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Impact of China-US Trade Disputes on the Korean Economy

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KDI Brief No.95 (April 18, 2017)

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Impact of China-US Trade Disputes on the Korean Economy

Implications of the Rapid Increase in Pre-sale Apartments
AUTHOR
Kyu-Chul Jung
Fellow, Department of Macroeconomic Policy, KDI
 
 
In the event of a China-US trade dispute, the domestic demand in both countries will shrink, having a negative impact on the Korean economy. Indeed, such an impact will be much stronger on US trade restrictions than vice versa.
 
   ○ The global supply chain between Korea and China has weakened on China’s processing trade quotas, making the demand path more vital than the supply path.
 
   ○ Given that China depends more on the US than the other way around, it is mostly the decrease in China’s domestic demand caused by US trade barriers which will negatively impact the Korean economy.
 
   ○ A 10% decrease in China’s exports to the US is estimated to pull down Korea’s GDP by approx. 0.31%, which is not deemed as a serious crisis. Therefore, Korea should maintain composure and take the necessary actions.
 
Korea must aim to diversify its export markets in response to growing trade protectionism led by the US while preparing to prevent any backlash from the China-US trade disputes from spreading to the Korean economy.
 
   ○ If Korea’s exports remain heavily dependent on certain countries, even a local trade dispute could deliver a serious blow. As such, the risks should be mitigated via the diversification of export markets.
 
   - China and the US account for a huge share of the global economy, which means Korea’s exports have to remain dependent to some degree. However, new inroads should be actively sought in rapidly emerging markets such as India.
 
   ○ Therefore, Korea should make vigorous efforts to stay away from China-US trade disputes and play a leading role in preventing trade protectionism from spreading across the globe.
 
   - Korea should be pre-equipped with political and economic theories to prevent the risks from China-US trade disputes from impacting Korea.
 
   - Furthermore, Korea needs to cohere with other countries in efforts against the global spreading of trade protectionism.
 
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