U.S.-China escalation would hurt local economy, says KDI

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U.S.-China escalation would hurt local economy, says KDI

Korea’s economic growth will be slashed by up to 0.34 percentage points if the ongoing U.S.-China trade conflict worsens, according to a study by the Korea Development Institute (KDI).

Although the trade dispute has recently eased as the two sides near a Phase 1 deal, the state-run think tank warned Monday that Korea faces significant risks if the situation deteriorates and the two countries end up levying all their threatened tariffs by the end of this year.

The United States has warned that it could levy tariffs on up to $550 billion worth of Chinese goods by the end of this year, while China has said it could raise rates on existing tariffs on $110 billion worth of U.S. goods.

In such a scenario, Korea faces higher risks compared to the impact on global economic growth, which would be cut by 0.2 percentage points, according to the report.

The think tank explained that weakness in China’s economy from U.S. tariffs will weigh on Korea.

The impact of U.S. tariffs on China would lead to a 0.32 percentage point cut to Korea’s economic growth compared to a 0.02 percentage point drop from China’s tariffs on U.S. products.

The KDI said that U.S. tariffs would cut China’s economic growth by 1.06 percentage points and in turn result in reduced Chinese demand for Korean products.

“From our economy’s total exports, China accounts for 26.8 percent, larger than the United States at 12 percent,” read the report.

KDI research fellow Kim Seong-tae added during a briefing at the Government Complex in Sejong that around 70 percent of Korean exports to China are consumed within the country, meaning that a robust local economy in China is essential for Korea’s exports.

The KDI also explained that its analysis applies to the tariffs’ overall economic impact and that it is not applicable to just this year’s growth.

“The tariffs have been levied since last year,” said Kim. “We analyzed their impact under the premise that they were all levied at one point so it is difficult to pinpoint whether this applies to this year’s or next year’s economic growth.”

Korea faces an already pessimistic economic outlook.

Bank of Korea Governor Lee Ju-yeol recently acknowledged that it would be difficult to reach 2 percent growth this year, compared to the central bank’s official projection of 2.2 percent.

The think tank advised a combination of an expansionary fiscal policy in the short term and monetary easing.

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]
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