With Falling Labor Productivity, South Korea Is Unprepared for Trade War

The United States has once more dropped a bomb on China with customs duty. The Trump administration announced that a 25 percent tariff will be levied on 1,333 Chinese import items, worth $50 billion (54 trillion won). Most of those products listed were part of the “Made in China 2025” report that was intended to upgrade Chinese industry. This tariff will be enforced starting at the end of May, and these heavy tariffs are aimed at hindering China’s technological advances and cutting the U.S.-China trade deficit, which had reached $375.2 billion as of last year. China is reciprocating in response to the attack, and just yesterday announced that an additional 25 percent tariff on 106 U.S. products, including soybeans, cars and chemical products, will be implemented in the future. The U.S.-China trade war, which started last month with Trump’s imposition of high tariffs on Chinese steel and other imports, is spreading like wildfire.

It is very evident that this fire will spread over to our country (South Korea). According to an analysis by Hyundai Economic Research Institute, a 10 percent reduction of China’s exports to the United States will result in a $28.2 billion (30 trillion won) reduction in Korea’s exports to the U.S., an amount that accounts for 20 percent of South Korea’s exports last year. Our economy is already bruised as it is by the triple whammy of protectionism, interest rate hikes and lawsuits.

Our country is in dire straits. Based on a report from the Korea Institute for Industrial Economics and Trade, Korea’s labor productivity growth rate has newly fallen to a mere 2 percent in the last five years. Compared with the 6 percent in the 2000s, the number has more than halved. As a result, the labor productivity per hour of Korean companies in 2016 was only $33.1 based on actual purchasing power, ranking 27th among other Organization for Economic Cooperation and Development members. Our labor productivity is about half that of the U.S. and Germany, or more specifically, 52 percent of the U.S. ($63.3) and 55 percent of Germany ($59.8). Contributing to our country’s deterioration are strong unions, malignant regulations and anti-corporate policies that have stalled productivity. How can we expect to prepare for a trade war in this state of affairs?

If this is our reality, we need to start worrying about how to increase industrial competitiveness. However, our government is instead putting out backward policies – minimum wage increases, shortened working hours, elimination of performance pay in the public sector – which all chip away at our productivity. The government refuses to get embroiled in labor and regulatory reform, and major economic ministries keep silent under the direction and watching eyes of our Blue House* and the ruling party, whose ideologies are the most prevalent. If things continue this way, it will only create more wrinkles in our economy instead of jobs.

*Editor’s note: The Blue House is the executive office and official residence of the president of the Republic of Korea.