South Korea poised to crash and burn in 2025
2024 was bad but 2025 could be worse as Seoul’s dysfunctional politics collide with the Trumpian storm to come
It’s hard to think of any Asian nation happier to see the back of 2024 than South Korea.
In just the last month alone, President Yoon Suk Yeol declared martial law, backtracked six hours later, got impeached by parliament against the backdrop of massive street protests and now faces a historic arrest warrant.
If that wasn’t enough chaos and woe, the nation suffered its worst local aviation disaster in more than two decades, killing over 181 and raising harsh new questions about the safety of Korean skies.
Korea’s truly rotten December deepened what was already something of a midlife crisis year for Asia’s fourth-biggest economy. And yet, this may be as good as it gets as a wildly uncertain 2025 arrives: Seoul’s decidedly dysfunctional politics are about to collide with the Trumpian storm to come.
Even if, best-case scenario, “increased US protectionist measures imply lower tariffs on Korean exports than on other trading partners,” says economist Brian Coulton at Fitch Ratings, “declining demand from China and the US, which together accounted for around 40% of Korean goods exports in 2023, will negatively affect exports.”
Though the US president-elect’s threats of 60% tariffs are aimed at China, Korea will be right at the center of the collateral damage zone of potentially weaker Chinese demand. Japan, too, but then Tokyo isn’t embroiled in a political imbroglio the likes of which Seoul hasn’t seen in decades.
Something that Japan and Korea have in common, though, is being snubbed by Trump. Since his re-election on November 5, Trump rebuffed repeated overtures from Yoon and Japanese Prime Minister Shigeru Ishiba for a Mar-a-Lago tee time.
Both Yoon and Ishiba have watched as Trump met with a parade of world leaders, including Canada’s Justin Trudeau, France’s Emmanuel Macron, Ukraine’s Volodymyr Zelensky, Hungary’s Viktor Orban, Argentina’s Javier Milei and even the UK’s Prince William. But so far, he’s had no time for Washington’s top North Asian allies.
Whether that means Trump plans to throw Seoul and Tokyo under the tariff bus is anyone’s guess. Or that Trump’s hopes of a “grand bargain” trade deal with China take precedence.
As Yoon awaits possible arrest and his fate in the courts in the months ahead, Seoul’s distracted legislators won’t be doing much to raise Korea’s competitive game.
Even before Yoon’s bizarre martial law decree on December 3, his People Power Party wasn’t getting much done to level economic playing fields, address near-record household debt, increase productivity, empower women or improve corporate governance.
Yoon’s first 966 days in office were anything but a reformist whirlwind. As such, the odds of his party being able to devise an ample policy response to the Trump 2.0 shock are negligible.
That will leave the Bank of Korea even more in the driver’s seat. Since Yoon took power in May 2022, the BOK has taken the lead in managing one of the globe’s most open major economies. Now, the political vacuum in Seoul has Governor Rhee Chang-yong on the hot seat as never before.
Before Yoon’s short-lived martial law stunt, Seoul was planning to shore up key sectors as headwinds from Washington intensify. Chief among them is a package of support measures for the crucial semiconductor industry.
Home to leading memory chipmakers Samsung Electronics and SK Hynix, Korea faces greater uncertainty over Trump’s tariff plans than most peers. On December 2, Finance Minister Choi Sang-mok said, “the next six months will be the golden time that will decide the fate of our industries.”
Choi added that “given the current challenges, including global economic shifts under the incoming US administration, competition from emerging countries and the rapid reorganization of global supply chains, the role of the government must evolve from a supporter to a player working alongside businesses.”
Since then, though, Choi has been elevated to acting president, the third to serve as president this month. “So South Korea’s most bizarre and explosive political crisis in decades just got even weirder,” says Ian Bremmer, president of Eurasia Group.
That means it falls to his replacement to spearhead support for semiconductor firms — from fiscal assistance to tax incentives — to bolster the tech ecosystem. And to do so amidst rising political rancor.
These initiatives include everything from top-down policies to subsidizing the costs of burying transmission cables for semiconductor clusters in cities like Yongin and Pyeongtaek.
Already, Choi is doing his best to reassure the public. “Although we are facing unexpected challenges once again, we are confident that our robust and resilient economic system will ensure rapid stabilization,” Choi said on December 27.
Yet Choi inherits a 2025 budget that’s US$2.8 billion less than the government had hoped for. And now he’s also managing a second national crisis following the crash of the Jeju Air jet.
“There are already signs the crisis is having an impact on the economy,” says economist Gareth Leather at Capital Economics. “The crisis is unfolding against a backdrop of a struggling economy,” he says.
