🚨 Global Economic Challenges: US Protectionism, Interest Rate Dilemma, and Korea-US Trade Negotiations
Today Korean Economic News | 2025.04.22
📌 Upcoming Korea-US Trade Negotiations Amid Economic Challenges
💬 On April 24, Korea and the US will hold their "2+2 trade consultation" with finance and trade ministers from both countries. This meeting comes at a critical time as Korea faces challenges from US tariffs, supplementary budget effectiveness debates, and economic stimulus dilemmas. The Korean government aims to secure tariff reductions for key exports like automobiles and semiconductors, while the US is expected to leverage defense cost-sharing and Alaska LNG project participation as negotiation tools. The outcomes of these talks could significantly impact Korea's export-driven economy and future growth trajectory.
1️⃣ Easy Understanding
The global economy is facing multiple challenges, and Korea is particularly affected by several major issues that will impact its economic future. Let's break down these challenges in simple terms.
First, the US has implemented a "America First" trade policy under President Trump, imposing high tariffs on imports from various countries. Korea faces a 25% tariff rate, which is even higher than those imposed on Japan (24%) and the EU (20%). These tariffs are severely impacting Korea's key export industries, especially automobiles and semiconductors.
Second, the Korean government is grappling with how to stimulate the economy effectively. A supplementary budget of 12.2 trillion won has been proposed, but economic research institutes predict this will only raise economic growth by about 0.1 percentage points – an effect considered too minimal by many experts. However, issuing more government bonds to fund a larger budget could raise market interest rates and worsen fiscal health.
Third, Korea's central bank is considering lowering interest rates to stimulate the economy, but this approach carries risks too. If Korea's interest rates fall too far below US rates, foreign investment could flow out of the country, weakening the Korean won and potentially causing inflation.
Finally, Korea and the US will soon hold important trade negotiations. The main goal for Korea is to reduce or eliminate the 25% US tariffs, while the US is likely to demand increased defense cost-sharing and Korean participation in US energy projects like the Alaska LNG development.
These interconnected challenges require balanced policy approaches. Short-term economic stimulus must be weighed against long-term fiscal health, while trade negotiations need to consider security relationships and strategic partnerships. The upcoming Korea-US trade talks will be particularly crucial in shaping Korea's economic future.
2️⃣ Economic Terms
📕 2+2 Trade Consultation
The 2+2 Trade Consultation is a high-level economic consultation body where finance and trade ministers from both countries participate.
- It comprehensively discusses various trade issues including economy, trade, and investment.
- Rather than a regular consultation mechanism, it's specially organized when important trade issues arise.
📕 Supplementary Budget
A supplementary budget is an additional budget prepared outside the already established and confirmed budget.
- It is drawn up during economic crises, natural disasters, or urgent fiscal needs, and is confirmed through National Assembly deliberation and approval.
- It is used as an expansionary fiscal policy tool during economic downturns to stimulate the economy.
📕 Base Interest Rate
The base interest rate is the benchmark rate applied when the central bank lends funds to financial institutions.
- It directly affects deposit and loan interest rates at commercial banks.
- It is typically raised during economic overheating and lowered during economic slowdowns.
📕 Tariffs
Tariffs are taxes imposed by countries on imported goods, aimed at protecting domestic industries and securing fiscal revenue.
- They come in various forms: ad valorem (proportional to import price), specific (proportional to import quantity), and mixed.
- Tariffs are important negotiation targets in international trade talks and are commonly used as trade war instruments.
3️⃣ Principles and Economic Outlook
💡 US Protectionism and Its Global Impact
Let's analyze the strengthening of US protectionist policies and their impact on the global economy.
