[Currency War Part 3] Impact on the Korean Economy and Response Measures | Precarious Resilience

[Currency War] Impact on the Korean Economy and Response Measures

In Part 2, we examined the concept of a currency war and the historical lesson of the Great Depression of the 1930s, confirming that competitive devaluation leads to a 'race to the bottom' that harms everyone. In this Part 3, we will conduct an in-depth analysis of what specific effects this global trend will have on the Korean economy and discuss wise response measures that households, businesses, and the government should take.

Analysis of Impact on the Korean Economy and Response Measures (Part 3)

1. Impact on Key Export Industries

The Korean economy is highly dependent on exports, especially in key industries such as semiconductors, automobiles, and steel. The US has already initiated investigations into the semiconductor and pharmaceutical sectors, which demonstrates the vulnerability of Korean industries. The Korean government has shown diplomatic flexibility, such as lowering tariff rates on automobiles and parts and accepting adjusted conditions for the steel industry with the US.

1.1 Indirect Impact of the US-China Trade Conflict

As South Korea is China's largest export partner and is deeply integrated into the global value chain, the deepening trade conflict between the US and China poses a significant indirect risk to the Korean economy. If China were to undertake a competitive devaluation of its yuan, it could trigger currency instability across Asia, putting Korea in a difficult position to choose between maintaining export competitiveness and managing domestic inflation.

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2. Impact of Exchange Rate Fluctuations on Households and Businesses

A weaker national currency directly leads to higher import prices, which weakens consumer purchasing power. Since tariffs also directly raise the price of foreign goods, consumers bear the full burden of these price increases during a trade or currency war.

2.1 Increased Production Costs and Stagnated Corporate Investment

While a weaker currency can boost exports, Korean companies that rely on importing intermediate goods (raw materials, components, machinery) will see a significant increase in production costs due to tariffs and the weak won. Additionally, as trade war-induced investment uncertainty increases, companies will become more cautious in their investment decisions, which can lead to a vicious cycle that weakens long-term competitiveness.

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3. Conclusion: 'Precarious Resilience,' Proactive Response is Crucial

The current global economy is facing a period of 'precarious resilience amidst persistent uncertainty'. Fortunately, South Korea has substantial foreign currency reserves equivalent to seven months of imports and a sound fiscal position, giving it high resilience to external shocks. However, despite these financial strengths, monetary policy faces a difficult dilemma between managing inflation and supporting economic output. Therefore, the government and the central bank must prepare a multi-faceted and proactive strategy, including strengthening diplomatic efforts, diversifying trade partners, and promoting local currency trade settlements. It is also crucial for individual investors to diversify their asset portfolios and adopt cautious spending habits. In such times, an informed and adaptive approach from all economic agents is of utmost importance.

Key Summary:
A currency war poses the risk of directly hitting Korea's export-oriented industries and household economy. While Korea has resilience based on its financial strengths, a proactive and multi-faceted policy strategy is needed to cope with the uncertain future.

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.

▶View References◀

1. Economy of South Korea - Wikipedia
2. Korea Information - Economy - Korean Cultural Center New York
3. South Korea Gets Its Trade Deal with the United States - CSIS
4. South Korea: New challenges
5. The Impact of Export Controls on International Trade: Evidence from the Japan–Korea Trade Dispute in Semiconductor Industry* - The World Bank
6. World Economic Outlook - All Issues - International Monetary Fund (IMF)
7. CLA Outlook: Investment Strategies for Market Volatility from Tariffs
8. Why U.S. growth is likely to slow - DWS

▶Currency War Part 1

▶Currency War Part 2

▶Currency War Part 3