The impact of the U.S.-China trade dispute on the Korean economy and trade may be greater not only due to the direct impact of the tariff imposition of the two countries, but also due to indirect effects such as the strained financial markets, shrinking corporate investment due to rising uncertainties, and slowing consumer spending. In addition, if the spread of protectionism is expanded around the world along with the trade dispute between the U.S. and China, our trade with high degree of dependence upon foreign trade will be affected significantly, so the trade conflict between the two countries needs to be resolved urgently. Therefore, the purpose of this study is to keep a close eye on the impact on our economy and establish systematic countermeasures against the possibility of the U.S.-China trade dispute spreading to various sectors such as industry, technology hegemony, tariffs, foreign exchange rates, overseas investment and finance in the future.

The impact on Korea’s exports due to China’s export decrease to the U.S. was estimated based on China’s decrease in exports to the U.S. in consideration of the proportion of global exports. Based on the effect of China’s export reduction to the U.S. due to the four times of U.S. tariffs, the size of Korea’s export decrease was calculated as follows. Based on the fact that China’s exports to the U.S. decreased by 3.6 billion dollars during the first and second round of tariffs, it can be estimated that Korea’s exports to the world will fall by 0.16 billion dollars. Equally, it can be estimated that Korea’s exports will decrease by 0.23 billion dollars when China’s exports fell by 5.2 billion dollars due to the third round tariff. Also, it is estimated that Korea’s exports will decrease by 0.34 billion dollars when China’s exports fell by 7.7 billion dollars due to the fourth round tariff. Thus, Korea’s exports decrease to the world due to the a drop in China’s exports totaled 0.73 billion dollars. It means that total exports fell about 0.12 percent.

The effect of trade diversion to Korea by industry was estimated based on tariffs between the two countries. First of all, based on industry-specific data on which tariffs are imposed, the U.S. tariff on Chinese products in the third quarter of 2019 reduced imports from China by 20.7 billion dollars. Considering the estimate(？0.182) based on the analysis using quarterly data, it can be interpreted that about 18.2 percent of China’s export decline to the U.S. have been converted to Korea’s exports. Therefore, it means that as of the third quarter of 2019, about 3.8 billion dollars have been converted into an increase in Korea’s exports to the United States due to a drop in imports from China after the imposition of U.S. tariffs. The corresponding trade diversion effect by industry includes 1.34 billion dollars for machinery, 0.69 billion dollars for electrical equipment, 0.41 billion dollars for furniture and 0.47 billion dollars for other industries.

Meanwhile, China’s imports from the U.S. decreased by $4.86 billion in the third quarter of 2019 due to China’s imposition of tariffs on U.S. products. Considering the estimate(？0.123) based on the analysis using quarterly data, it can be translated that about 12.3 percent of China’s reduced imports from the U.S. being converted into Korea’s exports to China. Thus, it can be estimated that as of the third quarter of 2019, about $0.59 billion of the decline in imports of U.S. products following China’s imposition of tariffs has been converted to an increase in Korea’s exports to China. Corresponding size by industry is $0.25 billion for other industries, $0.18 billion for agriculture and livestock, $0.16 billion for transportation equipment, $0.08 billion for chemicals and $0.07 billion for machinery.

Only 0.6% of the surveyed companies said they were preparing strategies or countermeasures at the corporate level to cope with the U.S.-China trade dispute. That is, most companies were found to have no countermeasures against the trade dispute. As a policy measure to minimize trade damage caused by trade disputes between the U.S. and China, it was found that the policy of expanding consulting support to enhance competitiveness and supporting trade-damaged companies using the trade adjustment assistance system and various policy supports was effective. In addition, the respondents said that the loan extension, interest reduction, and additional loan support policies were effective. In particular, companies that have trade experience only with China tend to evaluate highly the effectiveness of all proposed policy measures. About half of mid-sized and large companies said expanding support for consulting on management and marketing was an effective policy.

The self-rescue efforts to minimize trade damage were also suggested. Those efforts are to make products more valuable through technology development and quality improvement, to come up with measures to reduce costs through rationalization of management, to enhance management efficiency through U-turn, reshoring, near-shoring or relocation of overseas facilities, and to improve marketing capabilities by developing new markets. Metal, food and distribution industries evaluated efforts increasing the value of products through technology development and quality improvement as the most effective policy among other efforts to minimize trade damage. Meanwhile textile, food and miscellaneous goods sectors evaluated the reduction of production costs through rationalization of management as a priority.

Measures to strengthen the competitiveness of companies affected by trade damage include measures to strengthen their research capabilities by supporting research and development, support for training human resources and smoothing supply of human resources, and measures to promote cooperative relations between companies of producing final products and parts and materials. In particular, measures to enhance research capabilities by supporting research and development were evaluated relatively more effectively by mid-sized companies and the metal and machinery industries. In the results of the evaluation of the effectiveness of measures to strengthen ompetitiveness, small and medium-sized companies showed a low proportion of positive responses across the measures. And it is deemed necessary to prepare means so that even small companies can expect real effectiveness by showing how policy measures can lead to minimizing trade damage and securing competitiveness.

Economists generally agree that an increase in trade costs stemming from the ongoing U.S.-China trade dispute will reduce trade and bring about higher consumer prices and trade diversion effects. The empirical analysis of this study found some empirical evidence of these claims using recent import data. By adopting a simple identification method to measure the difference in results between goods subject to additional tariffs and those not and controlling detailed sector-specific effects, practical evidence has been found that additional tariffs between the United States and China have resulted in a strong fall in imports from each other country. Such a drop in imports was partly replaced by import increases from the other countries. Through this empirical analysis, we have found implicit evidence that tariff costs have been passed on to American and Chinese consumers. However, it is expected that the U.S. and Chinese companies may have absorbed some of the tariff costs because they may have started to respond to the tariff imposition by lowering the unit price of exports after four additional tariffs were imposed.