South Korea’s export-reliant economy is likely to suffer a setback as a trade battle between the world’s two largest economies is escalating, according to a local trade organization on Sunday.

According to a report released by the Korea International Trade Association, the country is predicted to see a drop of over 0.14 percent in annual exports following the US’ recent move to increase tariffs on Chinese goods.

On Friday, the US increased tariffs on $200 billion of Chinese goods from 10 percent to 25 percent, heightening tensions with China, which immediately said it would impose “necessary countermeasures.”

This comes as a blow to Korea, which is heavily reliant on the two nations. Out of its total export destinations, China accounted for 26.8 percent and the US accounted for 12.1 percent last year. 

“Korea would see a drop of 0.1 percent in exports in the global market due to falling demand for intermediate goods from China. Slow growth in China would also lead to a further 0.04 percent fall in the nation’s exports in the global market,” said KITA researcher Moon Byung-ki.

Exports may see bigger falls “when considering the delay in investments, uncertainties in financial markets and falling oil prices.”

In the first quarter of this year, Korea’s exports to China saw a decline of 17.3 percent quarter-on-quarter due to the trade war between the US and China.

By industry, the nation’s intermediate goods and capital goods in the areas of electronics, steels and chemical products will be hit hardest, according to the report.

“If the goal of the two nations’ trade negotiations is to reduce the trade imbalance, they will reach a compromise and seek cooperation. But, if the US strives to address structural issues to maintain its supremacy, the trade war will be prolonged,” Moon said.

Separately from the trade war, the US’ growing protectionism is also weighing on Korea’s automobile industry. On Saturday, the Donald Trump administration is set to decide whether to impose tariffs on imported cars on national security grounds.

If the US imposes up to 25 percent tariffs on imported cars, this would result in 3 trillion won ($2.5 billion) of losses to the domestic auto industry. The nation’s largest automakers, Hyundai Motor and Kia Motors, will also have to seek other production bases beyond Korea to export cars to the US. The portion of car exports to the US stood at 33 percent of the nation’s total car exports last year. 

By Shin Ji-hye (shinjh@heraldcorp.com)