How Will Trump's Second Term Affect Korean SMEs Amid Economic Turbulence?

As Donald Trump prepares to take office for a second term on January 20, 2025, South Korean small and medium-sized enterprises (SMEs) are bracing for significant economic risks stemming from anticipated protectionist policies. A recent seminar held by the Korea Federation of SMEs (KBIZ) on January 15, 2025, in Seoul highlighted the urgent need for response strategies as Trump's inauguration is expected to trigger a new wave of tariffs [98bf28b1].

The proposed tariffs could see a staggering 60% on Chinese products and 10% on others, including those from South Korea. This could lead to a decrease in South Korean exports by an estimated $14.3 billion to $19.1 billion, with the country's economic growth rate potentially dropping by 0.4 to 0.62 percentage points [98bf28b1]. Joo Won from the Hyundai Research Institute emphasized the risks posed by the ongoing U.S.-China economic war, while Oh Seon-joo from Samil PwC warned that the export-oriented economy of South Korea could face rising production costs due to these tariffs [98bf28b1].

In a proactive move, South Korean Industry Minister Ahn Duk-geun visited Washington, D.C. on January 14, 2025, to reassure US officials about Korea's critical role in the global supply chain. During his visit, Ahn emphasized the importance of maintaining industrial incentives tied to the Inflation Reduction Act and received support from US lawmakers [85c479ed]. He addressed concerns regarding a leadership vacuum following the impeachment of President Yoon Suk Yeol, highlighting Korea's focus on high-value exports like semiconductors and secondary batteries, which are less affected by currency fluctuations [85c479ed].

In response to the anticipated challenges from Trump's policies, the South Korean government announced on January 20, 2025, a record financing support of 360 trillion won (approximately US$247.74 billion) for exporters. This unprecedented financial package aims to counter potential negative impacts from Trump's second presidency, particularly in key sectors like semiconductors and rechargeable batteries, which are at risk [e08158a7]. The finance ministry expressed concerns over heightened external uncertainties affecting exports, including increased insurance support against foreign exchange volatility and a rise in government project spending [e08158a7].

Ahn's visit follows his plans to travel to the US from January 5, 2025, to discuss bilateral economic exchanges with officials ahead of Trump's second term. After his meetings in Washington, he is expected to visit Georgia to meet with Governor Brian Kemp, seeking support for South Korean businesses and to discuss the production line of SK On Co. [de99b16c][d260c18a].

Finance Minister Choi Sang-mok announced on December 11, 2024, that the South Korean government will deploy all available 'policy tools' to address the challenges posed by Trump's policies, which are expected to prioritize 'America First' initiatives [f3963f5c]. Choi emphasized the urgency of the situation, noting that extraordinary measures are required with only 40 days until Trump's inauguration. The government's plans include injecting funds to stabilize supply chains in critical sectors such as semiconductors and batteries, alongside a comprehensive customs policy package aimed at cushioning the economy from potential shocks [f3963f5c].

In a recent analysis, Chey Tae-won, chairman of SK Group and the Korea Chamber of Commerce and Industry (KCCI), discussed the future of the Korean economy on KBS's 'Sunday Diagnosis' on January 19, 2025. He predicted a 'triangular wave' of tariffs, inflation, and artificial intelligence (AI) impacting the economy, emphasizing the need for a national-level AI strategy to navigate increased instability in Korea's export-reliant economy [8413812]. Chey noted a significant shift from WTO multilateralism to bilateral trade, highlighting that South Korea's trade surplus with the U.S. rose from $60 billion to $150 billion. He warned of potential U.S. tariff increases under President-elect Trump and stressed the importance of focusing on manufacturing AI to avoid economic collapse [8413812].

Soohyung Lee, a member of the Bank of Korea's Monetary Policy Board, stated that the proposed import tariffs by Trump pose a greater risk to South Korea's economy than the recent political turmoil. He noted that while political uncertainties typically resolve within three to six months, tariffs could significantly impact exports and inflation in the U.S., which would, in turn, affect the Korean won [55130b34]. Currently, the won is trading at 1,466.48 against the dollar, near 15-year lows.

A recent survey revealed that 82% of 239 companies expect harm to South Korea's economy from Trump's protectionist policies, reflecting the apprehension felt by South Korean policymakers and business leaders who were 'traumatised' by Trump's first term [d35a677d]. Concerns are particularly acute regarding import tariffs and the revocation of subsidies for Korean chip, battery, and electric-vehicle manufacturers, which are crucial to the country's economic landscape [d35a677d].

In response to these challenges, the Bank of Korea cut its GDP growth forecast for 2025 to 1.9% from 2.1%, while the Ministry of Economy and Finance projected a growth of 1.8% [55130b34]. Inflation in November was reported at 1.5%, below expectations, prompting the Bank of Korea to cut its benchmark rate to 3% in November, marking the first back-to-back rate cuts since 2009 [55130b34].

This proactive stance comes in the wake of South Korean President Cyril Ramaphosa's confidence that the G20 has sufficient 'shock absorbers' to manage the challenges posed by Trump's return [eaecb8c0]. During a virtual meeting on November 13, 2024, South Korea's Ministry of Trade, Industry and Energy discussed strategies to navigate the anticipated changes in U.S. trade policies under Trump, with Deputy Minister Park Jong-won highlighting the importance of monitoring U.S. trade dynamics that could impact Korea's economy [e7d12613].

Experts predict that Trump's administration will focus on reducing trade deficits, which could particularly affect South Korea, currently ranked eighth in trade deficits with the U.S. [d0e1cd28]. In response, South Korea is actively negotiating upgrades to existing Free Trade Agreements (FTAs) with various countries, including Britain and ASEAN, to strengthen its trade position [6c6cc2b0].

Ramaphosa's G20 presidency will also prioritize addressing climate change impacts on developing countries, a crucial issue as Trump's foreign policy is expected to be combative, potentially threatening tariffs against Brics nations, including South Africa [eaecb8c0]. In a show of diplomacy, Ramaphosa congratulated Trump on his election victory and extended an invitation for him to attend the G20 summit in late 2025 [eaecb8c0].

As South Korea prepares for the implications of Trump's policies, the government is investing heavily in its semiconductor industry, with plans to provide substantial financial support to firms in this sector. Additionally, a significant nuclear reactor construction deal with the Czech Republic is expected to be signed in March 2025, further diversifying South Korea's economic partnerships [6c6cc2b0].

The ramifications of Trump's policies extend beyond trade, with the U.S. national debt surpassing $35 trillion, raising inflation fears among economists. Retaliatory measures from countries like China could destabilize global trade and exacerbate domestic inflationary pressures [45e2055b].

In summary, as South Korea mobilizes its economic strategies in anticipation of Trump's return, the balance between immediate market reactions and long-term economic health remains a critical point of discussion. The global landscape is set for significant shifts, and leaders like Ramaphosa are keen to ensure that their nations are equipped to handle the potential turbulence ahead.