Korea braces for new era of trade rules under Trump

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Korea braces for new era of trade rules under Trump

Concerns over protectionism are mounting after President-elect Donald J. Trump had tough words about trading partners in his first press conference since the election in November, vowing to put America’s interests first.

Any trade war between Korea’s No. 1 trading partner, China, and the No. 2, the U.S., could obliterate any chance that Korea’s exports might see a turnaround after nearly two years of declines. Only in the last two months have Korea’s exports seen growth. And the Korean government has projected that this year’s exports will increase 2.9 percent on the back of improved global trade.

“We have hundreds of billions of dollars of losses on a yearly basis - hundreds of billions with China on trade and trade imbalance with Japan, with Mexico, with just about everybody,” Trump said at a press conference in New York. “We don’t make good deals anymore.”

Even Rex Tillerson, the former Exxon Mobil executive nominated to be Trump’s secretary of state, called out China for its economic and trade practices during a confirmation hearing Wednesday.

“China’s economic and trade practices have not always followed its commitments to global agreements. It steals our intellectual property, and is aggressive and expansionist in the digital realm,” Tillerson said.

During his presidential campaign, Trump threatened to raise tariffs on Chinese imports up to 45 percent.

The intensifying tension between the two countries comes at a bad time for Korea as China retaliates for Korea’s decision to deploy a U.S. Terminal High Altitude Area Defense (Thaad) missile system on the peninsula. It is cutting back on the number of Chinese tourists coming to Korea and banning imports of some Korean cosmetics.

It is also limiting the airing of Korean shows and unofficially blacklisting Korean entertainment figures from working.

Some non-American companies are trying to get on Trump’s good side by promising investments that will create jobs. But Korean companies are largely distracted by the ongoing political scandal surrounding President Park Geun-hye and her confidante Choi Soon-sil, which has implicated some major conglomerates.

Jack Ma, CEO of Alibaba, sat down with Trump on Monday to describe a plan to help small American businesses sell products to Chinese consumers through his e-commerce platform. Ma said the plan could create as many as a million new jobs in the Unites States. After the meeting, Trump said they “would do great things together.”

Korean companies have yet to connect with the new U.S. administration.

The Korean currency saw its value slide as much as 2.1 percent from Dec. 1 2016 to Jan. 10, 2017. The 2.1 percent fall was more drastic than that of the Chinese yuan, whose value went down 0.6 percent, according to data from by the Bank of Korea.

Two countries’ currencies have weakened due to the strengthened U.S. dollar, and the gap between the figures suggests that Korea is more exposed to changes in the U.S. currency.

Korea fears getting caught in the crossfire in any U.S.-China war.

According to International Monetary Fund estimates, Korea will see its annual GDP growth decline about 0.5 percentage points if the United States levies a 45 percent tax on Chinese products.

Experts, however, had mixed views on the impact of possible protectionist trade policy from the incoming administration.

Kim Kwang-rae, an analyst at Samsung Futures, said a recent decision by the Korean government to levy a fine on Qualcomm, the San Diego-based smartphone chip developer, for bullying smartphone manufacturers and violating antitrust laws might have the Trump administration consider tougher protectionist policies.

Other analysts say Korean companies will have no choice but to cave in, adding they will have to throw money at the United States.

Hyundai Motor and Kia Motors, for instance, already run factories in the United States - Hyundai in Alabama and Kia in Georgia - each capable of producing about 360,000 vehicles per year. But the two companies can’t meet the demand of the market with just U.S.-produced cars.

Last year alone, Hyundai sold about 770,000 units in the United States while its sister company sold about 650,000, which meant they had to ship vehicles out of Korea and other manufacturing sites around the globe, including Mexico. Trump promised he will slap heavy taxes on such activities.

“These companies simply cannot cover the demand from their U.S. factories,” said Shin Jae-young, an analyst from Cape Investment and Securities. “And the Trump administration’s strategy is not about slapping more taxes on the manufacturing companies. Rather, it will force them to expand their production in the United States and invest more in U.S. infrastructure.”

Still, other experts say there may not be so much to fear.

“I think there is a low chance of the incoming administration in the United States pursuing such policy since many U.S.-based companies will also be hurt by the policy,” said Hong Choon-wook, an economist at Kiwoom Securities. Hong argues that more than 90 percent of the top 1 percent of export companies in the United States, or 2,000 companies, are major importers, and they will be the biggest victims of protectionist policies.

Kim Moon-il, an economist at Heungkuk Securities, said Korean companies might actually be able to benefit from protectionist policies and expanded investments in the infrastructure sector in the United States.

“The Korean won is likely to further weaken against the dollar following the fall in the Chinese yuan and this will prompt more U.S. companies to import Korean products,” Kim argued. “Additionally, semiconductor products, which are one of our major export items, didn’t have tariffs even before the two countries signed a free trade agreement so they won’t be a part of discussions for a renegotiation of the FTA anyway.”

Lee Jeong-yeon, a professor of international studies at Yonsei University and a former researcher at the World Bank, said some changes in the free trade agreement between the United States and Korea may produce positive results for Korean consumers. “It may get rid of non-tariff barriers by Korea, which makes it hard for foreign companies to do business here,” said Lee. “In the long stretch, this may benefit the consumer, who will be able to enjoy more foreign goods.”

BY CHOI HYUNG-JO, KIM YOUNG-NAM [choi.hyungjo@joongang.co.kr]
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