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Donald Trump, the former US president and Republican Party nominee for the 2024 election, walks up stairs at the party’s national convention, held in Milwaukee, Wisconsin. (AFP/Yonhap)

The growing likelihood of Donald Trump being reelected to the US presidency after he was injured in a recent shooting is driving global discussion about the potential shock of changes to American economic policy. Since the Korean economy is directly impacted by the US economy not only through macroeconomic indicators like interest rates and exchange rates but also in the area of trade, it’s of critical importance for the Korean government to make concrete preparations.

Bloomberg News reported Tuesday that Trump opposes the Fed lowering interest rates before the election in November and has indicated he will impose steep tariffs not only on China but also on the EU. Trump pledged in the interview to strengthen trade barriers, including higher tariffs, to restrict immigration and to lower corporate tax rates. Such conservative policies are fairly predictable considering they were part of Trump’s economic policy during his first term in office.

But the global economic situation is fundamentally different from Trump’s first term in office, most of which occurred before the pandemic. Inflation is still unchecked because of shrinking free trade and collapsing supply chains, and interest rates are also being maintained at a high level.

If the US actually raises tariffs as Trump has pledged, the prices of imported goods will rise in the US, which would cause inflation to continue. Toughening immigration rules would also drive up domestic wages and prices along with them. That could force the Fed to keep interest rates high.

In Korea, commercial banks have already lowered interest rates on the expectation of a rate decrease in the US, prompting Korean households to take out more loans and supercharging Seoul real estate prices. But there are concerns that a sustained high interest rate policy in the US would increase the risk of Koreans defaulting on their loans. The Korean government must act now to cut down on household loans and clean up the mess of insolvency in project finance loans that’s been foisted on the private sector. 

Trump has repeatedly stated that he plans to nix the Inflation Reduction Act, one of Biden’s main legacy policies, if he returns to office. While some predict he’ll have trouble completely doing away with the legislation, which benefits solidly red Rust Belt states, it remains possible that he’ll make changes to it, including by slashing subsidies. If this happens it will only add to the troubles currently faced by battery manufacturers, who are caught in the “chasm” of EV adoption. 

Whether Trump will jack up tariffs on automobiles is also a concern. The US accounts for 56% of Korea’s auto exports, and last year Korea saw a record US$44.5 billion trade surplus with the US. There’s always the possibility of retaliatory tariffs by the US. 

South Korea should make efforts now to reach out to relevant officials and clearly explain our position in order to prepare for the worst-case scenario. We cannot repeat the same mistake we made with the Inflation Reduction Act, when our government was only aware of the repercussions after it was passed by US Congress. 

Please direct questions or comments to [english@hani.co.kr]