The global economy is again in unchartered water. The world is likely to march toward trade war as trade-deficit countries, including the United States, will clash with trade-surplus nations, including China, Germany and Japan. Seoul will also face pressure from Washington for balancing two-way trade.
A global trade war looms as the American economy, the world’s largest, is heading toward a double-dip recession. Japan, the world’s third largest economy, is reeling from the yen’s 15-year high. China, the world’s second largest economy, is seeing a contraction of its property market. The eurozone is in a painful transition from a deficit-ridden welfare region.
U.S. housing sales nosedived by 27.2 percent to a 15-year low. Unemployment claims also hit a nine-month high of 9.5 percent. The Dow Jones Industrial Average fell below 10,000 again.
The U.S. has yet to move out of the Wall Street meltdown in late 2008. Charles Evans, Chicago Federal Reserve Board president, warns that the risk of a double-dip U.S. recession has risen for the past six months.
Ahead of the midterm elections in November, Washington will be tempted to resort to protectionism. The Obama Administration may step up its offensive on Korea to open its car and beef markets wider before putting the bilateral free trade agreement into effect.
Korean policymakers should not sit in a condescending armchair. They need to prepare for the possible fallout of another global economic downturn. The country has recorded the fastest recovery in the OECD. For the sixth consecutive quarter, the nation has seen a trade surplus. The Bank of Korea reported that consumer sentiment fell in August for the first time in four months. The leading economic indicator has fallen for the past six consecutive months. The financial market is not in such good shape. Korea is seeing an early sign of the property market bubble bursting. The KOSPI has been falling, and won has been losing value against the dollar.
The Bank of Korea needs to monitor whether an interest rate hike is feasible. The much-touted exit strategy should be cautious and gradual. Like the United States and the EU, the country has no additional room for another fiscal stimulus. The fiscal deficit, which is now below average by the OECD standard, has been growing at a rapid pace. Korea must keep its fiscal health in good shape ahead of reunification.
Korea must also manage trade with the United States in a less disruptive way. Trying to avoid U.S. demands may trigger more disastrous retaliation. Korea alone cannot help the United States reduce its trade shortfall. Such surplus-nations as China, Germany and Japan must join in rebalancing trade with the deficit-ridden countries. An escalating trade war might put the global economy into a protracted downturn. Global leaders should not repeat the same folly as their predecessors did ahead of the Great Depression in 1939. Their irresponsible beggar-thy-neighbor policy triggered the Great Depression.