[New Year Special Commentary Series] ⑥ The Trump 2.0 Era: Trump Risks and Korea

I. Domestic Political Implications of Trump 2.0 and Maganomics

2024 was a "super year for elections," with the largest number of elections in human history. A total of 3.7 billion people across 72 countries participated in elections. Elections served as a stage for the simultaneous manifestation of latent yet structural domestic political issues such as economic inequality, social division, and political polarization worldwide.

Donald Trump's victory in the US presidential election is the biggest factor increasing the wave of uncertainty in the global economic order in 2025. As the presumptive President Trump has succeeded in regaining power under domestic political conditions vastly different from 2018, the Trump 2.0 administration is expected to further differentiate itself from the preceding Biden administration, and even from Trump's first term. Rather than a simple repetition of policies from eight years ago, the "Trumpification" of US policy may be further intensified. First, this election signifies a reaffirmation of the Trump administration's policy direction of "America First." Through this election, the Trump 2.0 administration has broadly received a political mandate to strengthen unilateral protectionism and extensively pursue "Maganomics"—creating high-quality jobs by promoting the revival of US manufacturing. This is why the Trump 2.0 administration is expected to expand the scope of tariff imposition to resolve trade deficits, extending beyond China to major trading partners.

Second, with President Trump's victory not only in the presidential election but also in congressional elections, one institutional veto point that could have checked the policies of the Trump 2.0 administration has been eliminated. The trend of the centrist forces in American politics disappearing, a result of the widening gap and conflict between the Republican and Democratic parties, is no longer new. As evidenced by Mitt Romney's announcement not to seek re-election, the position of moderate Republicans, who previously played a centrist role in the confrontation between the Republican and Democratic parties, has been further diminished. Consequently, the Trump 2.0 administration is expected to differentiate its policies from the Biden administration and accelerate policy implementation.

Third, the acceptance of Trump's policy direction within the Republican Party is increasing. While Trump's victory in the 2016 presidential election shocked not only the US but also the world, there was a tendency to view it as an exceptional and abnormal deviation. Indeed, after taking office, President Trump demonstrated decisiveness by using political language outside the mainstream of American politics and implementing unconventional policies. However, unlike the domestic political environment faced by the Trump 1.0 administration, the Trump 2.0 administration is expected to undergo a process of mainstreaming, based on an expansion of its support base within the Republican Party. In particular, the emergence of relatively younger politicians within the Republican Party suggests the formation of a new policy coalition supporting the policies of the Trump 2.0 administration. Furthermore, the common characteristics of the individuals appointed by President Trump to key administrative positions—loyalty, adherence to Make America Great Again (MAGA) principles, being Beltway outsiders, and possessing relatively thin resumes—indicate that the policy direction pursued by President Trump is undergoing a process of mainstreaming within the United States.

II. Economic Security Strategy of the Trump 2.0 Administration: Possibilities and Limitations

1. Derisking, the Rise of Connector Countries, and Trade War 2.0

President Trump has repeatedly advocated for the imposition of universal tariffs on all trading partners and targeted tariffs on specific countries like China. Regarding universal tariffs, while the speed at which the Trump 2.0 administration will implement "tariffs without exception" remains uncertain, the prevailing expectation is that it will be implemented, regardless of the scope and speed. President Trump has on several occasions pledged to impose high tariffs, reaching 60-80%, on Chinese imports. The US has continuously pursued diversification away from China, with its import dependency on China decreasing from 22% in 2017 to 14% in 2023, and its Foreign Direct Investment (FDI) in China declining. China is also pursuing diversification away from the US in response to US actions.

However, there are two points to note. First, despite diversification efforts, there are limitations in fundamentally eliminating dependence on China for key supply chain items. An analysis by the US Department of Commerce of 2,409 key supply chain items revealed that while overall import dependency has decreased, dependence on China for key items slightly increased from 19.5% to 19.8%. Among these, 156 items had an import dependency on China exceeding 70%, and 46 items were at 100% (Kim Na-yul, 2023). This serves as evidence of the practical limitations of complete decoupling, despite US diversification efforts.

