Bank of Korea Governor Rhee Chang-yong warns of trade tensions as headwinds for South Korea’s economy

In a revealing interview with CNBC, Bank of Korea Governor Rhee Chang-yong expressed significant concerns regarding escalating global trade tensions, underlining the vulnerability of South Korea's export-driven economy. He articulated that ongoing tariff disputes are not merely affecting South Korea directly—due to U.S. tariffs—but also indirectly impacting the country through tariffs that other nations face, where South Korean companies have substantial operations, such as in Vietnam for semiconductors, in Mexico for automotive and electronics manufacturing, and in Canada for battery production. Rhee's statements come at a critical time, just as South Korea's GDP reported its first contraction since Q4 2020, with a 0.1% year-on-year decline in the first quarter of 2025. The anemic growth is reflected starkly in the construction sector, which contracted by a staggering 12.4%. This economic backdrop can be attributed to political uncertainties stemming from impeachment trials and a fading global economic environment, further aggravated by deteriorating trade conditions. Despite these disheartening figures, Rhee maintained a note of optimism, claiming that South Korean firms are in a better position relative to global competitors, thanks to proactive diversification of their supply chains to reduce dependency on China—primarily driven by geopolitical concerns. He stated, 'Our companies have been preparing for this compared to other countries, so I believe they can adapt. The current trade tensions will likely accelerate this diversification.' Regarding future economic outlooks, Rhee indicated that it's premature to predict growth revisions until post discussions with U.S. financial counterparts, hinting at possible changes in fiscal policy that could significantly influence growth projections moving forward. As South Korea gears up for its presidential election set on June 3, the outcome will likely shape upcoming negotiations on trade, a matter of urgency given South Korea's critical export relationships. In the interview, Rhee reflected on the broader implications of U.S. tariffs, emphasizing their potential negative impact not only on South Korea but also on global trade dynamics, indicating a shared vulnerability among nations. These insights highlight a complex intersection of international relations and economic stability that will require careful navigation from South Korea's leadership in the coming months.