Gross domestic product, Leather notes, is expected to be just 2% this year amid slowing global growth. “Longer term, political polarization and resulting uncertainty could hold back investment in Korea,” Leather says, pointing to how Thailand’s turmoil since a 2014 coup undermined its economy.
Other economists are more optimistic. “We come from being an underdeveloped country to one of the world’s most dynamic economies in very few years, and Yoon Suk Yeol is a side effect of the growth,” economist Park Sang-in at Seoul National University told AFP. “Korean society was mature enough to counter his crazy actions.”
Analysts at BMI Country Risk & Industry Research write that “for now, we expect limited implications for the economy and financial markets as the Bank of Korea and the Ministry of Finance have responded swiftly by reassuring investors.”
Notably, BMI says, “the central bank committed to boosting short-term liquidity and enacting measures to stabilize the foreign exchange markets, which aligns with our view that risks around the South Korean won should remain contained for now.”
Krishna Guha, an economist at Evercore ISI brokerage, argues that “South Korea’s democratic institutions and culture have withstood the stress test. But it is extraordinary and troubling that it happened at all.”
Yet the question now is when and how the political crisis ends, particularly now that Yoon faces an arrest warrant. Its longevity is key to the Korean won’s outlook.
“If domestic political instability continues and external credibility in Korea decreases, the won’s price could fall further,” says economist Seo Jeong-hoon at Hana Bank.
Economists at T Rowe Price write that “political turmoil appeared to continue to weigh on investor sentiment in South Korea.”
Even before the blow-after-blow that hit Korea in December, Yoon’s presidency had been awash in challenges and controversies. Soon after Yoon took power, the Korean won plunged, North Korea unleashed a torrent of provocations and Seoul faced heavy criticism for its handling of a deadly Halloween 2022 crowd crush that killed 159 people.
All too quickly, Yoon’s approval rating fell below 30%, the danger zone for any leader in Seoul promising bold structural reform.
Yoon is the fourth Korean leader since 2008 who took power pledging to generate more economic energy from the ground up, not just the top down. Broadly speaking, that meant taking on the “chaebol system” led by family-owned behemoths like Samsung that helped propel Korea into the ranks of the top 12 economies.
The backdrop is that Korea Inc knows that so much of what it does well has been commoditized. China and other rising Asian powers are now rivals in cars, electronics, robots, ships and popular entertainment. Taiwan is constantly raising its innovative game, while upstarts like Indonesia and Vietnam are making the race for tech “unicorn” startups more competitive and dynamic.
The best way for Korea to maintain its high living standards is to innovate in ways that propel the economy upmarket even faster. That’s why Yoon and the three leaders who preceded him pledged an innovative “big bang” to move Korea into higher-value sectors.
Between 2008 and 2013, Lee Myung-bak came and went without fundamental changes to the chaebol system. Then came Park Geun-hye, Korea’s first female president. In 2013, she took office with bold talk of devising a more “creative” economy.
Park promised to shift tax incentives toward startups, strengthen antitrust enforcement and penalize big companies for hoarding profits that could be used to fatten paychecks.
Park ended up going easy on the chaebols. Yet she did succeed in enlivening Korea’s startup economy. Her efforts to increase the flow of cash to innovators helped morph Korea into a top 10 incubator of tech unicorns, or companies with a market capitalization surpassing US$1 billion.
Moon Jae-in, Park’s successor, expanded the program. Trouble is, the chaebols continue to hog the economic oxygen startups need to grow into large game-changers. That’s still Korea’s dilemma today.
It has loads of startups, but the conglomerates “don’t often allow space” for them to thrive and become medium-sized enterprises, notes Yukiko Fukagawa, an entrepreneurship expert at Waseda University.
Moon took power in 2017 with ambitious plans to pursue “trickle-up economics.” A more liberal leader than the previous two, Moon set out to wrestle economic control from Korea’s rigid corporate system to increase competitiveness.
His signature policy of enriching the middle class was essentially the flipside of the strategies championed by Trump, former Japanese Prime Minister Shinzo Abe and Ronald Reagan decades before. Yet when Moon grasped the difficulty of the task – and the messy political fallout to come – he backed off and left economic management duties to the BOK.
So has Yoon these last 31-plus months. Now, as acting President Choi manages dueling crises, he faces a wildly uncertain 2025 – both domestically and internationally.
One hope is that Korea Inc can raise its game in spite of political chaos. As Sohn Kyung-shik, chairman of the Korea Enterprises Federation, puts it, “companies must also make more proactive efforts toward economic recovery and job creation during these tough times.”
In top-down Korea, though, that might be easier said than done. Particularly with domestic politics in complete chaos just as the “Trump trade” heads Korea’s way.
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