US tariff feared to exacerbate Korea's ailing economy

Finance Minister Choi Sang-mok, third from left, poses with other participants during a meeting among top fiscal, monetary and regulatory policymakers at the Korea Federation of Banks in central Seoul, Thursday. From left are Financial Supervisory Service Governor Lee Bok-hyun, Bank of Korea Governor Rhee Chang-yong, Choi, and Financial Services Commission Chairman Kim Byoung-hwan. Yonhap

The Korean economy is likely to suffer from a 26 percent reciprocal tariff imposed by the United States on Korean-made goods, with its 2025 GDP growth potentially dropping below 1 percent in a worst-case scenario, according to economists and analysts on Thursday.

The U.S. unveiled the tariff rate on imports from Korea on Wednesday (local time), as growth in Korea’s exports, which make up more than one-third of its GDP, may lose further momentum after falling 2.07 percent year-on-year in the first quarter of this year.

A Meritz Securities report showed that Korea's annual exports could decline by up to 13 percent with a 26 percent tariff rate. Earlier, the National Assembly Budget Office forecast that Korea's exports to the U.S. and China combined may drop by $21.5 billion if the U.S. tariff rate were imposed at just 10 percent.

While the Seoul government has been bracing for the adverse effects caused by the U.S.' hostile trade policy for months, the 26 percent rate far exceeds what Korea’s export-reliant economy can withstand, experts said.

In particular, the rate was the highest for all free trade agreement partners with the U.S.

“I bet financial institutions in and outside Korea did not expect the tariff rate to be that high when they revised down the country’s 2025 growth outlook,” Hanyang University economics professor Ha Joon-kyung said.

Among the institutions were the OECD, which cut the outlook from 2.1 percent to 1.5 percent, and the Bank of Korea (BOK), which also lowered its forecast from 1.9 percent to 1.5 percent. S&P Global slashed the projection from 2 percent to 1.2 percent.

All these projections were made in March or earlier and, therefore, did not take into account the latest U.S. tariff rate.

“Under the circumstances, I predict that the 2025 GDP growth rate may fall below 1 percent in the worst circumstances,” the professor said, adding, “An unpredictable Donald Trump administration can come up with even more severe, unexpected trade policies."

Shin Se-don, professor emeritus of economics at Sookmyung Women's University, echoed a similar sentiment. “The Korean economy was struggling with sluggish consumer spending even before the U.S. tariff rate was imposed,” he said, pointing out that consumer spending and exports are two key pillars of the nation’s economy.

He then said many suppliers of semiconductors, cars and other major export items are small- and medium-sized enterprises, which are more vulnerable than large businesses in dealing with downside risks.

“A decline in their profits means they can’t afford to pay wages to workers, which, in turn, will press affected households to tighten their belt and spend less,” Shin said.

In the meantime, the country’s top four fiscal, monetary and regulatory policymakers vowed to take all possible measures to counter the impacts of the U.S. tariff on the nation's economy.

"We will make concerted efforts across the government to mitigate any damage to our economy and, through the economic security strategy task force, develop the best possible response strategies in collaboration with the private sector," Finance Minister Choi Sang-mok said during a meeting on macroeconomic issues at the Korea Federation of Banks in central Seoul on Thursday.

He also stressed that the government will take a comprehensive approach to its negotiations with Washington, aiming to minimize the potential economic impact through a thorough analysis of the latest U.S. trade policy.

The meeting was also attended by BOK Gov. Rhee Chang-yong, Financial Services Commission Chairman Kim Byoung-hwan and Financial Supervisory Service Gov. Lee Bok-hyun.

In a separate BOK meeting, BOK Deputy Governor Ryoo Sang-dai said, “U.S. reciprocal tariff measures were stronger than expected, and that volatility in the financial market is likely to increase."

“Against this backdrop, we will closely monitor how the situation unfolds, as well as the domestic financial and foreign exchange markets, based on our round-the-clock monitoring system in coordination with overseas offices,” Ryoo said.