It's time to prepare for a trade war and financial turmoil caused by President Donald Trump.
Barry Eichengreen, a global economic scholar and professor of economics at the University of California, Berkeley, said in a recent written interview with ChosunBiz that "the tariff policy announced by President Trump will be negative not only for other countries but also for the United States itself."
Professor Eichengreen is an expert on the global currency and financial system. He has served as a consultant at the Peterson Institute for International Economics, a research fellow at the National Bureau of Economic Research, and as a senior adviser at the International Monetary Fund (IMF). His research is known to have influenced the monetary policy of former Federal Reserve Chairman Ben Bernanke.
Professor Eichengreen predicted that the Korean economy would be significantly shaken due to the America First policy of Trump's second administration and technological constraints on China, as there is a high possibility that demands for increased defense cost-sharing or participation in anti-China policies will arise.
President Trump already demanded an increase in defense cost-sharing from member countries of the North Atlantic Treaty Organization (NATO) at the World Economic Forum held in Davos, Switzerland, on the 23rd of last month, criticizing the trade relations with the European Union (EU) as unfair.
Professor Eichengreen stated, "Like during the Trump first administration, South Korea must reaffirm its promise to be a good ally to the U.S. by emphasizing investment in the U.S., and should diversify its export markets and production sites in preparation for being forced to choose between the U.S. and China." The following is a Q&A.
—How will U.S. economic policy change in the future?
"Policy changes will revolve around three pillars: deregulation, tax cut, and tariff. Deregulating banks will cause financial instability, while reducing technology regulations will pose monopolistic risks, and relaxing environmental regulations will lead to environmental pollution.
Additionally, tax cuts not backed by finances are expected to exacerbate budget deficits and national liability issues. Elon Musk, the CEO of Tesla, envisions expenditure cuts that are merely products of rich imagination. (CEO Musk was appointed head of the newly established organization "Government Efficiency Department" set up by President Trump to pursue federal government restructuring and expenditure cuts.)
The tariff policy announced by President Trump will be negative not only for other countries but also for the United States itself.
—What do you think about the influence of CEO Musk, who has emerged as Trump’s ‘first buddy’?
"I don't know. What is certain is that entrusting immense influence and power to an unelected individual is reckless and unproductive."
—President Trump aims to induce a weaker dollar to alleviate the trade deficit. Will he achieve his goal?
"The level of the dollar will ultimately be determined by monetary policy, which is set by the Federal Reserve (Fed). Therefore, to weaken the dollar, Trump must threaten the independence of the Fed.
While I won't dismiss this possibility, the financial market is likely to respond negatively to the president's attacks on the Fed’s independence. I believe President Trump will take this into account. There are also other options to weaken the dollar, such as imposing taxes on foreign purchases of U.S. government bonds.
However, it is not certain that a weaker dollar will necessarily improve the U.S. trade balance, as a weaker dollar does not change the fundamentals.
—What impact will the 'America First' policy have on Korea?
"The America First policy implies that the Trump administration will not contribute to the defense of Europe and Korea as much as in the past. In the short term, he will force other countries to bear more of the defense costs.
It is time to prepare for a trade war and financial turmoil that will arise as a result. The U.S. demand for increased defense cost-sharing will undoubtedly have a negative impact on the Korea-U.S. alliance. South Korea will have no choice but to accept this considering the security situation.
—How will the U.S.-China conflict unfold this year?
"Initially, the trade conflict will start with Trump's tariff increase on Chinese goods. It will begin with a small figure but is expected to eventually add a 35% tariff on imports from China.
China will also impose tariffs on U.S. products and will move to ban exports of rare earths and other materials. The issue of whether to suspend TikTok services in the U.S. will be merely an interesting 'side show.' As the U.S. strengthens measures to ban exports of advanced technology to China and China's retaliatory actions follow, tensions between the two countries will continue to escalate.
—How should South Korea respond?
"Like during the Trump first administration, South Korea must reaffirm its promise to be a good ally to the U.S. By continuing to emphasize investment in the U.S., it must also maintain friendly relations with China, which serves as a market and assembly base for Korean corporations.
The problem arises if President Trump demands that countries, including Korea, 'choose only one between the U.S. and China.' South Korea must mobilize all possible diplomatic means to avoid responding to such an ultimatum, but the possibility of being forced cannot be dismissed.
For security reasons, South Korea will side with the U.S., and the resulting economic impact will be severe. Additionally, U.S. tariffs are certainly a major setback for Korea and others. This is why corporations must diversify their export markets, products, and production sites.
—There are concerns that Germany, a 'manufacturing powerhouse,' could be 'South Korea's future' in terms of economic crisis. What lessons should Korea learn from Germany's case?
"Germany relies on a slowing Chinese market, the declining technology of internal combustion engines, and costly and unstable Russian energy. All of these factors have combined to create a 'poisonous cocktail.'
Germany's case teaches that one should not rely excessively on particular industries. The automotive industry is a prime example. Given that Korea has been chased by China in the shipbuilding industry for decades, I believe it has already learned this lesson.
It is important to avoid excessive reliance on a single export market, such as China or the U.S., and to invest in renewable energy to reduce dependence on costly and unreliable imported energy.
—What other key variables are expected to shake the global economy this year?
"China's growth slowdown. The recent announcement that China achieved a 5% growth target last year reflected some manipulation of figures. The actual growth rate was likely lower. This year, China's growth is also expected to slow further.
Geopolitical conflicts centering around Syria, Ukraine, and Taiwan are also variables. This will have a significant negative impact on the financial market.
—Korea is facing issues such as low birth rates, an aging population, economic stagnation due to political uncertainty, and worries about falling international credit ratings. What advice would you give?
"Social structural issues such as low birth rates and aging cannot be solved in the short term. Restoring political normalcy and stability should be the short-term priority.
To promote economic growth, Korea must boost productivity in the service sector, which accounts for the majority of employment. I have emphasized this in my book on the Korean economy, "From Miracle to Maturity."
—How would you evaluate the Korean government's economic response since the emergency martial law situation on Dec. 3?
"I believe the economic policy responses so far have been appropriate. I especially commend the rapid response of the Bank of Korea. However, the key to resolving the crisis is not economic policy; it is a political issue. It is crucial that a majority of South Korean voters unite behind a centrist leader, but unfortunately, this is not an easy task."