U.S. Tariffs Raise Deflation Risks for South Korea, BOK Warns

Gerik

Summary:

South Korea’s central bank (BOK) has warned that U.S. tariffs of up to 15% could shave nearly half a percentage point off growth in 2025 and deepen risks of deflation, underscoring Seoul’s heavy reliance on the U.S. market...

Tariff Impact on Growth

According to the Bank of Korea’s latest report, Washington’s new tariff regime could reduce South Korea’s GDP growth by 0.45 percentage points in 2025 and 0.6 points in 2026. This leaves the world’s 13th-largest economy growing at just 0.9% this year and 1.6% next year, well below earlier expectations. While South Korea managed “relatively favorable” outcomes in negotiations compared with 50 other top U.S. trading partners, key export items such as automobiles, semiconductors, and electronics still face higher duties than rivals.

In the near term, exemptions and firms absorbing costs have softened the blow. However, the BOK emphasized that the structural effects will grow clearer over time, as South Korea’s export ecosystem is deeply dependent on U.S. demand. A redirection of global trade flows could see foreign competitors divert goods into Korea’s domestic market or push firms to expand production inside the U.S., pressuring domestic industries, risking job losses, and accelerating a potential “brain drain” of high-skilled labor.

Deflationary Concerns

The central bank explicitly raised concerns about deflationary pressures. If tariffs suppress exports and corporate margins, investment and hiring could weaken, feeding into slower wage growth and weaker consumer demand. That scenario risks dragging prices down despite Seoul’s already modest inflation outlook.

On the monetary side, the BOK opted to hold interest rates at 2.5% for a second month, balancing fragile growth with the need to guard against financial risks tied to surging household debt and overheating housing prices in Seoul. The decision reflects a cautious approach as policymakers grapple with simultaneous challenges: stabilizing property markets, preventing debt imbalances, and shielding the economy from U.S. trade shocks.

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