Caught in the Crossfire: Korea’s Economic Vulnerabilities in a Multipolar Trade War

Executive Summary

South Korea’s economy is navigating a perfect storm of geopolitical friction, domestic financial fragility, and structural constraints. From U.S.-China trade weaponization battering strategic industries to surging demand for safe-haven assets and a banking sector grappling with non-performing loans, the nation’s export-dependent model faces unprecedented stress tests. These developments reveal not just cyclical pressures but deeper vulnerabilities in Korea’s economic architecture.

The Geopolitical Squeeze: Trade Wars as Industrial Policy

The U.S.-China shipping fee escalation has turned South Korean firms into collateral damage. Hanwha Ocean’s U.S. subsidiaries, critical to the MASGA shipbuilding initiative, now face Chinese sanctions, jeopardizing a key bargaining chip in Korea-U.S. tariff negotiations. Meanwhile, Hyundai Glovis anticipates a 200 billion won annual cost increase from U.S. port fees on Korean-built car carriers. This dual pressure—caught between great power industrial policies—highlights Korea’s precarious position in global supply chains. With 25% auto tariffs already disadvantaging Hyundai against Japanese and European rivals, the cumulative cost could exceed 9 trillion won in 2024, eroding competitiveness in core export sectors.

Flight to Safety: Gold Hoarding as a Macroeconomic Signal

Domestic demand for gold and silver bars has overwhelmed commercial banks, with the Korea Gold Exchange suspending 1kg silver bar sales until 2025. This scramble reflects:

• Record-high international prices ($4,100/oz gold, $52.5/oz silver)
• Deepening risk aversion amid currency volatility (won down 37/month against USD)
• Distrust in traditional financial instruments as NPLs rise

The phenomenon underscores how global uncertainty and domestic economic anxiety are reshaping asset allocation strategies.

Banking Under Stress: The NPL Time Bomb

Commercial banks’ bad loan sales surged 12.2% YoY to 2.154 trillion won in H1 2024, with delinquency rates climbing to 0.59%. This deterioration stems from:

1. Prolonged high interest rates squeezing SMEs and households
2. Structural weaknesses in real estate-linked loans (donation-driven property transfers up 44% MoS)
3. Inadequate resolution mechanisms: The New Leap Fund faces resistance from lenders rejecting 5% bond buyback rates versus market norms of 25%

With banks planning 300-400 billion won Q4 NPL disposals, balance sheet risks are being externalized rather than resolved.

Policy Paralysis: From Export Vouchers to Tax Populism

Government interventions show diminishing returns. The export voucher program, despite a 2.6x budget increase, saw exports fall at 57.5% of recipient firms. Meanwhile, legislative hyperactivity—342 special tax law proposals in 2024—has created fiscal incoherence. Tax expenditure now exceeds legal limits (16% vs 15.5% cap), undermining revenue stability amid a projected 12.5 trillion won 2024 shortfall.

Conclusion: Navigating the Trilemma

South Korea faces a trilemma: maintaining export competitiveness amid trade fragmentation, stabilizing financial systems burdened by NPLs, and avoiding fiscal exhaustion. The path forward requires:

• Strategic decoupling: Diversifying export markets and onshoring critical supply chain nodes (e.g., Doosan’s gas turbine exports)
• Debt triage: Restructuring SME loans rather than asset-stripping via NPL sales
• Policy discipline: Curbing populist tax measures while enhancing targeted R&D/export supports

Without structural reforms, Korea risks becoming a perpetual casualty of geopolitical and financial crosscurrents rather than mastering them.