This blog post calmly examines why tariffs are used as a powerful weapon in trade disputes and the impact of the U.S.-China trade war on the global economy and Korean industries.

Tariffs are a very powerful weapon in trade disputes

Trade also operates according to market principles. However, some countries perceive that they are suffering losses in the trade process. In such situations, the countermeasure chosen by a country is a ‘trade barrier’. The primary method of erecting trade barriers is through the use of tariffs. While various other methods exist besides tariffs, for the sake of simplicity in this article, we will equate ‘trade barriers = tariffs’.
Tariffs are taxes levied during the customs clearance process. Goods exported from South Korea, goods imported into South Korea, and goods transiting through South Korea are all subject to tariffs. In other words, it’s easy to understand tariffs as taxes incurred whenever goods cross a nation’s border.

Tariffs are like lead weights strapped to a runner’s ankles

The reasons for imposing tariffs can generally be divided into two categories. First, to protect domestic industries. If foreign goods that are both inexpensive and of high quality flood the market, consumers naturally choose them over domestic products. From an individual consumer’s perspective, this may be a rational and desirable choice. However, from the perspective of the state or businesses, it does not necessarily bring only positive outcomes.
Let’s take imported cars as an example. In the past, imported cars were nearly luxury goods consumed only by the wealthy. Today, however, the number of consumers choosing imported cars has significantly increased. This is largely because various taxes, including tariffs imposed on imported cars, have been substantially reduced compared to the past. As demand for imported cars rises, demand for domestic cars inevitably declines. Companies producing home appliances face the same issue. To maintain national competitiveness and foster core industries in the long term, it is necessary to regulate the import of foreign products to a certain extent. This is why tariffs are imposed on imports, artificially raising their prices to protect domestic industries.
The second reason is to increase government revenue, i.e., tax income. Taxes on crude oil are a prime example. Since South Korea does not produce crude oil, no domestic industry would suffer direct harm if taxes on crude oil were eliminated. Nevertheless, the government imposes taxes on crude oil. From the perspective of domestic companies using crude oil as a raw material, such taxes inevitably become a burden. If taxes were reduced, they could purchase crude oil at a lower price.
From the importing country’s viewpoint, tariffs are necessary taxes, but from the exporting country’s perspective, tariffs are a clear obstacle and a means of forcing unfair competition. Imposing tariffs is akin to a country hosting a running competition, allowing its own athletes to compete without any equipment while forcing foreign athletes to start with heavy lead weights strapped to their ankles.
In this situation, other countries have two main options for response. One is to demand, through diplomatic pressure, that the lead weights be removed. The other is to respond by attaching lead weights to the foreign athletes’ ankles as well.
The outcome of choosing the second option is not difficult to foresee. If Country A attaches a 1kg lead weight to Country B’s athlete’s ankle, Country B will attach a lead weight of the same weight to Country A’s athlete’s ankle. Country A, displeased, increases the weight to 2kg, and Country B counters with an even heavier weight. As this process repeats, trade volume between the two countries plummets, ultimately plunging both economies into stagnation.
Attempts to remove these weights altogether are the institutions like the World Trade Organization (WTO), Free Trade Agreements (FTAs), and the Trans-Pacific Partnership (TPP). Conversely, the essence of the ongoing ‘US-China trade war’ is the pressure to somehow force heavier weights onto the other country.

The Big Match in the Global Economy: The US-China Trade War

The world’s top two economies have collided head-on, unleashing a colossal showdown that is shaking the foundations of the global economy. The rules of this economic brawl are simple: rules exist, but power can override them. There are no restrictions on fighting opponents of different weight classes, battling multiple adversaries alone, or forming alliances to attack a single nation. There is no clear standard for the duration of the match either. It stops when someone declares a truce, and resumes when someone suddenly launches an attack. No one can easily leave the ring, because enormous sums of money are at stake in the midst of this fight.
The conflict between the US and China has a significant impact on the global economy as a whole. Should the two nations collide head-on, the likelihood of the global economy entering a recession is very high. However, as the burden of full-scale war is too great for either side, they repeatedly alternate between hardline and conciliatory strategies. With this background explanation, let’s examine the following article headline.

