The analysis by the Bank of Korea indicates that the tariff war triggered by the second Trump administration could lower the country's growth rate by as much as 0.4 percentage points next year. In particular, the Bank expressed concern that if the U.S.-China conflict leads to a stronger dollar and a weaker yuan, there could be an outflow of foreign investment.
In the 'Monetary Credit Policy Report (March 2025)' released on the 13th, the Bank of Korea examined the impact of U.S. tariff policy on the global and domestic real economy.
According to the Bank of Korea, the U.S. tariff policy has been implemented more rapidly and strongly than expected at the time of the November forecast last year, expanding its impact on the global and domestic real economy. The timing of the tariffs against China was moved up from the second quarter of this year to early last month, and high levels of tariffs (25%) were also announced early for Canada and Mexico.
The Bank divided the scenarios regarding U.S. tariff policy into three categories: baseline, optimistic, and pessimistic. In the baseline scenario, it was assumed that the U.S. would impose low levels of tariffs on trade deficit countries excluding China and gradually reduce them next year, while maintaining the current level of tariffs on China.
In the optimistic scenario, it was assumed that the tariffs imposed in the baseline scenario would gradually be reduced for all countries, including China, next year. In the pessimistic scenario, it was assumed that the U.S. would increase tariffs on major trade deficit countries, including China, by the end of this year and maintain them throughout next year, with major countries responding with high retaliatory tariffs against the U.S.
As a result of the analysis, under the baseline scenario, the growth rates for this year and next year are expected to be lower by 0.1 percentage points and 0.2 percentage points, respectively, compared to the November forecast last year. According to the Bank of Korea, based on this baseline scenario, the growth rate forecasts for the country were presented as 1.5% for this year and 1.8% for next year as of the 25th of last month. In the optimistic scenario, the growth rates for this year and next year are expected to be higher by 0.1 percentage points and 0.3 percentage points, respectively, compared to the baseline scenario, while in the pessimistic scenario, they are expected to be lower by 0.1 percentage points and 0.4 percentage points.
In terms of prices, this year's fluctuations are expected to be small. While the slowing growth is expected to exert downward pressure, the expectations for a reduction in interest rates by the U.S. Federal Reserve (Fed) and the resulting rise in the won-dollar exchange rate are expected to exert upward pressure, according to the Bank of Korea. However, as time progresses into next year, it is projected that the downward pressure from the slowing growth will increase.
Specifically, for this year's inflation rate, there was no change compared to the November forecast last year (an increase of 1.9%) in both optimistic and pessimistic scenarios as well as in the baseline scenario. For next year's inflation, the baseline scenario shows a decrease of 0.1 percentage points compared to the previous forecast (an increase of 1.9%), while the optimistic scenario shows an increase of 0.2 percentage points, and the pessimistic scenario shows a decrease of 0.3 percentage points.
Furthermore, the Bank of Korea examined the impact of the U.S. new government's tariff policy on the stock market, long-term interest rates, and foreign exchange in the domestic financial market. First, regarding domestic stock prices and long-term interest rates, it was analyzed that the impact of the tariff policy of the second Trump administration would be limited, as they had already fallen significantly, reflecting expectations for interest rate cuts since the second half of last year.
However, in light of escalating U.S.-China tensions leading to a stronger dollar and a weaker yuan, it considered that the value of the won could be influenced not only by the dollar but also by fluctuations in the yuan, potentially increasing exchange rate volatility significantly. Additionally, uncertainty surrounding U.S. tariffs could dampen investment sentiment towards the Asia region, raising pressures for capital outflow from foreign securities investors in the country.
The Bank of Korea noted that the strengthening of the U.S. new government's tariff policy is expected to have a limited additional impact on domestic stock prices and long-term interest rates compared to the first Trump administration, while emphasizing the need to continue monitoring the differentiation in financial market trends between the U.S. and China, as well as movements in foreign investment and exchange rates in the country.