How Korea can get off Trump’s 'naughty list'
On July 30, President Donald Trump announced an agreement with Korea to impose 15 percent tariffs on Korean imports to the United States, 10 percent lower than what he originally proposed, while U.S. products imported to Korea will remain tariff-free. Korea’s car exports will face 15 percent tariffs, down from the rate of 25 percent that the president had already imposed on cars from most of the world. Although the final details still need to be worked out, the deal is similar to those with Japan and the EU: a 15 percent tariff, investment announcement and no tariffs on imported U.S. products.
Attention is now on upcoming tariff discussions regarding pharmaceuticals, steel and other items. The semiconductor tariff, announced at 100 percent just recently, was of particular interest. Until now, semiconductor products sent to the United States have been free of tariffs under the Korea-U.S. Free Trade Agreement.
There is good news and bad news. The good news is that 25 percent tariffs would have been worse. In addition, the deal provides some certainty to Korean companies seeking to sell to the U.S. market.
The bad news is obviously that this will make it harder for Korean firms to sell in the U.S. market, forcing them to raise prices, accept lower margins, or both. But if Korea plays its cards right, it perhaps can turn this into a temporary, rather than a permanent, setback.
Before discussing how, it’s important to understand the thinking behind the Trump administration’s actions and how it got here. For the last half century, the United States was the most open market in the world and was the importer of last resort.
In fact, the U.S. annual trade deficit exceeds $900 billion per year and the United States accounts for 78 percent of global deficits among countries running trade deficits. The result has been a hollowing out of U.S. manufacturing, where U.S. advanced industrial goods production as a share of national GDP in 2020 was just 80 percent of the global average.
Given this, Trump’s manufacturing protectionism should not be surprising. United States Trade Representative (USTR) Jamieson Greer laid out the administration’s three trade goals: reduce the trade deficit, boost manufacturing and reshore “our economy.” Pretty straightforward.
As such, while the Lee Jae Myung administration's trade team will be working with Greer's office over the next months to put meat on the bones of this agreement, they should also consider the long game of how they can work to eliminate the Korean trade surplus with the United States, especially in goods.
As the Trump administration has made clear, it is laser focused on one number: the bilateral trade deficit between the United States and other nations. In 2023, U.S. imports from Korea were $120 billion, with vehicles accounting for 35 percent, machinery 21 percent, electronics 15 percent and chemicals 12 percent. In contrast, the United States exported just $61 billion, with minerals accounting for 27 percent, machinery 19 percent, chemicals 14 percent and agriculture 13 percent. In other words, the U.S. trade deficit with Korea was $59 billion.
As such, the Lee government should put in place a plan to reduce that deficit to zero, and then go back to Trump, give him credit for getting to balance and then ask to renegotiate the deal for lower tariffs.
Korea can do this in ways that minimize harm to its industrial competitiveness.
First, the commitment by the Korean government that its companies will make a $350 billion investment in the United States will not only boost goodwill with the Trump administration, it can measurably reduce the trade deficit. That's especially true if Hyundai and Kia expand existing auto plants and build new ones in the United States, and if Samsung and SK hynix continue their investments made under the CHIPS Act in U.S. semiconductors. The Korean government should encourage other firms to do the same.
But the Lee government should also encourage more U.S. imports, especially by reducing imports from other nations and substituting them with U.S. products. The Korean commitment to purchase $100 billion of U.S. liquefied natural gas (LNG) will help. But there are other steps the government should take. It should press Korean Air to only buy Boeing jets for the next decade. It should switch some agricultural imports (aside from beef and rice, which are sensitive) from other nations to the United States. The government should buy more U.S. defense products. And overall, it should establish a closer partnership with the U.S. International Trade Administration to help American companies, particularly small and mid-sized companies, to sell more to Korea.
At the same time, the Lee government should work to reduce the number of items on the USTR National Trade Estimates report that are seen as problems from the U.S. side, including encryption and security requirements for public procurement of information and communication technology equipment, cloud security certification for public sector cloud service procurement, and network usage fees. These are proposals forcing foreign content providers to pay network usage fees to Korean Internet service providers, restrictions on location-based data and strict competition regulations on internet platforms.
There is no reason why these steps cannot be successful. In the last few years many Korean firms have already made or announced manufacturing investments in the United States. And as these come online, U.S. imports from Korea should decline. And with the government taking other steps on both the import and export side, it should be able to get to trade balance by 2028.
At that point, it should declare success, and ask Trump to treat it like other nations that have trade balances or deficits with the United States. This may not be ideal from the Korean side, but it is a heck of a lot better than the new arrangement.
Dr. Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation, an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. The views expressed in the above article are those of the author and do not reflect the editorial direction of The Korea Times.