How a second Trump term could shake the Korean market

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How a second Trump term could shake the Korean market

Published: 17 Oct. 2024, 06:00

SHIN HA-NEE
shin.hanee@joongang.co.kr

Audio report: written by reporters, read by AI

Containers are stacked at a port in Busan on Sept. 11. [NEWS1]

As November draws near, Korean investors are bracing for what may be the most consequential event of this year: the U.S. presidential election.

Not only is the country's market inextricably linked to the tech giants of the United States, but it has only become more vulnerable to U.S. economic shifts, as evidenced by the historic stock market plunge that stateside recession concerns and AI skepticism triggered in early August.

Experts predict that a second Donald Trump term could bring massive tariff hikes and heightened market volatility — both bad news for Korea. A win for Vice President and Democratic candidate Kamala Harris may appear a safer bet for the country, but still not the rosiest path with the rise of protectionism around the world.

With political uncertainty hanging over the market and monetary policy in flux, the question grows ever more critical to the export-driven nation: Will Nov. 5 turn the tide for Korea's sluggish market, or will 2018 — when the U.S.-China trade war drove the benchmark Kospi down 20 percent — repeat itself?

A screen in Hana Bank's trading room in central Seoul shows the Kospi closing at 2,441.55 points on Aug. 5, down 8.77 percent, or 234.64 points, from the previous trading session. [YONHAP]

A looming tariff barrier over Korea

For onlookers outside the United States, free trade remains a key concern as Trump continues to push for significant tariff hikes in his third presidential campaign. Harris, while distancing herself from the Republican nominee's “extreme” proposals, could retain the Biden administration's “targeted” approach, though the Democratic campaign has not clearly outlined its plans.

During his presidency, Trump effectively kicked off a trade war by implementing a 25 percent tariff on Chinese imports, which was followed by additional hikes, from both the United States and China, through 2019. Korea, which had been heavily reliant on the Chinese market, found itself caught in the crossfire: The Kospi slid 19 percent in 2018, driven by both trade tensions and a downturn in chip demand toward the end of the year.

If elected, Trump is likely to continue his protectionist initiatives with potentially even higher tariffs across the board. He has proposed a universal tariff of 10 to 20 percent, with an additional tax of more than 60 percent on Chinese imports.

“Other countries are going to finally, after 75 years, pay us back for all that we’ve done for the world, and the tariff will be substantial,” the former president during the Sept. 11 presidential debate hosted by ABC News.

The Republican nominee has vowed to bring manufacturing back to the country’s soil with heavier tariffs, pulling capacity from both adversaries and allies.

“You will see a mass exodus of manufacturing from China to Pennsylvania, from Korea to North Carolina, from Germany to right here in Georgia,” Trump said during a campaign rally on Sept. 24.

The Korea Institute for International Economic Policy estimated that a 10 percent tariff would knock the country's shipments to the United States down by $15.2 billion per year and those to other countries by $7 to $8.9 billion.

KB Securities analyst Ha In-hwan suggested that a Harris presidency would be “relatively more favorable,” for Korea's stock market in a report released in September. “Trump is foreshadowing another tariff war.”

NH Investment & Securities analyst Baek Chan-kyu also expects that “as Trump’s policies will likely have a bigger impact on the economy, a victory from Harris would be more favorable in terms of the market stability.”

While Harris slammed Trump’s bold tariff proposal as “a sales tax on the American people” in an interview last month, the Biden administration has largely maintained tariff policies implemented during the Trump era. It recently hiked its tariffs on Chinese EVs 100 percent and those on solar cells by 50 percent.

The Harris campaign has also vowed not to “tolerate unfair trade practices from China or any competitor that undermines American workers,” a clear signal of support for trade barriers, albeit in a more targeted manner compared to the Republican contender.

A Trump win spells inflation

Market forecasters largely agree that a Trump presidency would drive volatility in the foreign exchange market.

Kim Yeong-ik, an economics professor at Sogang University, believes a Trump presidency could send inflation — which has fallen since its 2022 peak — surging again.

Kim predicted that the Republican nominee's calls for tax breaks, tariff hikes and immigration crackdowns would “increase the U.S. national deficit, leading to more treasury bond issuance, which will raise interest rates and strengthen the dollar.”

On the other hand, the dollar's value would depend more on the fundamentals of the U.S. economy under the Harris administration, according to Kim's projection.

Harris has proposed a federal ban on price gouging to curb soaring grocery bills, but many economists are also skeptical that such a policy would solve the underlying issues inflating food prices in the first place, such as labor costs and supply disruptions.

That said, experts do not expect her overall platform to drive the U.S. deficit at nearly as fast a pace as Trump's, particularly given her plans to increase taxes on corporations and high-income households.

Scott Bessent, a hedge fund manager and one of Trump's closest economic advisers, noted in a recent interview with the Financial Times that the former president “stands by [the dollar] as a reserve currency,” indicating that he is not likely to deliberately devalue the greenback.

“I believe that if you have good economic policies, you're naturally going to have a strong dollar,” Bessent said.

When the U.S. sneezes, Korea catches a cold

Korea's economy — and, by extension, its stock market — has grown increasingly sensitive to the U.S. market, and its tech sector in particular.

The country is a trade-driven one, with exports having reached a new monthly record for the 14th consecutive month in September, and the United States was its largest partner in 2023, logging a trade surplus of$44.4 billion.

That close relationship can be a double-edged one. The benchmark Kospi plunged a record 234 points on Aug. 8, an event the Bank of Korea later attributed to “a strengthened industrial link with the U.S. chip sector,” citing the country's membership in the Chip 4 alliance and global supply chain restructuring in the AI sector.

As such, experts say Korea needs to prepare for the impacts of the U.S. presidential election.

“Speculations have been revolving around whether [Trump] will implement higher tariffs or not — but I believe we should focus more on how we will address the issue, assuming the tariffs are inevitable,” said Yeon Won-ho, director of the Center for Economic & Technology Security Studies under the Institute of Foreign Affairs and National Security.

Korea, after all, is not powerless in this negotiation. Korea should come to the table prepared, Yeon suggests.

“Smaller imports to Korea from the United States,” Yeon said, “may come across as problematic.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]