First, high tariffs are at the core of "America First" policy. President Trump has imposed differentiated tariffs on major trading partners to reduce the trade deficit and revitalize domestic manufacturing. Korea faces 25% tariffs, higher than those imposed on Japan (24%) and the EU (20%), showing a differentiated pressure even among allies. Particularly high tariffs of 34% on China have reignited the trade war. These tariff policies go beyond simple trade measures and can be seen as part of a reorganization of the global economic order and geopolitical competition. The US is using economic means to gain an advantage over China in strategic areas such as advanced technology, energy, and security.
Second, the reignition of the US-China trade war is creating disruption in global supply chains. Conflict between the world's two largest economies leads to global trade contraction and worsening investment sentiment. The IMF has warned that if the US-China trade war intensifies, global economic growth could decline by more than 0.5 percentage points. In particular, the "decoupling" phenomenon, where global supply chains are divided into US-centered and China-centered networks, is expected to accelerate. The US is strengthening "friend-shoring" through USMCA and IPEF, while China is expanding its sphere of influence through RCEP and the Belt and Road Initiative. This blocking reduces the efficiency of global trade and deepens the strategic dilemma for countries like Korea that have high dependence on both the US and China.
Third, uncertainty in the world economy is increasing along with strengthened protectionism. US high tariffs increase inflationary pressure, which can act as a constraint on economic stimulus through interest rate cuts. In addition, the investment contraction due to intensified trade conflicts may hinder productivity improvement and technological innovation. Emerging economies in particular may see their growth momentum weaken due to reduced access to developed markets and decreased investment attraction.
The US protectionist policy should be viewed as part of structural and long-term changes rather than a short-term phenomenon. This increases uncertainty in the global economy and accelerates the blocking of trade structures. For countries with high external dependence like Korea, this presents a serious challenge but could also be a strategic opportunity to respond to global supply chain reorganization.
💡 Interest Rate Policy Effects and Dilemmas
Let's examine the impact of interest rate policy on the economy and the policy dilemma in the current situation.
First, interest rates have a wide-ranging impact on the economy. The base rate set by the Bank of Korea directly affects deposit and loan rates at commercial banks. When interest rates fall, businesses can raise funds more cheaply, increasing investment, while households see reduced mortgage and credit loan burdens, potentially increasing consumption. Low interest rates can also increase consumption through the "wealth effect" by raising asset prices such as stocks and real estate. Conversely, rising interest rates can contract investment and consumption by increasing loan costs and may lower asset prices. Korea's current base rate is 3.25%, having been raised after COVID-19 to respond to inflation. Many economic experts believe interest rate cuts are necessary for economic stimulus, but the situation must consider the interest rate difference with the US Federal Reserve.
Second, there are international constraints on interest rate policy. In open economies like Korea, independent interest rate policy is difficult. Particularly if the interest rate gap with the US widens, foreign investment funds may flow out, causing the Korean won to depreciate, which can lead to import price increases and inflationary pressure. Currently, the US base rate is 5.0-5.25%, about 2 percentage points higher than Korea's. The Fed is expected to maintain rates until inflation approaches its target (2%), limiting the Bank of Korea's room for rate cuts. Also, if foreign exchange market instability increases, there are risks of foreign capital outflow, increased overseas borrowing costs for companies, and increased household foreign debt repayment burdens.
Third, the effect of interest rate policy may be limited in the current situation. For interest rate cuts to be effective in stimulating the economy, several conditions must be met. First, household and corporate debt levels should be appropriate. Currently, Korea's household debt is about 104% of GDP, significantly higher than the OECD average, limiting the capacity for additional loans due to interest rate cuts. Also, for the effects of interest rate cuts to be smoothly transmitted to the real economy, the financial system must be stable. Due to the recent real estate market downturn and liquidity crises at some vulnerable companies, financial institutions have strengthened risk management, so loan screening may remain strict even if interest rates fall.
Interest rate policy is an important means of economic stimulation, but Korea currently has limited policy scope due to the interest rate difference with the US, high household debt, and inflation concerns. In this situation, it's important to carefully adjust the timing and speed of interest rate cuts and find a balance between financial stability and economic stimulus.
