The Korea Development Institute (KDI) significantly lowered its economic growth forecast for our country this year after three months due to the rationale that the tariff measures imposed by the Trump administration proceeded more swiftly than expected.
The KDI's projected growth rate of 1.6% this year is based on the assumption of a "10% universal tariff increase on China." This implies it could be further lowered depending on how the U.S. trade policy develops. In particular, if the tariff rates on major export items such as "semiconductors and automobiles" are increased, there are concerns that the growth rate could sharply decline.
◇ The growth rate in Korea drops from 2% to 1.6%, only reflecting the 'China tariff'
On the 11th, KDI presented the revised economic outlook for 2025, indicating that Korea's economic growth rate this year has been lowered by 0.4 percentage points to 1.6% from previous forecasts. The main reason for the downward adjustment is the 'realization of tariff imposition by the Trump administration.'
KDI also identified uncertainties in Trump's trade policy as a risk factor for our economy. The KDI noted, "If the uncertainty regarding the target, timing, and extent of changes in U.S. trade policy continues for an extended period, domestic and international investment demand will shrink, and it will exert downward pressure on our exports," adding, "The direct impact of trade restrictions due to trade disputes, along with the resulting economic slowdown in various countries, will also act as additional downward factors for our exports."
This outlook reflects the factor of a "10% tariff increase on China" among various risks associated with Trump's trade policy. Jung Kyu-chul, head of KDI's Economic Outlook Division, stated, "The premise of our outlook is based on the assumption that 'the 10% tariff increase on China will continue throughout the year,'" and explained that "Since the tariffs on Mexico and Canada have been temporarily postponed, other tariff impositions are still assumed not to be occurring."
The imposition of tariffs on China is clearly a downward factor for our economy. Deputy Minister Jung explained, "We export intermediate goods to China, with products entering the U.S. through China, and if China cannot export to the U.S., our exports will also decrease," adding, "Consequently, the deterioration of the Chinese economy itself is also a negative factor for our country. Both pathways are downward factors."
◇ 'Steel and aluminum' have a minimal impact on GDP, while 'semiconductors and vehicles' face significant hits
The looming question of when and to what extent various tariff measures not reflected in this outlook will be implemented could lead to sharp fluctuations in Korea's growth rate. KDI's revised economic outlook in February did not reflect scenarios such as ① tariffs on Canada and Mexico ② tariffs on steel and aluminum ③ tariffs on semiconductors, automobiles, and pharmaceuticals. All are downward factors for our economy.
KDI believes that the impending '25% tariff on steel and aluminum' set to take effect early next month may not have a significant impact. Deputy Minister Jung stated, "Korean steel is already implementing a quota system (limiting export volume to 70%), so the impact of imposing a 25% tariff, absent of any restrictions, is considered limited," and added, "Most importantly, steel and aluminum account for only about 0.8% of our total exports, so while there may be a significant impact on the industry, it is not expected to affect GDP (Gross Domestic Product) significantly."
The same applies to the tariffs on Canada and Mexico. Deputy Minister Jung noted, "Primarily, Canada and Mexico are not our major export destinations, and there are positive and negative factors because they compete in the U.S. market with similar products," adding that "combining these factors, the impact on GDP is seen as almost negligible."
However, the imposition of tariffs on semiconductors, automobiles, and pharmaceuticals is assessed as critical. On this day, U.S. President Donald Trump signed an executive order for tariffs on steel and aluminum while indicating that tariffs on semiconductors are also under consideration. Deputy Minister Jung noted, "Given the substantial nature of our exports in semiconductors and automobiles, if these sectors are hit, it will likely have a significant impact on growth rates," but he added, "It is difficult to quantify how much rates will potentially decrease, as measures have not yet been specified in a quantifiable way (such as tariff rates)."
As of last year, the share of semiconductors and automobiles in our exports was 20.8% and 10.4%, respectively, making them the top two items among the 15 major export categories. In response to a reporter's question about whether Korea's economic growth rate could drop to the low 1% range if tariffs on these two items are realized, Deputy Minister Jung stated, "They constitute such a significant part of our exports that it is difficult to say no."