🚨 Current Account Balance Decreases by $24 Billion Due to Tariff War... Base Rate Expected to Drop to 2.0%

Today Korean Economic News | 2025.04.19

📌 Current Account Balance Decreases by $24 Billion Due to Tariff War... Base Rate Expected to Drop to 2.0%

💬 South Korea's current account surplus is expected to decrease by more than $24 billion compared to last year due to strengthened U.S. tariff policies. As export contraction makes a decline in growth rate inevitable, market expectations are spreading that the Bank of Korea may lower the base interest rate to 2.0%. Major export industries such as automobiles and semiconductors are being hit, making economic structural improvement and monetary policy response urgent tasks.

1️⃣ Easy Understanding

The U.S. has imposed high tariffs on Korean products, causing difficulties for our economy. I'll explain what this means and how it affects us in simple terms.

President Trump has imposed a 25% tariff on Korean products as part of his "America First" policy. This has significantly increased the prices of our major export items such as automobiles, semiconductors, and home appliances in the U.S. market. Since the U.S. is one of our most important export markets, these tariffs have a major impact on our economy.

The current account balance refers to the comprehensive balance of international transactions, including trade in goods, services, and investment income. Simply put, it's the difference between what our country earns from abroad and what it spends abroad. This tariff war is expected to reduce South Korea's current account surplus by $24 billion (approximately 32 trillion won) compared to last year.

When exports decrease, corporate profits decline, and production and employment contract. In response, the Bank of Korea is likely to lower the base interest rate from the current 3.0% to 2.0%. Lowering the base rate reduces loan interest rates, which can ease the burden of corporate financing and potentially increase consumer spending.

In this situation, our economy needs to: ① diversify export markets to reduce dependence on the U.S., ② enhance technological competitiveness to create products that will be chosen despite tariffs, and ③ revitalize the domestic market to reduce export dependency. Although there are short-term difficulties, if we use this opportunity to improve our economic structure, we can emerge as a stronger economy.

2️⃣ Economic Terms

📕 Current Account Balance

The current account balance is a key indicator of international balance of payments that shows the difference between a country's income earned and expenses paid in foreign transactions.

• It consists of the goods balance (export/import of goods), services balance (tourism, transportation, etc.), primary income balance (investment returns), and secondary income balance (foreign remittances, etc.).
• A surplus means more money earned from abroad, while a deficit means more money going abroad.

📕 Base Interest Rate

The base interest rate is the reference rate applied when the central bank lends funds to commercial banks.

• It is used by the Bank of Korea as a key monetary policy tool and directly affects market interest rates.
• Lowering the rate decreases borrowing costs, stimulating investment and consumption, while raising it restrains economic overheating and inflation.

📕 Tariff

A tariff is a tax imposed by a country on imported goods, aimed at protecting domestic industries and securing fiscal revenue.

• It increases the price of imported goods, protecting domestic industries and discouraging consumers from purchasing imports.
• The higher the tariff rate, the greater the decrease in imports and the higher the price in the domestic market.

📕 Quantitative Easing

Quantitative easing is an unconventional monetary policy where the central bank purchases government bonds or other financial assets on a large scale to supply funds to the market.

• It is used when additional economic stimulus is needed despite already low interest rates.
• It provides liquidity to the market, leading to asset price increases, interest rate decreases, and reduced corporate financing costs.

3️⃣ Principles and Economic Outlook

💡 Impact of the Tariff War on the Korean Economy

• Let's examine how U.S. tariffs affect different sectors of our economy.

  • First, export decline and current account deterioration are inevitable. As the U.S. imposes a 25% tariff on Korean products, the price competitiveness of our products has significantly weakened. Korea's annual exports to the U.S. amount to about $110 billion, accounting for 15% of total exports. According to an analysis by the Korea International Trade Association, the 25% tariff is expected to reduce exports to the U.S. by up to 22% (approximately $24 billion). Key export items such as automobiles ($57 billion), semiconductors ($22 billion), and home appliances ($8 billion) are being directly hit. This goes beyond a simple export decrease and has a chain effect on production, investment, and employment in related industries. If this situation continues, there are concerns that the GDP growth rate could drop by more than 0.5 percentage points.

