SEOUL — The Bank of Korea rarely finds itself at the center of the global economic discourse.
Yet the team led by Governor Rhee Chang-yong is on the front lines of the two biggest 2025 imponderables: the experience of the US and Chinese economies and their respective markets.
Of course, Donald Trump’s return to the White House ensures these two giants will collide, perhaps creating a third unknown: a huge trade conflict the likes of which the globe has never seen before.
Still, domestic considerations in both Washington and Beijing are already putting Rhee’s BOK on the spot. In flux are the odds of a US Federal Reserve rate cut at its November 28 policy meeting — odds that are falling by the day.
Looked at one way, the case for a Fed easing move is buttressed by signs US employment growth may be slowing and that China’s property crisis continues to generate deflation.
Korean inflation, meanwhile, is holding well below the BOK’s 2% target. As the Korea Development Institute, a state-run think tank, puts it: “tightening of monetary policy through interest rate hikes appears to have been effective in curbing high inflation since 2022.”
Yet Rhee’s decision is complicated by trends at home, particularly near-record household debt levels.
“The central bank faces a challenging situation of slower domestic demand and inflation below target, which typically calls for rate cuts,” says Ashok Bhundia, an economist at the Institute of International Finance. “However, concerns about financial stability due to high household leverage complicate the decision.”
Bhundia’s bottom line is that “delaying the next rate cut will allow more time for evaluating the incoming US administration’s policy agenda and its potential impact on global trade, which would affect Korea’s growth and inflation outlook for 2025.”
That agenda could change things drastically as Trump 2.0 hits the ground running with 60% or more tariffs on China. And as Trump’s team slaps 20% blanket, across-the-board levies on all goods globally.
Trump’s cabinet picks — including Robert Lighthizer, former and likely future trade czar — are mulling moves to devalue the dollar. This effort might happen unilaterally via aggressive intervention in currency markets or with another “Plaza Accord” gambit.
The reference here is to a 1985 pact to weaken the dollar versus the yen. It was forged by the top industrialized nations at New York’s Plaza Hotel, which Trump owned for a time. Trump also wants to reduce the Federal Reserve’s independence, giving his White House influence over interest rate decisions.
In August, Trump said “the Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot.” He went on to say that “I feel the president should have at least say in there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
This is more the stuff of China than a Group of Seven central bank.
In the past, Trump has talked about defaulting on government debt. In 2016, while running for president the first time, Trump said this about US government debt: “I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So therefore, you can’t lose.”
Remember that Trump as a businessman declared bankruptcy six times. The Trump 1.0 White House mulled cancelling debt held by Beijing amid trade tensions. With the US national debt twice the size of Chinese GDP, it’s easy to see why that could cause a financial earthquake of historic proportions.
China, meantime, is juggling dueling crises in property, local government finances, high youth unemployment, rising in-person protests and weak retail sales. All this has Beijing adding fiscal and monetary stimulus to its mix.
It’s a concern, though, that “China’s response to deflationary challenges remains cautious,” says Jonathan Garner, an equity strategist at Morgan Stanley. This is even before Trump arrives to make giant trade wars great again.
How Rhee balances Korea’s current challenges with what’s to come in 2025 — whatever that might be — is an open question. And one that could matter far beyond decisions made at BOK headquarters in downtown Seoul.
Korea’s sizable, open and trade-reliant economy often serves as a weathervane for global inflection points. That’s why Korea’s “sandwiched” reality these days is raising more than a few red flags.
This predicament was arguably coined in 2007 by then-Samsung Group head Lee Kun-hee. At the time, Lee described Asia’s fourth-biggest economy as sandwiched between wealthy Japan and low-cost China.
Now, though, Korea is caught in the middle of something of a quadruple-decker sandwich. It’s squeezed between a Japan that’s raising rates, a China that’s slowing and an imminent “Trump trade” causing extreme dollar volatility.
Economists eyeing policy choices agree that a case could be made for the BOK to ease next week but also to wait until January.
As Capital Economics economist Shivaan Tandon puts it, recent Korean data “was somewhat encouraging as it suggests that the worst is probably over for domestic demand.”
Others are less sanguine. Dave Chia, an economist at Moody’s Analytics, thinks soft third-quarter GDP results are “concerning and could lead to South Korea missing the BOK’s 2024 GDP growth target of 2.4%.”
Seoul, though, must accelerate moves to batten down the hatches as the Trump vs Xi brawl begins. Though China is the immediate target, Korea Inc will suffer serious collateral damage.
