Unsettled Korea-US trade agreements identified as potential risks by former IMF economist
In the event of a second term for President Trump, South Korea, like many allies, faces increased pressure to shoulder more defense costs while the US retreats from climate accords and the World Health Organization. This shift has sparked concerns and discussions about South Korea's economic future.
Maurice Obstfeld, former Chief Economist of the International Monetary Fund, has expressed his concerns about the unresolved trade deal between the US and South Korea. He believes that the prolonged negotiation increases the risk of fresh disputes. Obstfeld also urges Korea to deepen ties among its allies and potential partners, citing Korea's potential entry into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership as an example.
The strategy for South Korea, according to Obstfeld, is to balance security and economic priorities while expanding partnerships in Europe and Asia. However, he warns that if the US sees the deficit is not shrinking as the trade balance with South Korea is reviewed, it may claim there are hidden barriers or imbalances and demand more concessions.
On a positive note, Obstfeld praises Korea's relatively favourable sovereign debt compared to other OECD countries. Yet, he raises concerns about higher global interest rates due to US and European defense spending posing a risk to Korea's public finances. Deficits, he notes, are not inherently negative if spent wisely, as funding for productive investments that raise potential growth and advance structural reforms can make the fiscal burden more sustainable.
Obstfeld also advises South Korea to maintain vital ties with Japan and China despite geopolitical strains. He downplays fears that Korea could follow Japan into prolonged stagnation. However, he points out that Korea still faces vulnerabilities such as low fertility, high housing costs, and heavy household debt relative to disposable income.
Rapid aging in Korea will strain public finances, as greater demands on fiscal resources are already rising to support a larger, less healthy elderly population. Obstfeld believes that South Korea and the US may have different interpretations regarding the type, size, and distribution of investments, as well as who will carry them out.
In light of the US becoming less generous in providing global public goods, Obstfeld suggests that the world should close ranks. He also calls for stronger cooperation among the South Korean government, the US government, and the institutions involved in the US-Korea Free Trade Agreement. Despite the challenges ahead, Obstfeld does not express concerns about the unresolved trade deal between the US and Korea increasing the risk of fresh disputes in the current context.