Second, although the mutual interdependence between the US and China has decreased, a new form of interdependence is emerging. According to an analysis by the International Monetary Fund (IMF), the direct linkage between the US and China is indeed decreasing, but this is a superficial change. This is because the direct linkage between the US and China is shifting to an indirect linkage through third countries. As US import dependency on China sharply declines, there has been an increase in exports to the US from Mexico, Canada, and Southeast Asian countries (especially Vietnam) (see Figure 1-1). These countries also share the commonality of increased exports and FDI from China (see Figure 1-2). This signifies the rise of "connector countries" linking the US and China. While various measures such as tariff imposition, export controls, and intensified investment screening are reducing direct interdependence between the US and China, indirect interdependence through third countries remains. The Trump 2.0 administration's attempt to block circumvention imports through connector countries will likely expand the trade war from a trade war 1.0 centered on the US and China to a trade war 2.0 encompassing third countries.

[Figure 1] The Rise of Connector Countries

[Figure 1-1] US Import Share and China's Export Share [Figure 1-2] China's FDI Share and US Import Share

Source: Gopinath et al. (2024)

2. Strategic Decoupling

The Trump 2.0 administration is expected to redouble its efforts to resolve two issues. This is why there are projections and concerns that the advent of the Trump 2.0 administration will lead to Trade War 2.0. Regarding the mitigation of direct dependence on China, the Trump 2.0 administration is likely to pursue strategic decoupling and an upgrade of supply chain strategies. Strategic decoupling signifies a differentiation from "small yard, high fence," a concept symbolized by derisking, which the Biden administration pursued throughout its term. In other words, strategic decoupling will move beyond containing China by focusing on carefully selected strategic sectors, and instead focus on restoring trade balance and fundamentally resolving threats to the well-being and national security of American citizens. Despite some domestic concerns and opposition, the Trump 2.0 administration is expected not to abandon strategic decoupling if trade balance with China is not achieved, even if other issues are resolved.

The Trump 2.0 administration will likely focus on fundamentally blocking China's circumvention strategy of maintaining or expanding access to the US market through third countries. President Trump's pledge to impose a 25% tariff on goods from China, Mexico, and Canada on his first day in office reflects this policy intention. Ostensibly, the reason cited is the lack of effort by these countries to block drugs like fentanyl and illegal immigration, but this is not unrelated to the fact that these countries record large trade surpluses with the US. This is also why Vietnam is projected to be the next target of the Trump 2.0 administration. In fact, as of 2023, Mexico and Vietnam ranked second and third, respectively, in terms of US trade deficit countries, following China. Considering that these two countries are representative connector countries, the Trump 2.0 administration will strive to reduce indirect linkages between the US and China by blocking circumvention export routes.

3. Supply Chain Strategy: Splitshoring

The Trump 2.0 administration is also expected to pursue certain changes in its supply chain strategy. The Biden administration pursued reshoring as a policy tool to reduce dependence on overseas, particularly China, in key advanced industries and create high-quality domestic jobs. However, given the limitations in expanding independent production capacity in the US and in cooperation with allies and partners, it established ally shoring and friend shoring as the foundation of its supply chain strategy. This is why South Korea, Taiwan, and Japan have emerged as partners in US advanced industry cooperation.

Considering the priority given to the revival of US manufacturing and job creation, the Trump 2.0 administration will pursue a change that further increases the proportion of reshoring in its existing supply chain strategy. The effect of job creation in the US due to reshoring is significant. It is estimated that approximately 2 million jobs in the US have been created through reshoring since 2010. In particular, 2022 saw a record high of 343,000 new jobs created. Although there was a slight decrease in 2023, 287,000 jobs were created. It is unlikely that the Trump 2.0 administration will pass up this opportunity for job creation. Furthermore, considering President Trump's efforts to block circumvention exports through third countries, the proportion of nearshoring will decrease. While it will be difficult for the US to pursue a supply chain strategy solely reliant on reshoring, the possibility of "splitshoring," where the relative proportion of reshoring increases in the Trump 2.0 administration's supply chain strategy, is high.

4. Whack-a-Mole?

The intensification of US-China strategic competition is highly likely as the US expands and strengthens the scope and level of its containment of China in the Trump 2.0 era. A more serious problem is that over the past eight years, the official channels between the two countries that could have been used to ease tensions and conflicts between the US and China have been virtually neutralized. While there were over 90 official dialogue channels between the US and Chinese governments, it is known that the majority of these official dialogue channels have disappeared since the inauguration of the Trump 1.0 administration.

