South Korea's President Moon Jae-in. Photo: Wikimedia Commons

Moon Jae-in probably didn’t expect to be worrying about credit default swaps at the 118-day mark of his presidency.

Premiums on South Korean debt recently hit 18-month highs as North Korea tests its sixth nuclear weapon, startling Asian markets and making Seoul fear for its credit rating.

Even more surprising still, Moon is taking blows from a most trusted ally.

US President Donald Trump seemed to lash out more at Moon than North Korea’s Kim Jong-un in response to Pyongyang’s latest provocation.

A rise in the cost of insuring South Korean debt after a North Korean missile test. Source: Bloomberg.

Critical of what he called Seoul’s “appeasement” with North Korea, Trump now wants to withdraw from the five-year-old Korea-US free trade deal. An odd misdirection of anger, but one that greatly complicates Moon’s early plans to create jobs and raise living standards.

The risk is that North Korea’s military adventurism, coupled with Trump’s bluster, distracts Moon from the economic tasks at hand.

The risk is that North Korea’s military adventurism, coupled with Trump’s bluster, distracts Moon from the economic tasks at hand.

They include reducing youth unemployment (currently more than 9%), cutting record household debt, addressing widening inequality, catalyzing innovation and replacing the export-led model with “income-led” growth.

With predecessor Park Geun-hye in a prison cell and confidence weak, voters rallied around Moon’s 3 percent economic growth pledge.

It means wrestling power away from the family-run conglomerates, or chaebol, that impede small-to-midsize businesses and hamper competitiveness.

Moon laid out a wise manifesto of anti-trust crackdowns, taxes on super-rich tycoons and cashed-up corporate giants and reduced real-estate speculation. Seoul wants to give “trickle-up economics” a try.

Trump isn’t helping that transformation. In fact, he’s showing Moon’s nation, a long-time and vital U.S. ally, borderline contempt.

US President Donald Trump and North Korea’s leader Kim Jong Un.

Sure, this could be little more than loose talk – a plot to force a reversal in a $27 billion U.S.-Korea trade gap that’s more than doubled since 2007.

It’s an oddly familiar pattern, though, one to which Australia’s Malcolm Turnbull and Germany’s Angela Merkel can attest.

If Trump wants his legacy to be losing every trusted friend America has, he’s off to an impeccable start. Disrespecting Moon’s young administration is a particular own-goal, given Seoul’s pivotal role as a bridge to Pyongyang.

Of course, Trump’s anger at North Korea could quickly become a major headwind globally. His threat to cut trade with any nation that does business with Pyongyang is preferable to all-out war, but this nuclear-economic option would shoulder-check the global financial system.

The nearly $700 billion of China-US trade hanging in the balance would panic world markets.

The nearly $700 billion of China-US trade hanging in the balance would panic world markets.

But nations that transact with North Korea include Brazil, Burkina Faso, China, Mexico, Pakistan, the Philippines, Thailand and Trump’s beloved Russia, according to a Massachusetts Institute of Technology report.

Trump, of course, wasted no time weaponizing trade. He reneged on the 12-nation Trans-Pacific Partnership, and his team is re-negotiating the North America Free-Trade Agreement, or NAFTA.

Trump started out doing the same with the Korea-US deal, only to change his mind and seek to tear it up. Trump can’t even be consistent in making US policy inconsistent.

Even if Trump ditches the Korea-US agreement initiated by former President George W. Bush, goods will still flow westward, ending up in American auto showrooms and electronics shops.

But American families would pay more for their SUVs, flat-screen televisions and smartphones and it would hurt. The US is the biggest market for Samsung, a conglomerate that generates between 20% and 25% of South Korea’s annual gross domestic product. The bottom lines of Hyundai, Kia and LG would take hits, too.

That puts Moon in a bad place. One of his biggest challenges is curbing the family-run conglomerates, including Samsung, that suck up most the economic oxygen.

These “chaebol” monopolize industries, hoard talent, bully subcontractors, pick off any startup that might imperil their market share and play by opaque governance rules that dent shareholder value.

Moon seeks to turn Korea Inc. upside down through regulatory action, tax incentives and $9 billion of stimulus.

Before he can make Korea great again, Moon must protect the gains Asia’s No. 4 economy has made in recent decades.

The distraction from Kim and Trump slugging it out rhetorically – perhaps even exchanging real fire – is the last thing his young presidency needs. Or the rest of Asia, for that matter.

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