[비즈한국] On July 31, South Korea announced an agreement with the United States to invest $350 billion in the U.S. in exchange for lowering mutual tariff rates from 25% to 15%. However, nearly three months after reaching this trade agreement, the two sides have failed to narrow their differences regarding the nature of the $350 billion U.S. investment fund, leaving mutual tariff rates and automotive tariffs stuck at 25%.
In contrast, Japan, a key competitor in the U.S. market, reached an agreement on the details with the U.S., and as of the 4th of last month, its automotive tariff rate to the U.S. was lowered from 27.5% (25% mutual tariff + 2.5% base tariff) to 15%. The problem is that according to a survey by the United Nations Conference on Trade and Development (UNCTAD), South Korea's risk exposure to changes in U.S. foreign policy is the highest among major Asian exporting nations, including Japan, China, Taiwan, and India. If the semiconductor and pharmaceutical tariffs promised by President Trump are implemented, South Korea is bound to suffer greater damage than other Asian countries.
Kim Yong-beom, Head of the Presidential Office's Policy Bureau, Minister of Industry and Trade Kim Jung-gwan, and Trade Minister Yeo Han-koo visited the U.S. Department of Commerce in Washington D.C. on October 16 (local time) and held talks with Secretary of Commerce Howard Lutnick for about two hours, but failed to reach a final agreement regarding the $350 billion U.S. investment fund. When asked by reporters about the outcome of the negotiations after the meeting, Kim responded, "We talked enough for two hours." When asked about any progress, he repeated, "We held a meeting for two hours."
It remains unclear whether South Korea and the U.S. will resume negotiations on the 17th. The reason the two sides cannot narrow their differences is the persistent gap in positions regarding the investment method: the U.S. insists that most of the $350 billion be direct cash investment, while South Korea maintains its stance on providing investment guarantees. Regarding the $350 billion amount, South Korea requested a split-payment method and the establishment of a currency swap, but the U.S. has been passive, preventing an agreement on this issue as well.
Koo Yun-cheol, First Vice Minister of Economy and Finance, told reporters at the IMF headquarters in Washington D.C. that day, "I understand that the U.S. is asking for the $350 billion 'up front'," adding, "There is real uncertainty as to whether President Donald Trump will accept it if we try to persuade him." This remark highlights the gap in positions between the two countries.
As the negotiations stall, the reductions in mutual tariffs (25%→15%) and automotive tariffs (25%→15%) have not been realized. If the agreement is delayed, the consensus to grant South Korea Most-Favored-Nation (MFN) status regarding future semiconductor and pharmaceutical tariffs will also become empty words. Although the Lee Jae-myung administration is conducting negotiations in the name of national interest, the South Korean economy is inherently vulnerable to changes in U.S. policy. If a compromise is not found, it is bound to suffer a harder blow than other competing Asian exporters.
According to a report recently published by UNCTAD titled ‘Trade policy uncertainty looms over global markets,’ South Korea's risk exposure to changes in U.S. foreign policy was 44.8%, the highest among major Asian nations. In the case of Taiwan, which competes with South Korea in the U.S. semiconductor market, the risk exposure was 39.8%, 5 percentage points lower than that of South Korea. For Japan, which competes in the automobile and home appliance markets, the risk exposure was 39.4%. China, which is infiltrating the U.S. market with low-cost offensives in virtually all sectors, had the lowest risk exposure among major Asian nations at only 33.7%.
India, which has recently emerged as a global factory replacing China and is penetrating the U.S. market, also had a lower risk exposure than South Korea at 34.4%. Given that the U.S. policy uncertainty index has surged since the beginning of the second Donald Trump administration, the damage to the South Korean economy, which has high risk exposure, is bound to be greater. The ‘U.S. Policy Uncertainty Index,’ created by IMF researchers, was recorded at 317 as of September this year. This is a massive 190-point increase from a year ago (127). The uncertainty of U.S. policy has soared due to various tariff policies suddenly announced by President Trump.
South Korea's higher risk exposure to U.S. policy changes compared to other Asian countries is due to its excessive dependence on the U.S. market. Last year, the U.S. was the top destination for South Korean automotive exports, accounting for 49.1% of the total, and the U.S. also ranked first for auto parts exports at 36.5%. In steel exports, the U.S. accounted for the largest share at 13.1%. Aluminum exports also saw a 20.4% share, the second highest after China (22.1%). All of these are items currently subject to high tariffs under President Trump's tariff policy.