“Global Growth to Slow Next Year… US-China Conflict a Risk Factor” (Newstomato, 2022.12.04.)

The conflict between the US and China has persisted for a long time, and the likelihood of it being resolved in the short term is low. In this process, the concept of ‘fragmentation’ has come to the fore. Before the US-China conflict, the global economy was structured to connect everything across borders and trade under the most efficient conditions. However, as the US and China confront each other, this network is becoming fragmented. This is referred to as the fragmentation of the global economy.
For example, the structure where the US designed components or raw materials, China performed primary processing, and then South Korea imported these for assembly and further processing before selling the finished products globally is gradually breaking down. The closer one side moves to one camp, the further it inevitably drifts from the other. Trade relations are increasingly governed not by efficiency, but by principles and bloc logic.
In July 2018, the U.S. imposed 25% tariffs on approximately 800 types of Chinese imports, marking the full-scale onset of the U.S.-China trade dispute. In response, China also imposed 25% retaliatory tariffs on U.S. agricultural and fishery products, automobiles, and other goods that same month. Subsequent negotiations between the two nations faced repeated setbacks. Despite the signing of a Phase One trade agreement in early 2020, conflicts persist in various forms. The clash has expanded beyond economics into the realms of politics and security, fueled by competition for technological supremacy centered on semiconductors, challenges to the dollar-centric international financial order, and geopolitical tensions.

Will we get caught in the crossfire?

The conflict between the United States and China is by no means solely their problem. Korean companies do not operate solely within Korea or produce goods using only domestic raw materials. The same is true for China and the United States. Goods traded between the two nations contain raw materials and components produced in multiple countries, including some made in Korea.
Therefore, if the US-China trade war reduces trade volume between the two nations, the trade of other involved countries will inevitably be affected. This is why the entire world reacts sensitively to changes in the relationship between these two countries.

“G2 Semiconductor War Intensifies… Korea Worries About the Next Decade” (Dong-A Ilbo, 2022.12.20.)

Now, let’s narrow our focus to the semiconductor sector, a core industry for South Korea, within the broader US-China conflict. China has challenged the US export controls as unreasonable at the World Trade Organization, while the US has restricted exports of related equipment to prevent China from producing advanced semiconductors. Japan and the Netherlands have joined in this coordinated response. Essentially, the US has built a defensive line with its allies to block China’s growth in the semiconductor industry.
However, China is unlikely to accept this situation passively. China has publicly declared its intent to invest massive capital to nurture its own semiconductor industry. Should the United States and China, the so-called G2, collide head-on in this manner, South Korea is also highly likely to suffer damage. This is because a significant portion of South Korea’s semiconductor exports relies on the Chinese market. Even a simple calculation shows that if trade with China shrinks, a large share of overall performance disappears. Furthermore, the possibility cannot be ruled out that cornered Chinese companies might resort to reckless attempts to secure technology.
Once established, the massive currents of the international economy do not change easily. This evokes memories of the Cold War era of the 1960s, when the world was divided between the United States and the Soviet Union. As then, there is a possibility that tensions will persist until one side gains the upper hand. From South Korea’s perspective, whichever side it chooses, it faces the difficult situation of a shrinking market.

“TSMC’s US Factory to Produce Semiconductors for Apple… Samsung ‘Tense’ in Competition to Secure Customers” (Dong-A Ilbo, 2022.12.08.)

So, is firmly siding with the US the solution? The most fundamental reason for the US-China clash is each country’s national interests. An ally’s interests cannot supersede a nation’s own. The U.S. seeks to contain China’s semiconductor industry while simultaneously building a stable domestic semiconductor production base. This is because, while possessing design technology and massive demand, it lacked manufacturing facilities capable of mass-producing advanced semiconductors. Consequently, the U.S. has attracted Taiwan’s global semiconductor companies to its shores and is strengthening a U.S.-centric supply chain.
The reality South Korea faces in this process is far from light. The Chinese market is steadily shrinking, while competition in the U.S. market is intensifying. Caught in this dual squeeze, South Korea must simultaneously endure a shrinking market and rising uncertainty. This is the heaviest question the U.S.-China trade war poses to our economy.