U.S.–China Trade Conflict and the Changing Multilateral Trading System: Korea's Perspective

Abstract

One of the biggest risks to the world economy today is the U.S.–China trade tension. Korea is said to be particularly vulnerable to the trade conflict between the two economic giants because the United States and China are its two largest trading partners. Under the scenario that both the United States and China mutually impose 25 percent of tariffs on all imports, Korea's exports are projected to be reduced by USD 13.3 billion, just 2.2 percent of total exports in 2018. This apparent low impact is because a significant portion of Korea's exports to China are used for domestic consumption in China, not for re-export to third countries, including the United States. The adverse impact of the tit-for-tat tariffs between these two countries on Korea's exports may not be fully realized yet, however, because of the efforts by individual firms to avoid pre-announced tariffs. Thus, more time is needed to properly capture the influences of the U.S.–China trade tensions on the Korean economy. On the other hand, the current World Trade Organization (WTO) reform led by developed countries such as the United States, EU, and Japan can be interpreted as another version of a bilateral trade conflict between the United States and China. In fact, it targets state-owned enterprises’ (SOEs) subsidies, which are the backbone of China's state-led economic development model. Furthermore, WTO reform is closely related to U.S. complaints that the WTO cannot effectively control the unfair trade practices of non-market economies like China. Considering the consensus-based decision-making mechanism of the WTO, it is highly unlikely that WTO members will derive a successful agreement on the current WTO reform. Again, the WTO is in danger of dichotomy; one group led by developed members and the other group composed mostly of developing members. Each group will try to make new trade norms suited to only their own taste.