How to hedge against Trump risks

Trump seeks a complete economic decoupling with China in his second term.

Kim Doo-sikThe author is CEO of Tech & Trade Institute and a lawyer. “They’re cheating, and we’re seeing the damage here in America,” Joe Biden said of China. The U.S. president declared he will “consider tripling” the existing 7.5% tariff rate on Chinese steel and aluminum. Biden made the declaration in reaction to Donald Trump’s promise to impose tariffs of 60% or higher on all imports from China if he is re-elected president. Biden has all but caught up with Trump in recent polls, but is still lagging far behind his rival on diplomatic and economic issues in particular. To turn the tide before the Nov. 5 election, Biden must show his strength in foreign affairs, including U.S.-China relations above all.

Such developments in the United States with less than six months left before the presidential election show Trump’s radical policy proposals on diplomacy and economy are still working among U.S. voters. Trump won the 2016 election thanks to white voters’ fervent support for his isolationist platforms regardless of his extreme words and actions. Trump 2.0 foreshadows another seismic shift in the global security and economic order.

Trump’s re-election can upset the security of U.S. allies. The former real estate tycoon perceives alliances as a “burden,” not “assets.” He prioritizes economic interests over universal values like human rights. In particular, Trump abhors Europe free riding on America for its own security. The old continent now fears the possibility of the United States withdrawing from the North Atlantic Treaty Organization (NATO). The situation in the Korean Peninsula could be different from Europe’s. But Trump did threaten to pull out U.S. forces from Korea during his first term. If he returns to the White House, the egomaniac would push for the withdrawal once again unless his demands are fully met.

U.S. allies worry that Trump may endorse “changing the status quo by force” through a unilateral deal with Russian President Vladimir Putin to end the Ukraine war with unfavorable conditions. European countries now wonder if Trump would really defend Taiwan if China invades the island. Fortunately, Trump expressed support for the $61-billion military package for Ukraine, which passed the House in April. “As everyone agrees, Ukrainian survival and strength should be much more important to Europe than to us, but it is also important to us!” he said. But such rhetoric can hardly dispel U.S. allies’ deepening security concerns. In the era of a blurry line between economy and security, such possible changes during Trump’s second term will only obfuscate global security and fuel uncertainties in the world economy. Trump regards tariffs as a major tool to address economic conflicts with foreign countries, as seen in his labeling of himself as “Tariff Man.” He wants to use that weapon to resolve America’s massive trade deficits thanks to his conviction that promising to lower tariffs and open the U.S. market to foreign countries through free trade agreements (FTAs) only damages U.S. interests. In the same context, Trump orchestrated America’s withdrawal from the Trans-Pacific Partnership (TPP), followed by a relentless push for FTA renegotiations with Korea, Canada and Mexico.

The economic policy proposals Trump promised to implement in his second term — particularly his trade policy toward China — are even more radical than before. During the first term, Trump took the drastic action of imposing a 10 to 25 percent tariff on Chinese goods worth $550 billion to pressure China. But China remained unperturbed. Instead, the U.S. trade deficit kept swelling during his first term. After tasting bitterness from his administration’s failed China policy, Trump seeks a complete economic decoupling with China in his second term. If he levies a higher-than-60 percent tariff on all imports from China, the two countries’ annual trade volume, amounting to $575 billion, will plunge to nearly zero, according to an analysis by Bloomberg. Trump went on to threaten to disallow U.S. companies from investing in China and ban Chinese companies from acquiring U.S. assets. If such extreme platforms are put into action, it will certainly trigger a gargantuan shockwave leading to a colossal rebuilding of global supply chains and trade structure.

In a stunning move, Trump also wants to impose a 10 percent universal tariff on all imports to help reduce the enormous U.S. trade deficit exceeding $1 trillion annually. In 2018, Trump levied a 25-percent tariff on steel imports from Europe and other allies — and a 10 percent tariff on aluminum imports — citing security reasons. But the 10 percent tariff Trump mentioned is a universal tariff imposed on all imports from any countries.

Such an indiscriminate tariff is reminiscent of the lifting of the average tariff rate for all imports to almost 20 percent based on the Smoot-Hawley Tariff Act signed by U.S. President Herbert Hoover in 1930 during the Great Depression. But the legislation backfired, as it provoked retaliatory duties from U.S. trade partners and rapidly diminished global trade. The 10 percent universal tariff will surely prompt vehement resistance from America’s trade partners and spike a global trade war once again. The United States has been imposing no tariff or low rate tariffs with more than 20 countries, including Korea, it struck FTAs with. If Trump levies the 10 percent universal baseline tariff even on those countries, they will lose their trust in the U.S., surely to be followed by fierce trade disputes.

More fundamentally, Trump will likely rattle the global economic order established during the Biden administration. Biden stresses the importance of alliances to keep China in check, as clearly suggested by his persistent effort to confront the China-Russia-centered bloc with the U.S.-EU-Japan-focused bloc. That’s why he tried to renew or build multilayered security networks — such as the Group of Seven (G7), the Quadrilateral Security Dialogue (QUAD), the trilateral security partnership between Australia, the United Kingdom and the United States (Aukus), the U.S.-EU Trade and Technology Council (TTC), the Indo-Pacific Economic Framework (IPEF), to name a few — over the past three and a half years. But Trump — the unflinching champion of “America First” — will try to handle China on his own rather than seeking cooperation from U.S. allies.

As mentioned earlier, Trump’s re-election is expected to dramatically change the global security and trade systems. It will also negatively affect the Korean economy. The possibility of Trump winning the November election is approximately 50 percent at the moment. Still, there are several reasons for Korea to methodically brace for his return to the White House.

First of all, Korea must urgently build communication channels with Trump or his close aides. According to news reports, a Trump 2.0 administration will not have anyone who would put the brakes on his impulsive and eccentric action. That accentuates the need to directly communicate with his campaign aides. Fortunately, the details of Trump’s tariff and trade platforms are yet to be finalized, leaving room for Korea to protect its interests by minimizing apparent damages through close communications. Korea needs to pay attention to Japan’s effort to build a human network with Trump’s campaign in advance, as seen in its appointment of a bureaucrat close to Trump as ambassador to the United States and its sending of former Prime Minister Taro Aso to New York for his face-to-face meeting with Trump there.

At the same time, Korea needs to make effort to manage — and reduce — its trade surplus with America. Korea is the United States’ eighth largest trade deficit country. Last year, Korea showed a surplus of $44 billion after a steady increase. If Trump imposes a 60 percent tariff on all Chinese goods, it will likely boost Korea’s exports to the U.S. and expand its trade surplus further. But such an immoderate surplus can stimulate Trump to demand a renegotiation of the Korea-U.S. FTA — and undermine Korea’s negotiation leverage over other urgent issues between the two countries.

As Trump’s re-election will surely intensify America’s isolation, Korea must strengthen economic cooperation with other countries, too. Korea’s U.S.-biased diplomacy and economic policy may not be viable any longer. Korea already made FTAs with a number of countries whose combined GDP account for a whopping 85 percent of the world’s. But Korea must move on. The country must hurry to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) regardless of political difficulties, and deepen economic cooperation with Japan, as well as maintain solid trade and economic relations with China. Bolstering cooperative relations with other countries will be a strategic hedge against all the risks from Trump’s re-entry into the White House.

Translation by the Korea JoongAng Daily staff.