South Korea’s exports to the United States, which exceeded $100 billion in 2022, surged more than 20% beginning in 2023, increasing to $127.8 billion in 2024. This is expected to surpass exports to its largest trading partner, China, which stand at $133 billion. The trade surplus with the U.S. is projected to exceed $100 billion over two years.
Yoon Jong-won, a former chief economic advisor to the Blue House who has served as a permanent executive director at the International Monetary Fund (IMF) and ambassador to the Organisation for Economic Co-operation and Development (OECD), identified the $100 billion surplus with the U.S. over the past two years as a risk factor during an interview on Jan. 20.
Yoon noted, “It seems that President Trump, who declared the introduction of universal tariffs to correct trade imbalances and protect domestic industries, will not overlook specific countries that generate significant trade surpluses with the U.S. South Korea, with its $100 billion trade surplus over the past two years, must prepare measures to avoid being a target of retaliation.” He added, “We need to prepare incentives for ‘correcting imbalances and expanding investment,’ such as importing U.S. gas and weapons, to present during negotiations with the Trump administration.”
In relation to this, President Trump directed a review of unfair trade practices with foreign countries and existing trade agreements immediately after taking office on Jan. 20 (local time). The Korea-U.S. Free Trade Agreement (FTA) is likely to be among those under review.
Yoon predicted that “the universal tariffs and protectionist measures of the Trump administration will lower the growth of the global economy, including South Korea, and increase risks. This will adversely affect the overall export sectors, including automobiles and semiconductors, in South Korea, which has an open economic structure with exports and imports accounting for 70% of GDP.”
However, he projected that regarding the universal tariffs announced by President Trump, it will be necessary to examine the situation of tariff rate increases in the future. Yoon stated, “Given that President Trump has mentioned the establishment of a new external revenue agency to collect tariffs, selective tariff increases targeting a few countries seem inevitable, and the speed and extent of any additional increases or universal tariffs will be adjusted according to economic effects and negotiation situations with other governments.” He continued, “A high rate universal tariff will backfire on U.S. growth and inflation, so it will be difficult to achieve the promised maximum increase of 20%. For now, it is likely that tariffs will be selectively increased, focusing on countries with significant trade imbalances with the U.S. and needing supply chain restructuring.” In fact, President Trump has not announced immediate plans to impose universal tariffs. The following is a Q&A.
Key variables affecting the U.S. economy this year.
“The U.S. economy, which is expected to grow close to 3% in 2023-2024, will continue to experience growth in the 2% range in 2025 due to productivity improvements through technological innovation. From a macroeconomic perspective, inflation and the direction of monetary policy seem to be major variables. The deportation of illegal immigrants could increase wage pressures, leading to higher inflation than initially projected. As a result, delays in the Federal Reserve’s interest rate cuts may slow growth due to high interest rates. There is more concern over trade wars and geopolitical uncertainties than macroeconomic variables. Unexpected situations may arise, as indicated by mentions of the Panama Canal and Greenland. It is difficult to rule out the occurrence of ‘unknown unknowns’ due to retaliations from counterpart countries. The outlook is quite blurry.”
Despite the Federal Reserve’s interest rate cuts, the yield on 10-year Government Bonds in the U.S. recently soared to 4.7%. The impact on the global economic and financial markets is.
“In tandem with changes in the Trump 2.0 policies regarding tariffs and other factors, the yield on 10-year Government Bonds in the U.S. has risen by 1 percentage point since October 2024. The flow of ‘Breakeven Inflation Rate’ (5-year 0.7 percentage points, 10-year 0.4 percentage points rise), as evident from the difference between nominal Government Bonds and inflation-linked Government Bonds, indicates that the rise in inflation expectations is a main cause. There are also supply-demand effects from an expanded issuance of Government Bonds due to a fiscal deficit surpassing 6% of gross domestic product (GDP) and a decline in demand for Government Bonds due to a global decrease in savings. The rise in U.S. Government Bond yields strengthens the concentration of global funds in the U.S. and increases the likelihood of adjustments in U.S. stock markets that are facing evaluations. In emerging countries, currency depreciation, increased foreign debt burdens, and pressures for interest rate hikes are expected. Preparations for the worst-case scenario are necessary.”
Is the U.S.‘s ‘exceptional growth’ an opportunity for South Korea?
“The unilateral dominance of the U.S. may heighten global economic instability and uncertainty, but the robust partnership with the U.S. as a linchpin presents opportunities for South Korea compared to China. There are investment opportunities in cooperation or mergers and acquisitions (M&A) within advanced technology sectors such as semiconductors. However, while it may appear relatively better, the overall effect would still be significantly negative. If a trade war occurs, it is inevitable that the overall export sector will be adversely affected. To turn the growth of the U.S. economy into an opportunity, one must ride on the U.S.‘s coattails. The window for trade and investment opportunities with the U.S., such as FTAs, should be expanded further.”
Amid strong global dollar trends, the recent domestic political uncertainties have excessively amplified the weakness of the won. Are there any measures to stabilize the exchange rate?
“The recent surge of the won-dollar exchange rate to the upper 1400s is an abnormal level, akin to a garment that doesn’t fit. The strong dollar may persist, and the won-dollar exchange rate in the 1400s may continue for a while, but as domestic political instability and external uncertainties ease, it should gradually converge to normal levels. During uncertain phases, it is effective to play conservatively in a game of go. Foreign exchange policies should respond flexibly rather than contrarily to the market, increasing the provision of market situation information, improving supply-demand imbalances, and strengthening economic fundamentals concurrently.”
There are also arguments that fiscal expansion should be strengthened to defend against economic downturns following the martial law situation.
“Based on revenue, government expenditure, fiscal balances, and the fiscal impulse index, the fiscal stance for 2024 (according to settlement of account) was tight, and the fiscal stance for the 2025 budget is even tighter than last year. Although there were shortfalls in tax revenue such as corporate tax, I believe that the issue of inadequate fiscal capacity is not the case. To defend against economic downturns, this year’s fiscal policy should have an expansionary stance. Focus should first be on early execution of expenditures, and even if shortfalls in revenue occur, it should be accepted to avoid cuts in expenditures, allowing the built-in stabilizers of fiscal policy to operate. Additionally, there is a need to prepare a supplementary budget early to strengthen the foundations for economic recovery. The supplementary budget should focus on future investments in infrastructure, research and development, and energy transition, and reduce deficits to restore fiscal soundness once the economy recovers.”
Compared to the U.S., which is strengthening industrial competitiveness through semiconductor chips and the CHIPS Act, there are criticisms that South Korea’s industrial policy is too weak.
“It is necessary to strengthen industrial policies in support of new technology industries and to ensure stability of supply chains and economic security. Industrial policies must guide capital and human resources toward new technologies, low-carbon, and promising industries in line with the changing industrial trends of smart, eco-friendly, and converged sectors. Like the U.S., which is increasing investments in strategic industries such as semiconductors and AI, South Korea should also expand investments for the future in digital transformation and biohealth. Even if the U.S. falls behind in the decarbonization trend, it should maintain its eco-friendly policy stance.”
Until now, the government has been extremely reluctant to provide government funding to large corporations.
“It is desirable to focus on technology development, human investment, cluster expansion, and regulatory innovation, which have larger external effects nationally, rather than specific industry selection support like the past ‘winner-picking’ policies. For example, it is necessary to support R&D in areas with insufficient private investment due to risk, support for costly infrastructure expansion, and expand assistance for the digitalization of small and medium-sized enterprises through smart factories to enhance productivity.”