The Peninsula

First Effects of the Tariff Shock on South Korea

Economic data for South Korea from recent months, analyzed by the Korea Economic Institute of America (KEI), offers an early indicator of how U.S.-imposed tariffs from April 2 might impact Korea’s economy and U.S.-Korea trade. Section 232 tariffs on steel and aluminum imports went into effect in February, followed by tariffs on autos on April 3 and auto parts a month later—all exempt from additional reciprocal tariffs and with mild subsequent reprieve for the car industry. Just two days after Q1 ended, President Donald Trump announced the 10 percent “ring around the collar” levies and reciprocal tariffs for additional countries (25 percent in Korea’s case).

Though the 25 percent reciprocal tariffs on Korea and other countries have since been paused, the remaining measures—namely, baseline 10 percent and those under Section 232—are likely to have a significant effect on U.S.-Korea trade as well as Korea’s GDP. This would also be the case for the 25 percent reciprocal tariffs, if resumed. With this backdrop, in Q1 2025, Korea experienced its first quarter of negative year-over-year (YoY) real GDP percent change since the COVID-19 pandemic in 2020 at -0.1 percent, underscoring a theme of ongoing economic strain.

Real GDP is an inflation-adjusted figure that represents the health of an economy based on myriad factors, including the level of net exports (exports minus imports). Bank of Korea analysis shows that real GDP dropped slightly in South Korea partly due to a decrease in expenditure and exports linked to weakening consumer and investment confidence. This adds to meager quarter-on-quarter growth for the second half of last year, partially driven by declining exports and decreasing investments in construction in Q3, as well as decreasing construction investments and agricultural yields in Q4. In other words, U.S. tariff shocks this year add to a broader picture of economic malaise in South Korea.

Barring tariff relief, there is little reason to expect better performance for subsequent quarters in the rest of this year. Exports amounted to 44 percent of the former’s overall GDP in 2023. USD 116 billion of the USD 632 billion in total exports were in goods sent to the United States—the number two annual export destination behind China. According to data from the International Trade Center, the largest export item category for Korea’s U.S.-bound items were autos and auto parts at USD 40.6 billion and USD 43 billion for 2023 and 2024, respectively. This means that the April 3 tariffs on auto imports and May 3 tariffs on auto parts will likely weigh down the upcoming Q2 2025 numbers.

Indeed, Korean export data to the United States for April reflects weak sector confidence, with exports to the United States down 6.8 percent YoY for the month. Along similar lines, the International Monetary Fund (IMF) cut Korea’s real GDP projection by 50 percent for the remainder of the year. The report cited tariff measures by the United States as a negative shock effect on overall global economic growth.

For shipments to the world as a whole, though Korea experienced a brief increase in total exports at 3.7 percent YoY in April, this was followed by a 2.4 percent YoY decrease for the first twenty days of May. If current trends persist, it will be difficult for the economy to weather the worst effects of tariffs in the short term by leaning into growth from other GDP components or trade sectors. Outbound shipments to the United States form a significant portion of Korea’s GDP growth. Korea’s other trade partners facing their own headwinds from tariffs may further restrict appetite for global imports as ripple effects strike economies across the board. Taking this into account, Seoul may have to hold out for a deal when it comes to long-term sectoral reliance with its second-largest trading partner.

A reprieve could take shape in the form of a bilateral trade package: both Washington and Seoul have signaled interest in reaching a deal by the expiration of the reciprocal tariff pause on July 8. The United Kingdom became the first partner to finalize such an agreement on May 8, raising the prospect that Korea could be on the list of those next.

Any real progress will likely have to wait until South Korean voters elect a new president next week. A finalized deal—paired with a new government—could likely boost investor and consumer confidence, offering a clearer path forward for Korea’s economy. However, it remains uncertain whether a deal would truly serve as “one-stop shopping” for U.S.-Korea trade negotiations, as President Trump has said, or merely mark the beginning of a longer process.

With the United States and South Korea having committed to reach some form of agreement, covering all aspects of bilateral trade will be a challenging feat to accomplish in the short timeframe set forth by the July 8 deadline. This means additional negotiations or concessions beyond then could be expected. In any event, even modest progress would provide meaningful reassurance to the economies of both countries.

 

Tom Ramage is Economic Policy Analyst at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Shutterstock.

KEI is registered under the FARA as an agent of the Korea Institute for International Economic Policy, a public corporation established by the government of the Republic of Korea. Additional information is available at the Department of Justice, Washington, D.C.