A looming trade war could lower South Korea’s annual growth rate by up to 0.4 percentage points next year, potentially bringing it down to 1.4%, the Bank of Korea said on March 13. The central bank also warned that escalating U.S.-China tensions could strengthen the dollar and weaken the Chinese yuan, increasing the risk of foreign capital outflows from Korea.
The Trump administration’s tariff policy was imposed sooner and with greater intensity than previously expected, amplifying its impact on the global and domestic economy, the BOK stated in its Monetary and Credit Policy Report for March 2025. The U.S. slapped tariffs on China last month and announced 25% tariffs on imports from Canada and Mexico.
The central bank outlined three possible scenarios: base, optimistic, and pessimistic. Under the base scenario, the U.S. imposes low-level tariffs on trade deficit countries (excluding China) and gradually rolls them back next year while maintaining existing tariffs on China. The BOK estimated Korea’s growth rate would be 0.1 and 0.2 percentage points lower for 2025 and 2026, respectively, than the BOK’s November 2024 forecast according to the base scenario. Based on this scenario, the BOK had projected growth at 1.5% for 2025 and 1.8% for 2026 in its updated forecast last month.
The optimistic scenario assumes that the U.S. gradually lowers tariffs on all countries throughout 2026, including those on China. In this case, Korea’s growth for 2025 and 2026 would each be 0.1 and 0.3 percentage points higher than the base scenario.
In the worst-case scenario, the U.S. raises tariffs on major trade deficit countries, including China, by the end of 2025 and maintains them throughout the following year, while major economies retaliate with strong countermeasures. The BOK projected that Korea’s growth rate could fall 0.1 and 0.4 percentage points lower for 2025 and 2026, potentially reducing growth to 1.4% for two years straight.
The BOK also noted that if U.S.-China tensions intensify, a stronger dollar and a weaker yuan could increase exchange rate volatility, as the Korean won is heavily influenced by both currencies. Additionally, uncertainty surrounding U.S. tariff policies could dampen investor sentiment in Asia, increasing capital outflows from Korea.
“A decline in exports to the U.S., a slowdown in trade with other countries, and weaker investor confidence due to heightened trade policy uncertainty will exert downward pressure on Korea’s economic growth and inflation,” the BOK concluded.
