Uncertainty in U.S. trade policy is expected to lower Korea's economic growth rates by 0.1 percentage points (p) each this year and next. This is due to reduced exports and investments stemming from President Donald Trump's tariff policy, which has negatively impacted corporations' decisions to enter overseas markets and invest. However, the tariff negotiations with the U.S., finalized in July, have been cited as a factor that may mitigate the decline in Korea's economic growth rate next year.
The Bank of Korea (BOK) announced on the 1st its 'BOK Issue Note: The Impact of Uncertainty in U.S. Trade Policy on Our Growth.'
The BOK research team analyzed the scale of the economies of South Korea and the U.S., import reliance, and corporations' export entry and exit behaviors, concluding that uncertainty in U.S. tariff policy is expected to lower Korea's gross domestic product (GDP) growth rate by 0.13 percentage points this year. This result arises from the U.S. tariff policy alone, regardless of the actual imposition of tariffs. Next year, it is estimated to impact the GDP growth rate negatively by minus (-) 0.16 percentage points.
The BOK explained, "In terms of GDP components, during the initial phase of the uncertainty shock, exports temporarily increase due to early shipment in anticipation of future tariff hikes." It continued, "As U.S. import demand gradually slows down, the negative effects of the uncertainty shock have begun to manifest with a time lag." It added that "households are also seen reducing consumption as precautionary motivations strengthen due to high external uncertainties."
Assuming that tariff uncertainty continues until next year, the research team forecasts that our economic growth rate will decline by an additional 0.04 percentage points this year and by 0.11 percentage points next year. Furthermore, if a high level of tariff uncertainty persists through the end of Trump's second term in 2028, it is expected to drop by 0.06 percentage points this year and by 0.18 percentage points next year.
The research team noted, "The degree of expectation formation among economic agents regarding the persistence of tariff uncertainty can significantly impact the real economy," adding that "in this context, the recent conclusion of the tariff negotiations between South Korea and the U.S. is assessed to have contributed to mitigating the negative impacts of U.S. trade policy uncertainty on our economy."
Although a broad trade agreement with the U.S. has been reached, uncertainties may remain in specific aspects. The opening of agricultural markets is a representative example. The Korean government announced that the opening of agricultural markets was not on the negotiation table, but President Trump had posted on social media that "Korea has agreed to completely open its agricultural products."
Although President Lee Jae-myung and President Trump met on the 25th of last month, the specific details of their discussions concerning trade negotiations have not been disclosed.
The research team added, "Uncertainties also persist regarding the progress of negotiations with the U.S. involving China, Canada, Mexico, and others, where tariff negotiations have not been concluded."