As the Trump administration’s steep tariffs triggered retaliatory moves from China, the European Union and Canada, the global tariff war is escalating. Fears of shrinking trade and a worldwide economic slowdown are spreading, sending shockwaves through global financial markets. Over the course of just two days, the market capitalization of U.S. stocks plummeted by $6.6 trillion, rattling investors.
The impact is particularly severe for South Korea, whose economy relies heavily on exports. While the Constitutional Court’s decision to dismiss former President Yoon Suk-yeol has ended four months of political uncertainty, the U.S.-led tariff war now poses a serious threat to the S. Korean economy.
In response to the U.S. tariffs, China said it would impose an additional 34% levy on all American imports starting Apr. 10. It also banned exports of rare earth elements to the U.S. and halted imports of certain American agricultural and livestock products.
Similarly, the EU announced plans to put a 50% retaliatory tariff up for a vote among its member states, and French President Emmanuel Macron called on domestic companies to suspend investments in the U.S., signaling a full-scale economic standoff among major economies.
Even before taking a toll on real economies, the trade war has shaken global financial markets. In just two days, U.S. markets lost $6.6 trillion in market value. The benchmark S&P 500 index plunged 6% on Apr. 4 alone — a sharper drop than during the dot-com crash in 2000 (-5.8%) or the aftermath of the Sept. 11, 2001, terrorist attacks (-4.9%).
Markets in Europe, Japan and other major economies also tumbled. Although criticism is mounting within the U.S., with voices warning the tariffs are a grave mistake, President Donald Trump remains defiant, saying “things are going well” and insisting that the market will rebound with a boom.
The U.S.-driven tariff war is likely to lead to shrinking trade, reduced production and surging prices, raising the risk of a global downturn. Global investment banks forecast that the U.S. economy could slow to a growth rate of just 0.1% this year, with inflation surging to 4.7%. J.P. Morgan raised the probability of a global recession from 40% to 60%.
What’s worse for South Korea is that its two largest export destinations — the United States and China — are locked in a tariff standoff that could deliver a direct hit to Korean trade.
Citibank and J.P. Morgan have warned that if the tariff war drags on, S. Korea’s growth rate could fall to the 0.8–0.9% range this year. Although the U.S. has announced a 25% reciprocal tariff on S. Korean goods, it has left room for bilateral negotiations that could lead to an adjustment.
To address the growing threat, Acting President Han Duck-soo, an expert in trade policy, should take the lead in negotiations with Washington. The government and major conglomerates need to form a united front and craft a strategy to extract as many concessions as possible from the United States.
Late last month, the S. Korean government announced a 10 trillion won (about $6.8 billion) supplementary budget to support wildfire recovery and boost domestic demand. However, the package did not include support measures for export companies or the trade sector, both of which are expected to be hit hard by the U.S.-led tariff war.
In contrast, Taiwan — which has been slapped with a 32% tariff by the United States — unveiled an emergency relief package worth about $8.4 billion, offering interest subsidies and new financing for exporters.
S. Korea should also expand its supplementary budget by adding robust support for exporters. With profitability deteriorating and liquidity drying up for many companies facing the tariff shock, timely support is urgent. To counter a slowdown in exports, the government should also consider increasing funding aimed at boosting domestic consumption. Above all, time is of the essence.
Although the S. Korean government hopes to pass the supplementary budget within April, the ruling People Power Party and the opposition Democratic Party are locked in a dispute over whether to prioritize disaster relief or how large the budget should be—delaying action. The government and political parties must move swiftly to finalize the budget and restore calm in the markets.