  • Second, deteriorating corporate profitability and investment contraction are concerns. Companies face a dilemma: if they absorb the tariff burden, profitability significantly deteriorates; if they pass it on to consumers, sales volume decreases. Major export companies' Q1 results have already decreased by an average of 15% compared to the same period last year, with a larger decline expected in Q2. Companies are responding with cost reductions, production adjustments, and postponement of new investments, but this could lead to a weakening of growth drivers in the mid to long term. Particularly concerning is the significant reduction in capital investment plans in key export sectors such as automobiles, electronics, and chemicals, which threatens manufacturing competitiveness. Poor corporate performance has led to stock price declines, with the KOSPI index falling more than 8% since the beginning of the year.

  • Third, negative effects are spreading to employment and the domestic market. Export decreases and deteriorating corporate profitability ultimately lead to employment instability. According to a recent corporate survey, 35% of export companies have reduced their hiring plans this year, and 17% are considering restructuring. There are particular concerns about chain employment shocks in major manufacturing regions, including the automotive, shipbuilding, and steel industries. Employment instability leads to weakened consumer sentiment, likely causing the domestic market to contract simultaneously. The consumer sentiment index has already declined for six consecutive months, and anxiety about unemployment has significantly increased. Urgent policy responses are needed to prevent a "double dip" situation where both domestic consumption and exports contract simultaneously.

• The U.S.'s high tariffs are having a widespread impact on the Korean economy as a whole. Export declines can lead to a vicious cycle of deteriorating corporate profitability, investment contraction, employment instability, and consumption depression. In particular, the structural vulnerability of Korea's highly externally dependent economy is being more clearly revealed by this tariff war. The government and businesses stand at a critical juncture where they must address both short-term crisis response and mid to long-term economic structural improvement.

💡 Bank of Korea's Interest Rate Cut and Monetary Policy Outlook

• Let's analyze the direction of the Bank of Korea's monetary policy and its market impact in response to recession concerns.

  • First, lowering the base rate has become an inevitable choice. The Bank of Korea is likely to lower the base rate from the current 3.0% to 2.0% within this year. Despite maintaining a cautious stance due to inflation concerns, a monetary policy stance change has become necessary as the risk of recession due to the tariff war has rapidly increased. One member of the Monetary Policy Committee already advocated for a rate cut at the March meeting, and a 0.25 percentage point cut is likely in May. The market expects three additional cuts (0.75 percentage points) by the end of this year. Interest rate cuts are expected to help mitigate the recession by reducing companies' interest burdens and promoting investment and consumption.

  • Second, the possibility of introducing quantitative easing is also being considered. If the effect of interest rate cuts on economic stimulus is limited, the Bank of Korea may consider a more aggressive monetary policy, quantitative easing. Quantitative easing is a policy where the central bank purchases government bonds on a large scale to supply liquidity to the market. It is known that internal practical reviews for introducing quantitative easing as an "emergency policy option" are already underway at the Bank of Korea. The market forecasts that quantitative easing of up to 50 trillion won may be necessary. However, quantitative easing has side effects such as currency depreciation, financial market distortion, and asset price bubbles, requiring a cautious approach.

  • Third, monetary policy effects have limitations, making coordination with fiscal policy important. While interest rate cuts and quantitative easing help alleviate recession, they have limitations in resolving structural problems caused by tariffs. Export reduction, in particular, is a problem that cannot be easily solved by interest rate cuts alone. Therefore, coordination between monetary and fiscal policy is important. The government has already allocated a supplementary budget of 15 trillion won and is considering additional fiscal support. Policy efforts are needed for industry-specific customized support, employment stability, and domestic market revitalization. Efforts should also be made to enhance corporate competitiveness and discover new growth engines through regulatory reform and structural reforms.

• The Bank of Korea's monetary policy easing is an inevitable choice to respond to the risk of recession. Along with base rate cuts, the introduction of quantitative easing is also being considered if necessary. However, as monetary policy alone cannot solve the structural problems caused by the tariff war, a comprehensive approach is needed that includes coordination with fiscal policy and enhancement of industrial competitiveness. Particularly important are measures to strengthen financial intermediation functions to ensure that the effects of interest rate cuts are evenly transmitted to the real economy, and to expand support for vulnerable groups and small and medium-sized enterprises.

