Trump's Tariff War

On February 1, 2025, U.S. President Trump announced that he would impose 25% tariffs on Canada and Mexico and an additional 10% tariff on China.
In the aftermath, the Korean stock market closed on February 3 with the KOSPI plunging 2.5% and the KOSDAQ 3.3%.
It can be seen that the tariffs President Trump pledged before the election are now beginning in earnest.
In 2018, during Trump's first term, tariffs were imposed in the same way, and the U.S. and China fought a trade war.
However, while that was a trade war with China, in Trump's second term tariffs are being imposed with the whole world as the target.
The reason President Trump is imposing tariffs like this is that he champions "America First" and aims to protect U.S. industries.
So what happens when the U.S. imposes tariffs that sends such shocks through the global economy?
When tariffs are imposed, the prices of imported goods rise, and this rise in import prices can trigger inflation.
When prices rise, consumers cut back on purchases, and as these effects occur in a chain reaction, the economy begins to contract.
It is obvious that the countries hit with tariffs will naturally impose retaliatory tariffs on the U.S. in the same way.
Naturally, U.S. exports will also decline, and it is hard to expect a good outcome for the U.S. either.
However, from the standpoint of Canada and Mexico, which are hit with the tariffs, the story is different.
From the U.S. perspective, exports to Mexico account for 16% of the total, but from Mexico's perspective, exports to the U.S. account for 80% of the total.
No matter how much Mexico retaliates with tariffs, if the U.S. imposes tariffs, it is practically the same as Mexico facing tariffs on nearly all of its exports. It is truly a state of extreme emergency.
If President Trump uses tariffs as a weapon, these countries have no way to withstand it. Canada's situation is similar to Mexico's.
The reason President Trump is pushing ahead with tariffs is that he knows well that, in the end, the other country suffers the greater loss, and because he believes they are necessary to reduce the U.S. trade deficit, his ultimate goal.
Since the U.S. is a country that can be self-sufficient on domestic demand alone, this means that even if the economy contracts, it will not just stand by and watch other countries make money off the U.S.
In the end, global trade volume is bound to shrink, and production and consumption will decline, adversely affecting the global economy.
If inflation is detected in the U.S., it naturally also becomes difficult to expect interest rate cuts from the Federal Reserve.
That is why it is bad news for global stock markets that are hoping for rate cuts.
In particular, Korea has a structure that is highly vulnerable to such trade wars. This is because it is an export-driven country.
Moreover, the countries Korea exports to the most are the U.S. and China, so if these two countries start a full-scale tariff war, Korea is the one that takes the biggest hit.
During the 2018 U.S.-China trade war, the U.S. S&P 500 index actually barely fell. But China fell by as much as -24%.
At that time, Korea, which had the highest trade dependence on China, was also affected and fell by nearly -20%.
Starting with semiconductors and automobiles, which lead the Korean economy, and extending to other industries, exports were all affected, and stock prices underwent a major correction as a result.
The current situation has some similarities to the 2018 trade war. In 2017, before the U.S.-China trade war began in earnest, a global economic boom had driven stock markets in every country up sharply.
Korea was no exception. Afterwards, due to the U.S.-China trade war, Korean stock prices underwent a major correction in 2018.
If countries fail to find common ground on tariffs, stock prices are highly likely to undergo a correction for the time being, whether by falling or moving sideways.
What matters is that, in the end, countries highly dependent on the U.S. and China are greatly affected.
Korea ranks 8th among the top 10 countries with which the U.S. runs a trade deficit. That means it is a country that earns a lot of money from the U.S.
Even though Korean stocks have already fallen a lot compared with other countries' markets, if President Trump really keeps imposing tariffs, the situation we face looks very difficult.
President Trump must also know well how hard tariffs would be on the other countries. That is why he is bound to be all the more cautious about imposing them.
In fact, President Trump's real goal may be to use tariffs as a weapon to secure trade terms favorable to the U.S. Therefore, even if tariffs are imposed, the likelihood of them remaining in place for a long time seems quite low.
Even if tariffs are imposed and stock markets worsen like this, if the U.S. lifts them quickly, global stock markets may regain strength.
We hope that President Trump changes his mind, or that countries find common ground so that the tariff issue goes away.