I really hope this trade tension will dissipate because it’s bad for everybody.
On the 23rd (local time), Lee Chang-yong, the governor of the Bank of Korea, who attended the G20 finance ministers and central bank governors meeting and the International Monetary Fund (IMF) and World Bank (WB) spring annual meetings held in Washington, D.C., noted in an interview with CNBC that "Korea is essentially an export-oriented economy, and this trade tension will be quite a headwind for the Korean economy."
The governor added, "Korea is not only directly affected by the United States' tariff policy but also indirectly influenced through other countries," stating, "Semiconductor production in Vietnam, automotive and electronic product production in Mexico, and battery production in Canada will be hit hard."
However, the governor mentioned, "We also have strengths to respond to such issues," noting that "it would be hard to say we are lucky, but Korea has diversified its supply chain over the past five years, particularly adjusting it away from China."
He said, "We had to diversify our supply chain. Over the past 10 years, the competitiveness of China in the finished goods sector has significantly increased, prompting Korean corporations to seek alternative regions for intermediate goods production and simultaneously diversify their export markets."
He continued, "Regardless of whether trade tensions escalate, diversifying our supply chain and upgrading our value chain is a natural flow," adding that "recent trade tensions will further accelerate the pace of these changes."
The governor identified 'uncertainty' as the key issue of the current Korean economy, noting that trade tensions are escalating, downward risks to economic growth are increasing, and volatility in the financial markets is rising.
The governor stated that the decision to keep the base interest rate unchanged in the Monetary Policy Committee meeting on the 17th was also based on this. "Considering the uncertainty, I judged it better to maintain the rate and analyze new data before deciding on a direction," he said. He added, "We feel like we are entering a dark tunnel now, and at times like this, it’s better to slow down a bit and wait until our eyes adapt to the darkness."
The governor pointed out that Korea's political uncertainty is also an Achilles' heel for the Korean economy. He mentioned, "Since the former president’s declaration of martial law in December, we have experienced unexpected political instability," adding, "Since then, our currency value has significantly declined. It has now recovered considerably."
He said, "Consumer and investment sentiment has declined due to political instability," and added, "We need to see how significant that impact was in the GDP figures that will be announced tomorrow." He continued, "I hope the presidential election scheduled for June 3rd will help alleviate this uncertainty following the Constitutional Court's impeachment ruling, and we should watch how much economic sentiment, consumption, and investment will recover through the election."