Fitch Warns of Growing Geopolitical Risks and Economic Uncertainty for South Korea Amid U.S.-China Trade War

Fitch Ratings has raised concerns about how South Korea will manage the growing geopolitical risks amid the ongoing trade war between the United States and China. According to Jeremy Zook, Fitch’s Asia-Pacific director, South Korea is caught between two major powers, with the challenge of balancing its relationships with both countries becoming increasingly difficult as trade tensions rise. The agency is closely monitoring how these dynamics affect the nation’s geopolitical and economic stability.

Global Trade Disruptions Strain South Korea’s Economy and Trade Relationships

The global trade conflict has already severely impacted South Korea’s economy. Both the U.S. and China have imposed tariffs of over 100% on each other’s goods, which has essentially disrupted trade between South Korea’s two largest trading partners. As a major U.S. ally, South Korea is also facing a 25% tariff on its exports to the United States. These trade disruptions present significant challenges for the trade-reliant South Korean economy, with Fitch identifying the shifting global trade system as a key concern.

Earlier this month, Fitch downgraded China’s credit rating due to concerns about its fiscal stimulus and weakening domestic demand. While Fitch has not altered South Korea’s “AA-” rating, it has warned that the economic outlook for the country has become more uncertain. Despite these challenges, Fitch noted that South Korea’s public finances remain relatively strong, although the risks stemming from global trade shifts are becoming increasingly pronounced, putting pressure on the nation’s economy.

Political Instability and Economic Contraction Heighten South Korea’s Challenges

Adding to the economic uncertainty, South Korea is experiencing significant political instability. The country is embroiled in its worst political crisis in decades, triggered by former President Yoon Suk Yeol’s failed martial law attempt. With a snap presidential election scheduled for June 3, the outcome of the election remains unclear. This political uncertainty makes it more challenging for South Korea to negotiate trade deals, as the delegation seeks to reduce U.S. tariffs amidst a volatile political climate.

South Korea’s economy contracted unexpectedly in the first quarter of the year, exacerbating concerns about the nation’s economic health. This contraction has fueled expectations of more interest rate cuts in an attempt to stimulate the economy.

Fitch highlighted that while South Korea’s finances are still considered strong, there is room for additional fiscal support to counteract the effects of global trade challenges. Fitch has lowered its growth forecast for South Korea to 1.0%, with further downside risks possible given the current economic and geopolitical climate.