A blanket global US tariff of 20% would be disastrous for Korea, which generates 40% of gross domestic product (GDP) via exports. Then there’s how the Trump revenge tour might imperil key Korean industries, not least autos.
Trump has threatened 100% taxes on all Mexican-made vehicles. If Korean President Yoon Suk Yeol doesn’t agree to big trade concessions, Trump might widen those levies to include Korean vehicles. Japanese autos, too.
Korea Inc might try to placate Trump the same way Japan did from 2017 to 2021: upping investment in the US to keep the peace.
“If tariffs get raised, the first alternative firms can consider will be raising direct investment and on-site production,” Korean Trade Minister Cheong In-kyo tells Reuters. “There are ongoing investments already, and there is a possibility that investment could accelerate, followed by an increase in US-bound exports by small and medium-sized parts manufacturers.”
Cheong added that Seoul also would step up trade diplomacy efforts. “We can only respond to the new administration’s policy,” Cheong noted. “Nevertheless, we will make efforts for trade to remain smooth, with not only the United States but also China.”
In 2023, Korea’s trade surplus with Washington hit a record $44.4 billion, Seoul’s biggest imbalance anywhere. That’s unlikely to go unnoticed in Trump World.
With his approval rating around 20% at the halfway point of his five-year term, it’s not clear how much latitude Yoon has to cave in to Trump’s demands for trade concessions.
And what if, as many believe, Trump’s real goal with tariffs is to force China into a “grand bargain” trade deal? On the one hand, this might be good news for Korea if it avoids the financial carnage sure to come with a new trade war. But on the other, a US-China deal might leave Korea on the outside looking in.
Politically, being left out of a US-China deal could be just as bad for Yoon’s support rate as the economic hit from Trump’s tariffs.
Then there are the ways China might retaliate, including driving the yuan lower. Xi could always impose a manufacturing tax that slams Apple, Walmart and other top US companies.
Beijing could also dump large blocks of its $770 billion of US Treasury securities. Yes, the surge in US debt yields would boomerang back on China. But Xi might calculate the US would lose more as a plunging dollar devastates the stock market and Washington’s borrowing costs soar.
Korea — and the Kospi stock index — would be in the crossfire more than most export-driven economies. These risks and others explain why Rhee’s staff at the BOK may be dreading 2025. Yoon’s administration, too, as its lack of urgency in implementing vital reforms comes back to haunt it.
Unfortunately, Yoon is but the latest Korean leader to win power pledging a supply-side Big Bang only to fall short.
Over the last 15-plus years, Korean government after government got sidetracked by political squabbling and short-term concerns. Rather than recalibrate growth engines to increase competition and productivity, leader after leader turned to the BOK to paper over economic cracks.
If only Yoon’s predecessor Moon Jae-in had put some notable wins on the scoreboard to rein in the family-owned conglomerates, or chaebols, towering over the economy. Moon talked a great game of pivoting toward “trickle-up economics,” but achieved little.
The same went for Park Geun-hye, president from 2013 to 2017. Korea’s first female leader promised to build a more “creative economy” and reduce the economic power of chaebols.
She pledged to make space for startups to generate economic energy from the ground up as opposed to the top down. Park, too, achieved little.
Before her, Lee Myung-bak, president from 2008 to 2013, had his own bold plan to generate 7% growth and make Korea one of the seven largest economies via disruptive reforms. It was all talk.
Korea can’t get the last 15 years back to implement bold policies to level playing fields, increase productivity, empower women and encourage young entrepreneurs to take big risks.
And for all the excitement about Korea’s startup scene, the chaebol-heavy business climate leaves limited economic oxygen for enterprises to thrive.
At the same time, Korea now has an economic speed problem on its hands. China, for all its troubles, has been speeding up Asia’s economic clock — and increasingly so.
China continues to invest big in dominating the future of semiconductors, electric vehicles, aerospace, renewable energy, biotechnology, artificial intelligence, robotics and green infrastructure.
As China’s production capabilities increase, Korea is having a harder and harder time keeping pace with the region’s top export power and revamping its policy mix accordingly.
If the Yoon administration understands this challenge, it’s not saying — or articulating a clear strategy to meet the moment.
Missing the fact that things are ticking faster and faster outside its walls explains why Japan Inc has such a hard time adapting to rapidly shifting global dynamics. Korea must do a better job keeping an eye on the time.
With Trump versus China set to slam Asia two months from now, when Trump takes office, Seoul won’t have a moment to waste.
Follow William Pesek on X at @WilliamPesek