Korea must redesign its industrial and trade strategy

Home > Opinion > Columns

Korea must redesign its industrial and trade strategy

Published: 07 Apr. 2025, 00:03

Audio report: written by reporters, read by AI

Cho Won-kyeong

The author is a professor at the Ulsan National Institute of Science and Technology and the head of the Global Industry-University Cooperation Center.

On April 2, President Donald Trump announced a sweeping 25 percent reciprocal tariff on Korea, despite the Korea-U.S. FTA. The decision was made under the authority of the International Emergency Economic Powers Act, enacted in 1977, following the declaration of a national emergency.

The move sent shockwaves through the global economy, targeting 57 countries that were all left reeling by the sudden imposition of reciprocal tariffs. While the rates were ostensibly based on a formula factoring in tariffs, nontariff barriers, exchange rates and value-added taxes, the actual calculation was remarkably simplistic: U.S. trade deficits divided by import volume.

Trump’s version of “reciprocal tariffs” represents a dramatic departure from the concept’s historical roots. First introduced during the Great Depression in the 1930s, reciprocal tariffs aimed to facilitate the transition from protectionism to freer trade by mutually reducing tariffs. After his 1933 election, President Franklin D. Roosevelt repealed the infamous Smoot-Hawley Tariff Act by passing the Reciprocal Trade Agreements Act on June 12, 1934.

U.S. President Donald Trump holds ″The Trump Card″ as he speaks with journalists onboard Air Force One en route to Miami, Florida, U.S., April 3. [REUTERS/YONHAP]

Economic historian John Steele Gordon, author of “An Empire of Wealth”(2004) has argued that the Smoot-Hawley Tariff Act played a pivotal role in triggering the Great Depression. Enacted in June 1930, the law imposed an average tariff of 59 percent — with some as high as 400 percent — on more than 20,000 imported items. The result was a collapse in international trade, a sharp decline in the U.S. GDP and soaring unemployment. Trump’s tariff blitz is reminiscent of the same brand of protectionism that deepened the global economic crisis a century ago.

Is this déjà vu of the Great Depression an exaggeration? Perhaps not. On the first trading day after the tariff announcement, the tech-heavy Nasdaq plunged 5.97 percent, followed by another 5.82 percent drop the next day. Fears of a global slowdown, inflationary pressures and deferred corporate investment are intensifying. The U.S. Economic Policy Uncertainty Index has reached historic highs, and tensions with China have worsened after Beijing retaliated with a 34 percent tariff of its own.

Trump’s WTO skepticism and the end of multilateralism

Trump’s tariff shock has further undermined confidence in the World Trade Organization (WTO) and the liberal trade order it represents. His reciprocal and blanket tariffs are fundamentally at odds with the WTO's core principles.

Reciprocal tariffs, which apply different rates to different countries, clash with the WTO’s Most-Favored-Nation (MFN) rule, which requires that any favorable treatment granted to one member must be extended to all. Trump’s across-the-board tariffs — at least 10 percent on goods from 185 countries — likely violate the WTO’s National Treatment obligation, which prohibits discrimination between domestic and foreign products.

Trump’s indiscriminate tariffs do more than intensify protectionism — they unravel the entire multilateral trade framework. Agreements like the Korea-U.S. FTA and the United States–Mexico–Canada Agreement (USMCA) are being disregarded. While Korea’s average MFN tariff stands at 13.4 percent, the effective tariff on U.S. imports under the FTA is just 0.79 percent. Claims that Korea imposes four times higher tariffs on U.S. goods are simply untrue. Trump’s accusations of unfair trade practices — citing Korea’s rising trade surplus with the United States and high nontariff barriers — go too far.

WTO’s fading role and the China challenge

The WTO’s longstanding system of preferential treatment for developing countries is now under intense scrutiny amid the U.S.-China rivalry. China joined the WTO in 2001 with a 15-year grace period as a nonmarket economy. But in 2016, the United States and the EU refused to recognize China as a market economy (MES), arguing that its economic behavior remained heavily state-directed.

The MES designation affirms that a country’s economic activities — such as pricing, wages and currency values — are determined by market forces, not government control. Washington insists that Beijing's persistent nonmarket practices warrant different standards in antidumping investigations. As China’s state-led subsidies and economic interventionism have only intensified, the WTO has failed to serve its corrective function, according to Washington.

Moreover, the WTO’s ability to enforce trade rules has all but collapsed. The dispute settlement mechanism is notoriously slow, often taking years to resolve cases. The Appellate Body — the WTO’s equivalent of a supreme court — was rendered inoperative on Dec. 11, 2019, after six of its seven members stepped down and no replacements were appointed.

A large balloon with an image of U.S. President Donald Trump is seen above protesters holding signs during the nationwide ″Hands Off!″ protest against Trump and his advisor, Tesla CEO Elon Musk, in downtown Los Angeles on April 5. Protesters flooded the streets of several major U.S. cities to oppose the divisive policies of President Donald Trump, in the largest demonstrations since his return to the White House. [AP/YONHAP]

The FTA is no longer a shield

With traditional rules in flux, Korea must reassess its place in the new order.

First, the WTO must undergo sweeping reforms. Unless it fundamentally rethinks its treatment of large developing economies like China, U.S. participation in the WTO will be increasingly untenable. That said, calls for the WTO’s abolition are misguided. The multilateral system it upholds remains a pillar of Korea’s economic prosperity.

Second, the effectiveness of bilateral FTAs — particularly those with the United States — has been diminished, at least for now. However, products that meet the USMCA’s rules of origin will remain exempt from reciprocal tariffs. While Korea must now contend with the new tariffs, competitors like Japan, the EU, and China will face both existing and additional levies, offering Korea a relative advantage.

Third, the global shift toward strategic industrial policies cannot be ignored. Led by the United States and Europe, countries are offering subsidies and tax incentives to nurture key sectors and support reshoring. Korea must join this trend. The world is now justifying trade controls and industrial policies in the name of “rules” and “security.”

Fourth, Korea should also emphasize its status as an FTA partner. Areas such as shipbuilding, small modular reactors and liquefied natural gas imports should be packaged into strategic initiatives to align with U.S. interests.

Trump’s tariff war is more likely to backfire, failing to revive U.S. manufacturing while raising costs for U.S. consumers. Yet allowing China to monopolize global manufacturing under the pretense of developing-nation status is equally unacceptable. A contraction in global trade and slower economic growth now appear inevitable, and Korea will not be immune to the damage. We must remain steady and resilient until international trade stabilizes once more.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.