South Korea’s Options amidst a US-China Trade War: Opportunities and Risks

The trade war between the United States and China has heightened since March 2018, when the Trump administration hiked tariffs on steel and aluminum imports. Although this tariff was not targeted solely at Chinese imports, the Chinese government viewed the move as a warning that the Trump administration will retaliate if China does not agree to work with the US to solve the trade imbalance between the two countries. The Chinese administration decided to adopt retaliatory measures by issuing taxes on US imported goods, thereby setting off a “trade war” between two countries. Since then, the US and Chinese governments have steadily escalated retaliatory tariffs. The trade war does not only affect these two countries; given their size of economies and their shares in the world trade, these actions have the potential to escalate to a global trade war.

One of the nations that will be most affected is South Korea. China and the United States are South Korea’s two largest trading partners, and South Korea’s exports account for more than 50 percent of its total GDP. Nevertheless, there are mixed perspectives on what South Korea stands to gain or lose from the trade war. This article will examine the risks and opportunities that South Korea faces from a US-China trade war, and suggest that South Korea will need to cultivate other export markets to limit the potential negative effects.

The biggest concern for South Korea is being dragged into the trade war. South Korea has an export-oriented economy that is sensitive to external demand shocks. The US’s safeguards and tariff measures against Chinese imports are likely to be enforced on Korean imports as well given the similarity of their products, such as steel and electronic goods. In addition, President Trump views South Korean and Chinese imports as primary targets for antidumping duties due to his stated belief that both governments aid their exports by manipulating their currency value. Finally, South Korea’s export-led growth is likely to be hampered if the US-China trade war were to escalate into a global trade war. For instance, if the US, China, and the Eurozone were to implement tariffs against each other in the near future, the global trade volume is predicted to decrease by 6%. South Korea would lose approximately 3.67 billion dollars as a result, an amount equal to 6.4% of its total exports in 2017.[1] Likewise, the US-China trade war will likely disturb the South Korean economy, especially if it were to escalate to a global trade war. 

Despite the overwhelming odds, there are a few opportunities for South Korea to benefit from the US-China Trade war. One of these advantages is the fact that South Korea has signed Free Trade Agreements with both China and the United States. This can serve as an economic opportunity for South Korea: South Korea can act as an intermediary between US and China, allowing them to trade in a way that circumvents the tariffs. For example, Chinese raw materials or unfinished products can be transferred to South Korea where those products can be fully manufactured, which would change the origin of products to South Korea and therefore comply with the import agreements. Another option is for South Korea to move into the “freer” Chinese markets that President Xi promised in 2017. Xi’s new economic policy appears to promise an open-door policy toward foreign investments, capitalization, and market entry. Given that other countries such as the United States postponed the negotiation of the Bilateral Investment Treaty (BIT) with China as of early 2018, South Korea has an opportunity to be one of the first to invest in the newly opened Chinese market.

That said, the negative side effects of the trade war will likely overshadow these opportunities. South Korea’s best option is to adopt policies that will limit the potential damage from the trade war. First, South Korea needs to develop an alternative plan to prepare for additional tariffs on South Korea’s imported goods in the U.S. market. One option is to build more factories in the United States, Mexico, or Canada, in light of the United States-Mexico-Canada Agreement (USMCA). That way, South Korea can argue that their goods are beneficial to the United States by bringing more investment and jobs to the United States, which plays into Trump’s rhetoric. This is a safe-keeping policy considering previous incidents in which the Trump administration has imposed tariffs on South Korea’s imported goods like automobiles and laundry machines by initiating a Section 232 investigation of the Trade Expansion Act, even though the existing Korea-US Free Trade Agreement exempts taxes on these goods. Despite recently signing a revised Free Trade Agreement with the United States, South Korea is not well-protected under the new agreement from being the target of additional tariffs, should President Trump feel that these goods can hamper the growth of U.S. domestic industries. Furthermore, the Trump administration is likely to compete with China’s influence in Asia through regional integration, and one way to show that South Korea will side with the United States is to invest and build more factories in the United States or any USMCA territory, to show that South Korea is a willing ally to President Trump. That way, South Korea can escape criticism that they are playing both sides and will not side with traditional allies over China, which has positioned itself as economic rival of the United States in this trade war. Siding with the United States has its negatives, considering that it can result in economic retaliation by China -- similar to retaliation that occurred during THAAD crisis. However, China’s internal conflicts limit the extent to which it can retaliate against South Korea’s actions. Therefore, South Korea has more to gain from siding with United States and developing export policies that align with Trump’s agenda to facilitate a strong relationship with the Trump administration.   

Second, South Korea should look into seizing market opportunities in areas that have not been actively traded and negotiated before. The most attractive markets include Association of Southeast Asian Nations (ASEAN) members and South America. South American nations have shown great interest in joining a free trade pact, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to expand their export markets, as these nations are trying to shift from resource and agricultural product-based export to steel and finished goods-based export. South Korea should take this opportunity to start a new trade relationship with these regions, which could benefit both sides by providing new export grounds for South Korea and allow Latin America to receive investment from South Korean companies to grow their new industries. Under the rising protectionism and nationalism around the globe, export opportunities in Latin America are rare, and South Korea should look into expanding their economic relationship with this region to secure an early advantage.

Ultimately, the US-China trade war signifies not just the struggle for economic dominance but also who will become the ultimate powerhouse in the multilateral world. In this context, South Korea needs to consider the fact that aligning with President Trump’s current policies also signals that South Korea will endorse the United States’ agenda in the future. The first test will be whether South Korea is willing to go along with Trump’s protectionist policy. The Trump administration is tremendously sensitive about the trade imbalance and protecting its domestic industries, given that the president’s political base is mostly blue-collar workers and traditional industries like steels and automobiles. In this sense, South Korea needs to fully utilize the newly signed USMCA to avoid being targeted for new tariff measures in the United States. During this power struggle between the United States and China, South Korea should not only choose its side prudently but also pivot to new market opportunities that are less prone to the US-China economic war. In this regard, Latin America is an appealing option given their initiatives toward freer markets and desire to attract Foreign Direct Investment to promote economic growth.

Seunghyun Han is currently working as a researcher under Latin American & Caribbean Cooperation Division at Ministry of Foreign Affairs, Republic of Korea. Prior to his current position, he worked as a researcher in health economy at National Evidence-based Health Care Collaborating Agency in South Korea, and as a researcher at Foreign Policy Analytics under the Foreign Policy Group in Washington DC. He holds a M.A. degree in International Relations and Economics from the Johns Hopkins School of Advanced International Studies (SAIS).

[1] Byunggi Moon and Gui-il Jung, “Effects of US-China Import Tariff on South Korean Economy” (Trade Brief no. 7, Institute for International Trade, Seoul: 2018), 8.