Meanwhile, regardless of the intensification of US-China strategic competition, it remains uncertain whether the Trump 2.0 administration's strategy toward China will achieve the expected results. The prevailing expectation is that the Trump 2.0 administration will pursue a strategy to reduce dependence on China, both directly and indirectly, through strategic decoupling. However, there is no guarantee that expanded and intensified containment will necessarily be effective. If the Trump 2.0 administration's policies toward China fail to transition to proactive or preemptive prevention, it will be difficult to escape the limitations of reactive, delayed responses. We have already witnessed numerous instances where the US was preoccupied with reactive responses while China increased its dominance in the global markets for solar power, wind power, batteries, and electric vehicles. This is why the US strategy toward China faces criticism of being "whack-a-mole." Proactive and preventive strategies are entirely different from intensifying the level of containment against China.

Second, it is important to note that there will inevitably be a significant gap between planning and execution when pursuing changes in supply chain strategy. According to a survey by Bain & Company, 81% of surveyed large corporations have plans for reshoring. However, only 39% have actually implemented reshoring (Saenz and Borchert 2024). Considering China's 35% share of global manufacturing, it is inevitable that forming new supply chains excluding China will take considerable time.

III. Changes in the Global Economic Order

1. The Emergence of Trump Risks

There are widespread concerns that Trump risks will significantly increase in the Trump 2.0 era. The problem is that Trump risks will not be limited to China or Russia, the counterparts in strategic competition, but will extend to allies and partners. This is because the Trump 2.0 administration, unlike the Biden administration which emphasized international cooperation, is expected to exert pressure on allies and partners in a wide range of areas, including tariff imposition, upward adjustment of defense cost-sharing, and blocking illegal immigration and drug trafficking.

According to an estimation of Trump risks for over 70 US trading partners by the Economist Intelligence Unit, based on factors such as tariffs and trade restrictions, defense burden-sharing, and border and security controls, Trump risks are particularly high in Mexico, Costa Rica, Germany, the Dominican Republic, Panama, and Japan (see Figure 2). Among allies and partners, the paradoxically observed phenomenon is that the closer they are geographically and politically to the US, the higher the Trump risk, while countries like Saudi Arabia and relatively distant partners have lower Trump risks. Mexico even shows a higher Trump risk than China.

This is a combined result of two factors: President Trump's characteristic transactional approach towards allies and partners, and the way China has managed risks related to the US over the past eight years. In particular, China has continuously reduced risks associated with the US over the past eight years through diversification and strengthening domestic science and technology capabilities. As the US reduces its trade dependency on China, unintended consequences have emerged, such as increased Trump risks in Mexico and Vietnam, which serve as circumvention export channels for China, as well as in Germany and Japan, with whom trade has been actively expanded.

[Figure 2] Country-Specific Trump Risk

Source: Economic Intelligence Unit (2024)

2. Systemic Impact of US-China Strategic Competition

US-China strategic competition in the Trump 2.0 era will enter a new phase in two aspects. First, the global economy in the Trump 2.0 era is expected to undergo repeated processes of fragmentation and reconnection. The intensification of strategic competition between the US and China, along with increased geopolitical risks such as the Russia-Ukraine war, is unlikely to lead to a new Cold War that divides the global economy into two blocs, as in the Cold War era. Global value chains are extensively formed, and with intermediate goods trade accounting for over 40% of global trade, the global economy is intertwined in a way that is incomparably more intimate and complex than during the Cold War. Therefore, completely unraveling it is a arduous task. However, this does not mean that geopolitical risks have no impact. According to an IMF report, trade and FDI between the US-centric bloc and the China-centric bloc have decreased by 12% and 20%, respectively, compared to trade and FDI within the same bloc after the Russia-Ukraine war (Gopinath et al. 2024). The possibility of economic fragmentation centered on the US and China, and further, "bi-globalization" (Baracuhy 2024), cannot be ruled out. It is likely that the trend in the future US-China strategic competition 2.0 will be characterized by the continuous interplay of centrifugal forces promoting global economic fragmentation and forces seeking to reconnect the global economy by mitigating it.

