The Peninsula

China Tightens the Pressure as U.S. and South Korea Strike Trade Deal

South Korea’s USD 350 billion investment pledge in the United States, centered on shipbuilding, battery, and semiconductor projects, was meant to strengthen U.S.-Korea industrial cooperation. Instead, it has amplified familiar questions about overdependency that middle powers such as Korea must confront as U.S.-China competition intensifies.

China’s retaliation against Hanwha Ocean following its USD 150 billion shipyard investment under the “Make American Shipbuilding Great Again” initiative shows how exposed Korean firms remain to pressure from both sides, and resembles tactics the Xi Jinping government deployed in 2018. On October 14, the Chinese Ministry of Commerce sanctioned several Hanwha Ocean subsidiaries, sending the company’s shares tumbling. China also expanded export controls on rare earths and critical minerals, prompting President Donald Trump to threaten a 100 percent tariff on Chinese imports starting on November 1.

Whether Korea’s bet on U.S. manufacturing succeeds will depend less on tariff relief and more on how long firms can sustain confidence in U.S. policies and executive decision-making. This piece focuses on the risks posed by large investment commitments by Korean multinationals and the potential implications for U.S.-Korea industrial ties.

Expected Returns

Companies often use their profits to buy new equipment or build new facilities to grow and stay competitive. This type of spending is called capital expenditure or “capex.” For global companies, it also includes foreign investments, as they open factories and offices overseas to reach new markets and strengthen supply chains.

Under normal conditions, companies expect to make a certain amount of profit from a capex project, called the expected return. Those expectations change, however, when the global economy becomes less predictable—commonly known as risk-adjusted expected return. For example, if a company expects a 5 percent profit (expected return), it might fall to 3 percent once the risks are incorporated because uncertainty makes that 5 percent less reliable (risk-adjusted expected return).

Seoul’s USD 350 billion investment pledge came at the exact (risky) time that Washington was pushing its companies to invest more in the United States. Thus, the risk-adjusted expected return on this capex project was already lower than the expected return. Chinese sanctions and export controls add more uncertainty to what was already a complicated investment decision. Even if companies are expected to make a profit, the chances of earning that profit have become less certain.

Implications for U.S.-Korea Industrial Ties

The country’s major manufacturers in shipbuilding, batteries, and semiconductors face a difficult balancing act. Investing more in the United States offers some incentives, including tariff reductions. But doing so risks angering China. Each new policy move changes the calculation of what those investments are worth. As the risk-adjusted expected return on new projects declines, companies may reconsider where and how quickly to commit capital. The result is slower decision-making, more cautious investment, and a growing focus on how to keep production resilient without being caught between two economic giants.

Manufacturing is at the heart of what the United States wants to revive through its partnership with Korea. Yet, Korean firms could remain cautious due to investment irreversibility. The projects involved, including the shipyards mentioned earlier, require massive capital and long-term commitments that are hard to reverse once started. Moreover, many of these investments would not reach full operation for at least three years. By then, the political landscape in Washington could look very different. A change in administration could reshape incentives, tariffs, or industrial priorities. This reality makes firms hesitant to move too quickly, suggesting that U.S.-Korea industrial ties may develop more slowly and unevenly than anticipated.

Still, there is room to strengthen industrial ties. China’s policy environment carries constant risks of unfavorable regulations or discrimination against foreign firms, making the United States a relatively safer destination for Korean investment. Even with tariffs applied, the long track record of trade and economic engagement with the United States provides at least some assurance for the stability of investments going forward. This lowers long-term policy risk for Korean companies. Moreover, deepening cooperation in AI, advanced manufacturing, and digital technologies continues to align the industrial strategies of the United States and Korea, offering opportunities in an increasingly uncertain global environment.

South Korea’s record investment pledges underscore both the opportunity and the risk of deepening industrial ties with the United States. Rising geopolitical friction and shifting tariff policies have narrowed the margins of expected returns, making large-scale projects harder to justify in pure dollars and cents. As a result, it is not yet clear whether the current wave of investment will become a foundation for sustained industrial cooperation between the United States and Korea.

 

Sunhyung Lee is a Non-Resident Fellow at KEI and an Assistant Professor of Economics at the Feliciano School of Business, Montclair State University. The views expressed here are the author’s alone.

Feature image from The White House

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