Korea's growth could drop 0.5%p despite successful deal over US tariff: Citi

U.S. President Donald Trump speaks during an event announcing Korean auto giant Hyundai's $21 billion investment in the U.S. over the four years, at the White House, March 24. Other participants, from Trump's right, are Louisiana Gov. Jeff Landry, Hyundai Motor Group Executive Chair Chung Euisun, Hyundai Motor Company CEO Chang Jae-hoon, former Korean Ambassador to the U.S. Sung Kim and Hyundai Steel CEO Seo Gang-hyun. AFP-Yonhap

Even if tariff negotiations between Korea and the U.S. end successfully, Korea may still face a decline of 0.5 percentage points in its economic growth rate if tension between the U.S. and China continues, according to an analysis Citi released Wednesday.

Kim Jin-Wook, Citi's Korea chief economist, analyzed the economic impact under three scenarios.

The first and second scenarios assume the U.S. imposes reciprocal tariffs of 10 percent and 25 percent on Korea, respectively, while maintaining over 100 percent tariffs with China.

In both scenarios, Korea would see a 0.5 percentage point decline in gross domestic product growth this year. However, the first scenario would lead to a drop of 2.2 percentage points in 2026 and the second 2.3 percentage points.

The third scenario envisions a relatively moderate conflict in which the U.S. imposes a 10 percent tariff on Korean goods and a 60 percent unilateral tariff on Chinese imports.

Yet even under this more tempered outlook, Korea's economic growth is expected to fall by 0.2 percentage points this year and by 0.9 percentage points in 2026.

The anticipated decline is largely due to the limited benefits of tariff reductions. Even though the U.S. lowers the reciprocal tariff from 25 percent to the standard 10 percent for Korea, the actual effective reduction would amount to just 6.7 percentage points, Citi explained.

Ongoing tensions between the U.S. and China could lead to a decline in overall trade volume. Additionally, the country's exports of cars and auto parts to the U.S. — still subject to a 25 percent tariff — account for 34 percent of Korea's total outbound shipments to the U.S.

Previously, Citi projected Korea’s economic growth at 0.8 percent for this year and 1.6 percent for next year. Kim noted that while some tariff-related impacts have been partially factored into this year’s forecast, they are scarcely reflected in next year’s outlook due to heightened uncertainty.

Citi is not alone in revising its forecasts for Korea’s economy.

A Bloomberg survey conducted on April 10 found that the average forecast from 42 domestic and global institutions now stands at approximately 1.41 percent. Projections in the 0 percent range are also becoming increasingly common.