Second, US-China strategic competition in the Trump 2.0 era is likely to proceed in a manner that expands across advanced industries, not just trade. Considering that during the Trump 1.0 administration, China retaliated against US tariff impositions with retaliatory tariffs, the derisking pursued by the Biden administration, while focused on containing China, had the effect of preventing unnecessary escalation of US-China conflict by limiting the scope of containment. However, in the Trump 2.0 era, China is likely to pursue countermeasures corresponding to the level of US containment, particularly in advanced industries. The Chinese government has undertaken domestic legal reforms over the past several years to strengthen export controls. On January 2, 2025, the Chinese government added 28 US companies, including Boeing's defense and space division, Lockheed Martin, and Pacific Rim Defense, to its export control list, prohibiting the export of dual-use technologies. Subsequently, five subsidiaries of Lockheed Martin and ten US companies, including RTX, were added to the "unreliable entity list" for their involvement in arms sales to Taiwan. The Chinese government clearly stated that it is implementing export controls on US companies based on the Export Control Law, Regulations on the Control of Dual-Use Technology Exports, Foreign Trade Law, National Security Law, and Anti-Foreign Sanctions Law. This was a response to the Biden administration's intensified export controls on semiconductors to China, and at the same time, a clear expression of the Chinese government's firm resolve to protect its core interests to the incoming Trump 2.0 administration.

IV. Korea's Response Strategy

The risks facing the world in the Trump 2.0 era are unlikely to be limited to China, the counterpart in strategic competition. The fact that Canadian Prime Minister Justin Trudeau was swept up in the "Trump storm" of President Trump's pledge to impose a 25% tariff on Canadian imports is a glimpse of the risks that allies and partners will face in the Trump 2.0 era. In the Trump 2.0 era, Korea must design its response strategy based on a systematic combination and linkage of bilateral and multilateral, short-term and long-term strategies.

First, given that trade imbalances are an issue that the Trump 2.0 administration will seek to resolve quickly, proactive and agile responses are needed rather than delays. President Trump repeatedly pledged during the election campaign to correct trade imbalances. In 2023, Korea's trade surplus with the US was $51.4 billion, ranking 8th in terms of trade surplus with the US (Bureau of Economic Analysis, 2024). Although this is not comparable to China ($279.4 billion), Mexico ($152.4 billion), Vietnam ($104.6 billion), and Japan ($71.2 billion) (Bureau of Economic Analysis, 2024), it is undoubtedly a cause for concern considering the Trump 2.0 administration's characteristic of prioritizing the correction of trade imbalances.

Considering the characteristics of the Trump administration, Korea and Japan need to pursue more direct strategies to alleviate trade imbalances. This is the background behind European Commission President Ursula von der Leyen's remark on November 8, 2024, shortly after Trump's victory was confirmed, that European countries could consider replacing Russian LNG with US LNG. In 2023, the EU's trade surplus with the US reached a record high of €156.7 billion. Of this, Germany (€85.8 billion), Italy (€42.1 billion), and Ireland (€31.1 billion) accounted for the majority of the trade surplus with the US (Eurostat, 2024). Korea, the world's third-largest LNG importer with 46.39 million tons imported in 2022, possesses the capacity to use LNG imports as a means to address its trade imbalance with the US. Considering that long-term contracts with Qatar and Oman expire in 2024, Korea can achieve both the mitigation of the ROK-US trade imbalance and the stable import of LNG by increasing LNG import volumes from the US.

Meanwhile, in the short term, a systematic review and analysis are needed of the secondary effects of a 60% tariff on Chinese products by the US, which could expand market access for Korean products to the US and intensify competition with Chinese products in third-country markets. Furthermore, if a tariff war reoccurs, with China imposing retaliatory tariffs on US tariff impositions, protectionism could spread and uncertainty in the global trade order could escalate, making a passive strategy relying solely on indirect effects undesirable.

Second, although the Trump 2.0 administration is likely to weaken the momentum of cooperation in the Indo-Pacific region, it is necessary to reconstruct regional cooperation strategies that capture opportunities amidst difficulties. Korea needs to explore the possibility of leadership for regional cooperation without the US, while simultaneously pursuing a dual strategy of driving the US into the framework of regional cooperation by collaborating with like-minded countries. While the prospect that the nascent "Indo-Pacific Economic Framework (IPEF)" will "die" is gaining traction, the possibility that the Trump 2.0 administration will rebrand some or all of the IPEF's components under the Trump brand cannot be ruled out. At such a time, Korea must pursue middle power diplomacy by proactively proposing creative solutions that balance the interests between the US and regional countries.

