Korea Policy Vol. 3, Issue 2

Executive Summary 

The return of Donald Trump to the White House necessitates a reenvisioning of the U.S.-South Korea economic relationship to make it compatible with the new framework that the Trump administration is seeking to establish for trade and economic development in the United States. The U.S. shift on trade policy has created significant policy uncertainty for South Korea, which has momentarily been resolved with a new trade understanding between the United States and South Korea. The new agreement calls for South Korea to invest USD 350 billion in the United States in conjunction with USD 100 billion in energy purchases in return for reduced tariff rates on the Trump administration’s reciprocal tariffs and select Section 232 tariffs. However, a degree of uncertainty over U.S.-South Korea economic cooperation remains and is likely to be a feature of the relationship throughout the second Trump administration. 

Background 

The decision by the Trump administration to impose new tariffs on South Korea despite the Korea-U.S. Free Trade Agreement (KORUS FTA) necessitated that South Korea reach a new understanding with the United States. Trade is an important part of the South Korean economy, with imports and exports accounting for 77.6 percent of South Korea’s GDP in 2024 and exports alone accounting for 39.1 percent of GDP. Trade with the United States is also significant, accounting for 18.8 percent of South Korea’s total exports last year, only slightly less than exports to China, which accounted for 19.5 percent of exports. 

The Bank of Korea estimated that prior to finalizing the new trade agreement, South Korea faced the eighteenth-largest tariff increase of the fifty largest U.S. trading partners. Prior to the new tariffs, nearly all U.S. and South Korean products were duty free under the KORUS FTA.  

While the new reciprocal tariffs and Section 232 tariffs impacted the vast majority of South Korean exports to the United States, the Section 232 tariffs on automobiles and auto parts were particularly difficult for the South Korean automotive industry. Automobiles and automotive parts are South Korea’s largest export to the United States and represent slightly less than a third of all South Korean exports to the United States. 

Each of the major automotive producers in South Korea are highly exposed to the U.S. market. GM Korea is the most exposed, exporting 80 percent of its production to the United States. However, U.S. sales also account for 39 percent of the Hyundai Motor Group’s overall sales, with exports accounting for 54 percent of Hyundai’s and 38 percent of Kia’s sales in the United States.  

Policy Recommendations 

To some extent, the trade and investment framework initially reached in late July has set the contours of U.S.-South Korea economic cooperation. However, because that framework is still being defined, scope remains to build cooperation in mutual areas of long-term interest for both countries:   

• Early in the Trump administration, U.S. Secretary of State Marco Rubio put forward a metric by which every U.S. policy should be judged: does that policy make the United States safer, stronger, and more prosperous? The South Korean government and South Korean firms should consider investments in the context of how they meet Secretary Rubio’s test for U.S. policy. This will require South Korean firms over time to adjust their portfolio of future investments in the United States. That does not mean unwinding prior investments, but rather that new investments should be shaped by the Trump administration’s priorities where economically viable to avoid deepening political rifts with Washington. 

• Rather than considering the United States primarily as a market for South Korean goods, South Korea needs to shift its view of the United States to that of a market and a production base for exports to third markets.  

• Related to exporting to third markets are investments to reinforce South Korean supply chains in the United States. According to a study by the Korea International Trade Association, 51.2 percent of South Korean exports to the United States are intermediate goods exported for assembly in either South Korean or other U.S. factories. Potential areas for cooperation or investment include critical inputs, such as the recent South Korean investment in the production of rare earth magnets, or areas where there is limited competition and supply, like high-quality steel for the production of automobiles in the United States. 

• Finally, South Korea should work to maintain the KORUS FTA. While the current Section 232 tariffs do not face legal challenges, the Trump administration may not win its case at the Supreme Court on the reciprocal tariffs. If that is the case, there could be a period of temporary relief for South Korean exporters as the Trump administration turns to other legal authorities to reapply tariffs. More importantly, while the next administration may leave in place aspects of the Trump trade policy, they may be more open to returning to tariff rates with South Korea as they were established under the KORUS FTA. Seoul should work to keep that door open. 

Conclusion 

The steps taken by the Trump administration to reshape the trading order and gain advantages for the United States and U.S. firms should not come as a surprise. They represent consistent beliefs held by President Trump and key figures in his second administration. As the Lee Jae Myung administration and South Korean firms develop strategies to address these challenges, they should not forget the invocation to take Trump seriously, if not literally. This means that the recent trade talks are likely the beginning of a process rather than the conclusion of a lasting new trade agreement with the United States. South Korea should also view these changes in the context of longer-term shifts in U.S. trade policy. If strategies are developed in this context, South Korea and its firms will be able to find ways to successfully navigate this new trading environment.