On November 29, Bank of Korea Governor Lee became the first major central banker in Asia to hike interest rates since 2011. It was a pivotal moment, a sign that efforts to normalize liquidity after the 2008 “Lehman shock” had begun in earnest. Lee also telegraphed more tightening moves to come.
All that changed on Thursday. Lee’s central bank team left short-term rates alone – at 1.5% – as trade tensions suddenly clouded their outlook. It’s not that growth prospects worsened markedly between November and yesterday. Asia’s No. 4 economy is still on course to grow 3% this year.
Caught in the crossfire
What’s changed is a White House throwing tariffs around like spaghetti at a wall to see what sticks. Also, a president taking bedrock ally Korea for granted. Case in point: Trump refusing to say when he’ll sign a renegotiated Korea-US trade agreement that he forced President Moon Jae-in’s nation to reopen.
As if Moon doesn’t have enough on his plate with North Korea’s Kim Jong-un and China’s Xi Jinping. Kim’s provocations and nuclear program left Moon’s year-old administration with scant time to retool the economy, Moon’s real mandate with voters. China’s tantrum over Seoul hosting American missile-defense systems, meantime, savaged Korea’s tourism revenue and the mainland operations of Lotte and Hyundai.
The Trump effect is hardly helping. First came tariffs on steel and aluminum. Next, the White House launched a weak-dollar policy. Then came escalating levies on more than 1,300 mainland goods – roughly $150 billion so far.
Don’t buy into the idea that President Xi managed to talk Trump off the ledge with chatter this week about “dialogue rather than confrontation.” Xi thinks in decades, Trump as far ahead as the next tweet.
Even if Xi is serious, there’s zero chance Beijing opens the economy, curbs auto tariffs and protects property rights fast enough to placate Trump. The White House is even suggesting a return to the Trans-Pacific Partnership – a partnership which does not include China – on which he reneged last year. Bottom line: An escalating China-US clash is assured.
‘Trump trade’ is no longer about bulls
The “Trump trade” used to concern bullish bets on stocks. Now it’s about exiting the markets his administration targets. Though China is the main target, large, open economies like Korea and Japan are directly in harm’s way. That’s especially the case if Beijing ups its retaliation game. It’s already tossed $50 billion of levies Washington’s way. Xi’s government could always dump its $1.2 trillion of US Treasuries. Or it could devalue the yuan.
The shockwaves from any of these steps would slam Korea – China is Korea’s top export destination, and many of those exports are unfinished goods that go into China’s own exports to the US – and throw Lee’s team even more out of sorts.
Korea may be experiencing healthy growth, but its challenges are daunting. They include stagnant wages, a 9%-plus youth unemployment rate and record household debt. A trade war between the US and China is the last thing Korea needs.
Trump’s dramas are keeping Moon’s government – and others – up at night. Like the Korea-US deal, Trump wants his trade representative, Robert Lighthizer, to reopen the North American Free Trade Agreement.
“The US gains in both deals will be cosmetic,” says Arthur Kroeber of Gavekal Research, “but they will allow Trump to brag about the success of his get-tough approach and enable Lighthizer and his team to concentrate their fire on China.”
Koreans could be excused for wondering what the point is.
All this drama is further distracting Moon – already up to his neck in inter-Korean and geo-strategic politicking – from his key task of recalibrating the economy away from giant family-owned conglomerates to innovation and services. It also is taking Lee’s eye off the need to get short-term rates as far away from zero as possible.
The Bank of Korea started down that road in late 2017. Trump’s policy chaos makes further progress unlikely in the months ahead. Surprises may happen, but Lee & Co’s best-laid plans for 2018 are getting trumped as we speak.