[Currency War Part 1] US Tariff Policy, Opening the Prelude to a Currency War | The Wave of Protectionism and the Korean Economy

[Currency War] US Tariff Policy, Opening the Prelude to a Currency War

The global economy is currently paying close attention to the aggressive tariff policies put forth by the United States. Beyond a simple trade conflict, voices are growing louder that a 'currency war' between nations could break out. This unstable trend is a critical issue that is directly connected to the Korean economy. Over the next three parts, we will together examine the shadow of the upcoming currency war and the key points we need to know within it.

The Prelude to a Currency War, The Wave of Protectionism Rolls In (Part 1)

1. The Revival of Protectionism, The Trump 2nd Administration's Tariff Policy

The Donald Trump 2nd administration, which was inaugurated on January 20, 2025, is implementing an unprecedented level of strong tariff policies. The average US tariff rate, which was only 2.5% at the end of 2024, soared to a staggering 27% by April 2025, the highest level since the Smoot-Hawley Tariff Act was enacted a century ago. Although it was slightly adjusted down to 18.6% in August 2025 after some negotiations and adjustments, it still remains at a level incomparable to the past.

1.1 Background and Scale of Tariff Increases

These high tariffs were imposed based on broad legal authorities such as the International Emergency Economic Powers Act (IEEPA) and 1962 Trade Expansion Act 232, using national security and trade deficit resolution as justifications. Specifically, high tariffs of 50% were imposed on certain items like steel, aluminum, and copper, and a 25% tariff was applied to imported cars. Furthermore, a campaign pledge during the 2024 presidential election even proposed imposing 60% tariffs on products from China, 100% on products from Mexico, and 20% on all other countries. In addition, the 'de minimis exemption' rule, which previously exempted small import items under $800 from tariffs, was abolished, significantly expanding the scope of goods subject to tariffs. The US administration claims that these tariffs will foster domestic manufacturing, protect national security, and ultimately replace income tax with tariff revenue.

1.2 Economists' Criticism and the Risk of Stagflation

While the US administration views trade deficits as inherently harmful, economists criticize this understanding of trade deficits as flawed and point out that the idea of replacing income tax with tariff revenue is "mathematically impossible." Instead, they warn that these high tariffs could cause severe harm to both the US and global economies, leading to job losses, an expanding fiscal deficit, economic recession, and inflationary pressure (risk of stagflation). Tariffs are essentially a type of consumption tax on imported goods, which has a regressive nature that places a disproportionate tax burden on low- and middle-income households.

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2. How Do Tariffs Affect Exchange Rates?

The US tariff policy is having a complex impact on the value of the dollar, which is a key factor in the outbreak of a currency war. The US dollar, which had been strong since 2008, reversed to a downward trend from early 2025, and this decline accelerated after the tariff announcement on April 2, 2025. This weakening of the dollar is due to global trade uncertainty, a slowdown in the US economy, and an increase in national debt. This phenomenon is contrary to the 'Dollar Smile Theory,' where the dollar's value typically rises during economic crises.

2.1 Conflicting Predictions of Dollar Weakness and Strength

Some macroeconomic models also predict that a permanent tariff on US imports will strengthen the dollar's value in the foreign exchange market. A 50% tariff could cause the dollar's value to rise tremendously, which could account for a significant portion of the large tariff increase. This dollar strength could be further reinforced by accompanying tax cuts. On the other hand, a weaker dollar generally provides an advantage to US export companies, increasing the price competitiveness of US goods abroad.

2.2 Why Exchange Rate Volatility Leads to a Currency War

The conflicting predictions for the direction of the US dollar (observed weakness vs. model-predicted strength) indicate severe uncertainty in the global market. If the dollar strengthens as some models predict, it will raise the prices of US exports, weakening the very competitiveness that the tariffs were meant to protect. This situation would put immense pressure on other countries to devalue their own currencies to maintain their export markets, which could directly fuel a currency war. Conversely, even if the dollar weakens as initially observed, other countries might still undertake devaluations to prevent their own currencies from becoming too strong against the dollar, thereby maintaining export competitiveness and preventing trade imbalances. Therefore, whether the dollar strengthens or weakens, the volatility and uncertainty caused by US trade policy increase the possibility of a currency war.

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3. Conclusion: The Curtain Rises on a Currency War

In this first part, we have examined how the Trump administration's aggressive tariff policy is increasing global economic instability and could ultimately become the fuse for a currency war. Beyond a simple trade conflict, this ideological protectionism and the complex changes in the dollar's value that it causes are forcing all countries to take defensive measures. In the next Part 2, we will delve deeper into the nature of this destructive competition by exploring the concept of a currency war and its historical lessons.

Key Summary:
America's aggressive tariff policy threatens the global trade order, deepens the unpredictability of the dollar's value, and ultimately increases the possibility of a currency war.

The contents of this blog are for reference for investment decisions only, and investment decisions should be made under one's own judgment and responsibility. Under no circumstances can the information in this blog be used as legal evidence for the outcome of an investment.

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▶Currency War Part 1

▶Currency War Part 2

▶Currency War Part 3