Go back to the basics during tough times

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Go back to the basics during tough times

Published: 21 Nov. 2024, 19:01

Lee Hyun-hoon
The author is a professor at the Department of International Trade and Business, Kangwon National University, and president of the 4th Way Institute.

Ahead of Trump’s second term, the Korean economy is experiencing a tsunami of high interest rates, high exchange rates and high prices. If Trump imposes a universal tariff of 10 to 20 percent and a tariff of 60 percent on China, import prices in the United States will go up, and inflation, which has been under control, will bounce again. If a corporate tax cut is implemented on top of it, the U.S. government will issue more bonds to cover the growing fiscal deficit. Then, the yields on government bonds will also increase. The Federal Reserve will have no choice but to be cautious about lowering the benchmark rates.

Due to the prospects, the U.S. dollar has showed strength against major currencies, and the won-dollar exchange rate has exceeded 1,400 won ($1.00). This is something only seen during the IMF bailout in 1997 and the global financial crisis in 2008 — and it’s the first time since September 2022, when the Fed was bent on lifting the rate.

Rising foreign exchange rates will likely prompt price hikes in Korea as it accompanies rising import prices. The Bank of Korea won’t be able to lower the benchmark rate easily when foreign exchange market and prices are unstable. Unfortunately, the tsunami of “three highs” is not the only problem.

Another tsunami of “three lows” — more dreadful than the “three highs” — is approaching. They are low stock prices, low exports and low growth. First of all, the Korean stock market shows alarming signs. The Kospi has been on the decline since former U.S. President Donald Trump was re-elected on Nov. 5. What is more worrisome is that Korean stock prices are plunging steeper than those of Japan and Taiwan, as well as China, which is expected to be directly hit by the tariff bomb.

Trump’s tariff bomb will also hit Korea, which exports 18 percent of its total exports to America. In addition to the decline in Korea’s intermediate goods exports to China, Korea’s exports of consumer goods to the country will also shrink due to China’s economic slowdown. If exports are hurt, Korea’s economic growth rate will be also be hit hard.

The Korea Development Institute (KDI) has lowered its estimate for Korea’s economic growth for this year to 2.2 percent — 0.3 percentage points lower than its previous estimate three months ago. The KDI also lowered its prediction for next year’s growth to 2.0 percent. The prediction is based on the premise that the Trump administration’s tariff rate hike will take effect in 2026. But unlike his first term, Trump will start by signing a number of executive orders immediately after the inauguration. The tariff bomb will also explode next year. Chances are high that the Korean economy will enter a more serious slump than the KDI’s prediction.

Though Trumponomics triggered the two tsunamis. it is not their root cause. The fundamental cause behind them is that the Korean economy is a “house built with debts.” During the Moon Jae-in administration, apartment prices in Seoul and the metropolitan area soared two to three times. As housing prices showed signs of falling in the second half of 2022, the Yoon Suk Yeol administration started offering various policy loans to help lift housing prices.

As a result, home prices in Seoul and the metropolitan area have surged again this year with household debt rising sharply. As 79 percent of household assets are tied to real estate, household debt accounts for 149 percent of disposable income. Over 80 percent of new household debt this year is mortgage loans. Due to excessive household debt, spending power has weakened. As most of household assets are concentrated in real estate, there’s little room to invest in stocks. As a result, companies with difficulty in financing cannot invest in future projects, darkening the growth potential of our economy.

The government must acknowledge the crisis and make drastic policy changes. We must start by removing the real estate bubble and reducing household debt. Only then, consumption will pick up — and stock price value-up will be possible. That will increase investment and create more quality jobs.

Like the United States, Korea must increase quality jobs by pursuing a “reshoring” policy to bring back high-tech companies to Korea. Only then will the country be able to increase the fertility rate, slow down the population’s fast aging and enable sustainable growth. In hard times, we must go back to the basics.

Translation by the Korea JoongAng Daily staff.