After 14 months, it’s painfully clear Donald Trump’s White House doesn’t shoot straight. But few world leaders are taking more stray bullets than Moon Jae-in of South Korea.
First, the US president reopened a Korea-US free-trade agreement in effect since 2012. Not the best use of President Moon’s first year in office, a period he could’ve used tackling high youth unemployment, record household debt and unruly corporate giants. But what can you do when the leader of the world’s biggest economy – and one that protects your 50 million people – pounds the table?
Then, Trump introduced a new weak-dollar policy. Not the best news for an export-driven economy following the won’s 13% surge in 2017.
Now comes the trade war the former reality-TV celebrity had long previewed. First, tariffs on steel and aluminum. Then, levies on $50 billion worth of Chinese goods. Now it’s an all-out, escalating tit-for-tat between Washington and Beijing. On Wednesday, China tossed another $50 billion of goods onto the fire.
The problem for Moon’s economy is it loses all around. Korea sold some $142 billion of goods to China last year, almost 80% of which were intermediate goods, much of which are headed to the US. By some estimates, Korean shipments to China will plunge by half the magnitude of any drop in mainland exports to the US.
Then there’s the chilling effect all this might have on Korean executives. Moon has been largely sidetracked on efforts to curb Korea’s massive family-owned conglomerates. That is a blow to hopes they might boost wages and hasten national growth. The so-called chaebol hoarded as much as $2 trillion in recent years that would be better used giving workers a rise or boosting competitiveness.
‘Brace for trade blows’
Business sentiment might be less negative if Korean conglomerates could displace their Chinese peers, as Trump reduces mainland access to America. But that doesn’t look likely as the “America First” president builds walls around his economy along with physical ones on borders.
In a meeting with aides on Monday, Moon urged policymakers and Korea Inc. to brace for the worst.
That also could signal a change in the Bank of Korea’s tightening stance. In November, the BOK raised interest rates for the first time in six years, becoming the first major Asian central bank to tighten since 2014. Trump’s weak-dollar gambit and trade war may change the calculus for BOK Governor Lee Ju-yeol.
So what does this mean for Moon’s corporate restructuring scheme? A key plank of his “trickle-up economics” experiment is reducing the dominance of the chaebol. The reference here is to conglomerates like Samsung, Daewoo, Hyundai, LG and Lotte that tower over the nation and create headwinds for small-to-midsize enterprises.
Reformist given supervisory role
On that score, news that Moon appointed reform-minded Kim Ki-sik to head the Financial Supervisory Service was comforting indeed.
To Scott Seaman of Eurasia Group, the decision “provides more evidence that Moon’s government remains serious about promoting corporate governance reform, reining in chaebol excesses and otherwise working to reduce the ‘Korea discount’ that can lower investor valuations of stocks.”
Yet radical change is only possible if Korea is growing at a healthy clip. While Asia’s No. 4 economy is seen growing about 3% this year, the external outlook is darkening fast. The lower growth goes, the less political capital Moon has to recalibrate growth engines.
There’s no telling how the Trump effect might play out. Bizarrely, the president has even gone so far as to tie a trade deal with Moon’s economy to progress on Kim Jong-un denuclearizing North Korea. Kim’s recent trip to Beijing to confer with Chinese President Xi Jinping suggests Washington has less leverage than Trump thought. Trump is taking aim at South Korea, a staunch US ally, instead.
Moon also worries Korea will suffer collateral damage as Trump does his worst to China. So do Japan, Singapore, Taiwan and other trade-reliant economies. But none is more in the line of Trump misfires than Korea. The target on its back can only distract Moon from raising the nation’s competitive game.