💡 Korea-US Trade Negotiations: Key Issues and Expected Scenarios
Let's examine the main issues in the upcoming 2+2 trade consultation and possible negotiation outcomes.
First, tariff reduction or elimination is the biggest issue. Korea has prioritized eliminating the 25% high tariffs. If complete elimination is difficult, Korea will likely demand at least a reduction to Japanese (24%) or EU (20%) levels, or exceptions for certain items. Particularly for electric vehicles, there's a possibility of pursuing tariff exemptions in connection with the US Inflation Reduction Act (IRA). The US is expected to demand concessions and cooperation from Korea in response. The Trump administration is using tariffs as a powerful leverage in trade negotiations, so tariff reductions without concessions are difficult to expect. Possible scenarios include: ①partial tariff reduction ②tariff exemption for specific items ③agreement on a gradual elimination schedule.
Second, defense cost-sharing increases could be an important negotiation card. President Trump has emphasized increased defense cost-sharing by allies since his first term. Korea's current defense cost-sharing is about 1.4 trillion won annually, but the US may demand an increase of up to 50%. The US is expected to link tariff reductions with defense cost increases. This goes beyond a simple economic issue and relates to the sensitive matter of the essence of the Korea-US alliance. The government views some level of increase as inevitable and will likely demand mutually beneficial conditions such as expanded access to the US market for Korean defense industries or technology transfers.
Third, energy cooperation and supply chain participation are emerging as new negotiation areas. The US wants Korea to participate in the Alaska LNG development project and shipbuilding industry cooperation. The Alaska LNG project, worth about $40 billion, is a key project for US energy security and requires investment and technology from Korean companies. The US also hopes to cooperate with Korean shipbuilders in offshore wind power generation and eco-friendly shipbuilding. From Korea's perspective, participation in these projects could be a negotiation card for tariff reductions, but economic feasibility and risks must be carefully evaluated.
This Korea-US trade consultation is expected to be a comprehensive negotiation with various intertwined issues including tariffs, defense costs, and energy cooperation. While both countries proclaim "win-win," intense negotiations to maximize their own interests are expected. The government needs a strategic approach to achieve its core goal of tariff reduction, even if some concessions are inevitable.
4️⃣ In Conclusion
The upcoming Korea-US 2+2 trade consultation on April 24 is expected to be an important opportunity to create a new framework for trade and economic cooperation between the two countries. The core of this consultation is the issue of the 25% high tariffs imposed by the US on Korean products. These tariffs are directly impacting Korea's key export industries, automobiles and semiconductors, and are expected to lower the economic growth rate by 0.3 percentage points.
The Korean government has prioritized tariff reduction or elimination, but the Trump administration is likely to demand defense cost-sharing increases, participation in the Alaska LNG project, and shipbuilding industry cooperation in return. This is expected to be a complex negotiation involving various fields beyond simple trade issues, including security, energy, and industrial cooperation.
The expected negotiation scenarios include: ①partial tariff reduction ②tariff exemption for specific items ③agreement on a gradual elimination schedule. Regardless of the outcome, Korea is expected to make some concessions, and the government needs a strategic approach to achieve its core goal of tariff reduction.
At the same time, Korea faces a dilemma in stimulating its domestic economy. The supplementary budget of 12.2 trillion won is expected to raise economic growth by only 0.1 percentage points, but increasing the budget size through government bond issuance could raise market interest rates and worsen fiscal health. Interest rate cuts by the Bank of Korea could stimulate investment and consumption but might cause foreign capital outflow and exchange rate instability if the gap with US interest rates widens too much.
In the long term, Korea should use this crisis as an opportunity to strengthen industrial competitiveness and diversify export markets. The US protectionist stance should be viewed as a long-term trend rather than a temporary phenomenon, and in response, Korea needs strategies to enhance technological capabilities and brand value and proactively respond to global supply chain reorganization.