PiCK

Tariff Bomb Could Lower Growth Rate to 1.4% Over Two Years in Worst Case

Source

Korea Economic Daily

Summary

The Bank of Korea warned that in the worst case scenario, the global tariff war could lower Korea's economic growth rate to 1.4%%.
In the pessimistic scenario, U.S. tariff policies would cause Korea's next year growth rate to fall 0.4 percentage points more than the base assumption.
Meanwhile, in the optimistic scenario, if all countries' tariffs gradually decrease through negotiations by 2026, Korea's economic growth rate is expected to improve.

Bank of Korea's Scenario Analysis

Trump's Tariffs Stronger Than Expected

Next Year's Growth Rate Could Drop 0.4%P

The Bank of Korea warned on the 25th that if the global tariff war initiated by U.S. President Donald Trump reaches its worst case scenario, Korea's economic growth rate could fall to 1.4% over this year and next year. This is 0.1 and 0.4 percentage points lower than the growth forecasts for this year (1.5%) and next year (1.8%) presented in the Bank's 'Economic Outlook' report.

The Bank of Korea analyzed scenario-based impacts in its report 'Impact of U.S. New Administration's Tariff Policy on Global and Korean Economy' released today.

The base scenario assumes that the U.S. maintains its current 10% additional tariff on China until 2026 while imposing lower tariffs on other major trade deficit countries this year. For countries excluding China, tariffs are set to gradually decrease from 2026 through negotiations. Under this scenario, Korea's growth rate would decline by 0.1 and 0.2 percentage points this year and next year respectively due to U.S. tariff policies.

The pessimistic scenario envisions the U.S. raising tariffs on major trade deficit countries including China by the end of this year and maintaining them until 2026, with other countries responding with strong retaliatory tariffs. In this scenario, the Bank estimates Korea's economic growth rate would fall an additional 0.1 percentage point this year and 0.4 percentage points next year compared to the base scenario. The Bank expressed concern that "global trade would sharply contract and increased uncertainty surrounding trade policies would significantly slow domestic exports and investment."

The optimistic scenario assumes the U.S. maintains current tariff levels on China while imposing substantially lower tariffs on other major trade deficit countries. All countries' tariffs are expected to gradually decrease through negotiations by 2026. Under this scenario, the Bank projects Korea's economy could grow 1.6% this year and 2.1% next year.

Reporter Dong-wook Jwa leftking@hankyung.com