trump threatened to unilaterally levy a 20 percent tariff on all vehicle imports from the EU.
Sohn Sung-won, an economics professor at California State University-Channel Islands, said that a trade war with China is a distinct possibility as Beijing won't back down because its China 2025 initiative is so important to them.
“A trade war will hurt economic growth of both the U.S. and China. With slower economic growth, Korea won't be able to export as much, hurting the local economy,” Sohn said.
The real concerns lie in President Trump's misunderstanding of global trade.
He sees trade as a zero-sum game, meaning that America will be able to be better off by imposing larger tariffs on its trading partners.
However, in a trade war, there will be only losers, not winners, because less trade will end in losses for everyone by stoking inflation, pushing up interest rates and significantly cutting gross domestic product (GDP).
“Trade is not a zero sum game. If Trump causes a collapse in global trade, he shrinks the pie for everyone,” said ING Bank Asia-Pacific chief economist Rob Carnell.
“So whether his slice rises relative to anyone else is not really the point.
Experts said that export-oriented economies in East Asia, including South Korea, will be the biggest victims to the trade friction as they have few options at hand.
They added that if the current dispute undermines global rules, the long-term impact on South Korea could be significant given its dependence on trade.
“South Korea is at the mercy of the heightened trade tensions with few bargaining chips to influence the outcome in its favor,” said Katrina Ell, an analyst at Moody's Analytics.
“So far, South Korea's white goods and steel industries have been hurt by the protectionism and it's unknown what, if any further casualties there will be.”
The semiconductor industry could be the area that will be hit hardest, since the U.S. could push China to cut its trade deficit with the U.S. by buying more U.S. semiconductors.
“Autos, auto parts, semiconductors and specialized shipbuilding are some of the sectors which will be adversely affected. The semiconductor industry is notoriously cyclical. It could face a double whammy,” Sohn said.
The experts have called on Korea to take on a two-pronged strategy ― joining forces with other Asian economies and diversifying export destinations over the long term.
“The standoff between the U.S. and China, as well as the dispute over THAAD, demonstrated the need for South Korea to diversify its exports to reduce dependence on any one market,” said Troy Stangarone, the senior director at the Korea Economic Institute.
“At the same time, it will be important for Seoul to work with likeminded states to try and reinforce the rules based global trading order.”
Antonio Fatas, an economics professor at INSEAD Singapore campus, concurred.
“Companies, in Korea and elsewhere, will be doing their best to shift production across countries to avoid some of the tariffs,” he said.
“This is inefficient and a waste of resources but there is nothing else one can do given the U.S. administration's view.”
Ell stressed the importance of focusing on shoring up domestic economic weak spots, including the labor market, to help build resilience to outside shocks like heightened geopolitical tensions.
“If the government can make progress on reducing unemployment, particularly youth unemployment and income growth it will deliver a more prosperous economy that could help absorb adverse shocks if global trade relationships deteriorate further,” she said.