Bank of Korea Warns 15% US Tariff to Cut 2026 Growth by 0.6%

The Bank of Korea has issued a warning that the imposition of a 15% tariff on Korean exports to the United States will have a significant impact on the Korean economy. This move contrasts sharply with the zero-tariff policy previously agreed upon in bilateral trade agreements. The central bank highlighted that such tariffs would not only limit exports but also create a "triple blow" to the economy. The first blow would be the restriction on exports, which are a critical component of Korea's economic growth. The second blow would be the increased cost of imports, which would strain domestic industries. The third blow would be the potential retaliation from other trading partners, further complicating Korea's economic landscape.

The Bank of Korea's warning comes at a time when the Korean economy is already facing challenges. The country's economic recovery has been sluggish, and there are concerns about inflation. Analysts suggest that the current monetary policy, which is accommodative, may need to be maintained at least until the first half of next year to support economic growth. The central bank's stance reflects a cautious approach, given the uncertain global economic environment and the potential impact of tariffs on domestic industries.

The tariffs are expected to have a direct impact on Korea's export-driven economy. The United States is one of Korea's most important trading partners, and any disruption in trade relations could have far-reaching consequences. The central bank's report indicates that the tariffs could slow down Korea's export growth, particularly in the fourth quarter of this year. This would be a significant setback for an economy that has been relying on exports to drive growth.

The Bank of Korea has projected that the tariffs will reduce Korea's economic growth rate by 0.45 percentage points this year and by 0.6 percentage points in 2026. Additionally, the tariffs are expected to lower the consumer inflation rate by 0.15 percentage points this year and by 0.25 percentage points in 2026. The impact will be felt through trade, financial markets, and business confidence. Trade will be the most significant drag, as increased costs will weaken competitiveness and reduced demand from the United States will lead to fewer orders, causing Korean exports to the U.S. to shrink. The steel and automotive industries will be particularly hard hit, as they face higher tariffs. However, shifting some exports to other regions could mitigate some of the impact.

In July, the United States and Korea reached a trade agreement that exempted Korea from the threatened 25% tariffs by the then-U.S. President Donald Trump, in exchange for Korea's commitment to invest 3500 billion in the United States. Additionally, private sector investments from Korea to the United States are expected to reach approximately 1500 billion. The Bank of Korea noted that the U.S. investment fund, which is being discussed alongside the tariff plan, is also worth close attention. Although details are unclear, the combination of tariffs and increased investment in the U.S. could potentially hollow out Korean industries, leading to job losses and brain drain.

Earlier in the day, the Bank of Korea kept the policy interest rate unchanged at 2.5%, in line with market expectations. The central bank stated that it is necessary to closely monitor the development of the real estate market and the impact of U.S. tariff policies before considering another rate cut. The Bank of Korea also noted that the tightening of financial conditions due to increased U.S. inflation, prompted by tariffs, could delay the Federal Reserve's rate cuts. This could prolong domestic credit tightness, negatively affecting investment and consumption.

Increased uncertainty has made the economy more fragile, suppressing household consumption and corporate investment. Businesses are likely to remain cautious until the trade outlook becomes clearer. While the tariff grace period and companies absorbing some of the costs have eased the short-term impact, the Bank of Korea warned that the effects could worsen over time. In the long run, Korea may face risks such as supply chain disruptions, industrial hollowing out, and changes in the global trade landscape, which could permanently reshape the Korean economy.