💡 Strategies for Crisis Overcoming and Economic Structure Improvement

• Let's look at industry-specific response strategies and economic structure improvement measures to turn the tariff war crisis into an opportunity.

  • First, strengthening product competitiveness and market diversification are essential. While tariffs weaken price competitiveness, they can be overcome with quality and technological prowess. Companies need to expand R&D investment to develop differentiated products and target premium markets. Investment in future growth engines such as AI, eco-friendly technology, and digital transformation needs to be strengthened. At the same time, export market diversification is important. Dependence on the U.S. market should be reduced, and expansion into emerging markets such as Southeast Asia, India, the Middle East, and South America should be increased. The automotive industry should focus on electric vehicles and autonomous driving technology, the semiconductor industry should diversify its portfolio with AI semiconductors and system semiconductors, and future industries such as batteries and renewable energy should also be fostered.

  • Second, production base strategies in response to supply chain reorganization are important. U.S. high tariffs are accelerating global supply chain reorganization. Companies need to strengthen localization strategies in response to "friendshoring" (supply chains centered on allied countries). It is necessary to relocate or expand production bases for the U.S. market to the U.S. or USMCA (U.S.-Mexico-Canada) region. The automotive industry is already expanding factories in the U.S. and Mexico, and the battery industry is building local factories in the U.S. It is also important to diversify procurement sources for key components and raw materials and secure strategic inventory to enhance supply chain stability. At the same time, a "two-track" strategy is needed that maintains advanced technology and core capabilities domestically while finding the optimal combination of local and domestic production.

  • Third, domestic market revitalization and industrial structure advancement are necessary. An economic structure with high external dependence is inevitably vulnerable to external shocks such as tariff wars. It is important to diversify growth drivers by revitalizing the domestic market. Regulatory innovation for new industry cultivation, service industry competitiveness enhancement, and small business and startup ecosystem activation are needed. Particularly important are enhancing the competitiveness of domestically-focused service industries such as healthcare, content, tourism, and education, and creating added value through the servicification of manufacturing. Industrial structures should also be advanced through digital transformation and eco-friendly energy transition, and new growth engines should be discovered. The government should support this industrial structure advancement through talent development, technology development, and regulatory reform.

• The tariff war crisis should be used as an opportunity to improve economic structure. Key tasks include product competitiveness enhancement and market diversification, production base strategies in response to supply chain reorganization, and domestic market revitalization and industrial structure advancement. This requires corporate innovation efforts, consistent government policy support, and ecosystem building through industry-academia-research cooperation. If we fundamentally improve the structure of the Korean economy through this opportunity rather than just responding to the short-term crisis, we can secure stronger competitiveness in future global competition.

4️⃣ In Conclusion

The Korean economy faces serious challenges due to strengthened U.S. protectionism and the tariff war. As the U.S. imposes a 25% high tariff on Korean products, an annual current account surplus reduction of $24 billion is expected, and the GDP growth rate is forecast to drop by more than 0.5 percentage points. In response, the Bank of Korea is likely to lower the base rate from the current 3.0% to 2.0% within this year.

Major export industries such as automobiles, semiconductors, and home appliances are being directly hit, leading to deteriorating corporate profitability, investment contraction, and employment instability. Active coordination between monetary policy and fiscal policy is needed to prevent the risk of a "double dip" where both exports and domestic consumption contract simultaneously.

Companies are pursuing strategies such as enhancing product competitiveness, diversifying markets, and reorganizing production bases in response to this crisis. The automotive industry is responding with electric vehicle transition and U.S. local production expansion, while the semiconductor industry is developing high-value-added products such as AI semiconductors. Efforts are also being made to reduce dependence on the U.S. market by expanding into emerging markets such as Southeast Asia and India.

The government is pursuing export company support, employment stability, and domestic market revitalization through a supplementary budget of 15 trillion won, and is making policy efforts to minimize recession along with the Bank of Korea's interest rate cuts. However, there are limitations to short-term responses, and it is important to fundamentally improve the economic structure through this crisis.

Ultimately, this tariff war reveals structural vulnerabilities in our economy while providing an opportunity for structural improvement. We need to build an economy that is stronger against external shocks through product competitiveness enhancement, market diversification, domestic base expansion, and industrial structure advancement. A posture of preparing for the future even in crisis is more important than ever at this point.