Third, excessive anxiety, overreaction, and hasty responses to Trump risks are to be avoided. Proactive and preventive responses must be distinguished from hasty responses, as hasty responses can be more dangerous than delayed ones. While there are indeed concerns regarding Trump risks, Korea is not at the forefront of countries with high Trump risks. Korea's Trump risks, when viewed by sector, are 10th in trade and 7th in immigration, and outside the top 10 in security. This means that while vigilance is necessary regarding Trump risks, there is no need for overreaction by exaggerating them beyond reality. For issues of highest priority, such as trade imbalances, agile and proactive responses are needed, while for other issues, a dual approach of calm responses should be considered.

Fourth, the validity of a dual approach is confirmed in the broader context of upgrading the ROK-US alliance. As President Trump is expected to adhere to, or even strengthen, a transactional approach towards allies and partners, it is necessary to develop arguments that persuade how and how much the deepening and expansion of ROK-US cooperation can contribute to US national interests, rather than reactively responding to the transactional approach of the Trump 2.0 administration. It is clear that President Trump raises issues regarding the existing alliance system being unfair and unsustainable. On the other hand, in the reality of the 21st century, where economic challenges can easily lead to military threats, the Trump 2.0 administration does not exclude cooperation with allies and partners possessing advanced industrial capabilities necessary for the US to protect and enhance its national interests. Korea needs to explore the possibility of becoming a "super ally" that can proactively meet these US demands.

Fifth, leading countries around the world are engaged in fierce diplomatic battles before and after the inauguration of the Trump 2.0 administration. Given the high policy uncertainty of President Trump's potential return, intense competition is underway to preemptively secure friendly relations with the Trump 2.0 administration. Therefore, it is necessary for Korea to adopt a "whole-of-nation" approach, going beyond a "whole-of-government" approach that mobilizes all of Korea's diplomatic capabilities. It is positive that Korea's network for approaching the Trump administration has expanded significantly compared to the first term. In particular, Korean companies have greatly enhanced their corporate diplomacy capabilities with the US over the past eight years to effectively respond to risks originating from the US. Now is the time to actively seek ways to create synergy between government diplomacy and corporate diplomacy. ■

References

Kim Na-yul. 2023. "Status and Implications of US Key Supply Chain Items List." Trade Focus, Issue 1, 2023. https://www.kita.net/researchTrade/report/tradeFocus/tradeFocusDetail.do?no=2396(Accessed: January 9, 2025)

Barachuy, Braz. 2024. “What’s ‘bi-globalization’ and could this be the near future for geo-economics and global trade?” World Economic Forum. December 19. https://www.weforum.org/stories/2024/12/geoeconomic-biglobalization-global-trade/(Accessed January 9, 2025)

Bureau of Economic Analysis. 2024. “U.S. International Trade in Goods and Services, December and Annual 2023.” February 7. https://www.bea.gov/news/2024/us-international-trade-goods-and-services-december-and-annual-2023#:~:text=The%202023%20figures%20show%20surpluses,%2C%20and%20Sweden%20($9.8)(Accessed January 9, 2025)

Economic Intelligence Unit. 2024. “Trump Risk Index: The global impact of a new US presidency.” https://www.eiu.com/n/campaigns/trump-risk-index/(Accessed January 9, 2025)

Eurostat. 2024. “USA-EU - international trade in goods statistics.” February. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=USA-EU_-_international_trade_in_goods_statistics#:~:text=The%20trade%20in%20goods%20balance,(%E2%82%AC4%20204%20million) (Accessed January 9, 2025)

Gopinath, Gita, Pierre-Olivier Gourinchas, Andrea F. Presbitero, and Petia Topalova. 2024. “Changing Global Linkages: A New Cold War?” IMF Working Papers 2024, 076. https://www.imf.org/en/Publications/WP/Issues/2024/04/05/Changing-Global-Linkages-A-New-Cold-War-547357 (Accessed January 9, 2025)

Saenz, Hernan and Adam Borchert. 2024. “Businesses accelerate reshoring and near-shoring amid heightened geopolitical uncertainties and rising costs, Bain & Company finds.” November 14. https://www.bain.com/about/media-center/press-releases/2024/businesses-accelerate-reshoring-and-near-shoring-amid-heightened-geopolitical-uncertainties-and-rising-costs-bain--company-finds/ (Accessed January 9, 2025)

■ Lee Seung-juDirector, EAI Trade, Technology, and Transformation Center; Professor, Department of Political Science and International Relations, Chung-Ang University.

■ Contact and Editing: Park Han-sooResearch Fellow, EAI

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