US tariffs threaten Korea's auto industry
Ko Jong-hwan
The South Korean auto industry, a cornerstone of the nation's economic success, now stands on a cliff edge. The current 25 percent tariff imposed by the United States represents more than just a trade barrier — it's an existential threat to a critical engine of the Korean economy. The gravity of the situation becomes starker when compared to the preferential 15 percent tariff granted to competitors in Japan and the European Union.
A recent global trade simulation using a computable general equilibrium model I created lays out in numbers just how devastating such a policy could be. The scenario assumes U.S. tariffs of 25 percent on autos and parts from South Korea, 15 percent from the EU and Japan and 100 percent from China, with Canada and Mexico exempt. Meanwhile, Mexico, under U.S. pressure, imposes a 50 percent tariff on Chinese autos.
Although South Korea and the U.S. announced a 15 percent tariff agreement in July, no formal agreement has been signed, leaving the 25 percent rate still in effect. The delay in formalizing the lower rate likely stems from a complex mix of U.S. domestic politics and broader geopolitical maneuvering.
The Donald Trump administration may be using the unsigned agreement as leverage in other ongoing negotiations, possibly related to semiconductors or defense cost-sharing. To break this impasse, South Korea must launch a multi-faceted diplomatic effort. High-level government engagement is critical, but it must be coupled with strategic lobbying from the Korean auto industry, emphasizing its substantial investments in the U.S. manufacturing sector, which are expected to create American jobs. Building a coalition with the EU and Japan to advocate for fairer, rules-based trade could also apply collective pressure, reminding Washington that stable, predictable economic partnerships are mutually beneficial.
The simulation results are shocking. The 25 percent tariff will cause a catastrophic 61.2 percent collapse in exports of Korean-made automobiles to the U.S., creating an "export cliff" that effectively seals off access to this vital market. This external shock will trigger a crisis in South Korea's domestic industrial base, with output plummeting by more than 10 percent for finished vehicles and auto parts. Korea's real GDP is projected to contract by 0.24 percent, the sharpest decline among all major economies analyzed. The nation faces a staggering annual loss of $54.87 billion (7,681.8 billion Korean won).
Shockwaves will ripple through supply chains, hitting upstream industries like steel and fabricated metals, causing a broad-based industrial slowdown. Given the auto industry's immense contribution to GDP and employment, this double-digit contraction threatens devastating mass layoffs and supplier bankruptcies.
This tariff structure places Korean automakers in a particularly insidious "sandwich," squeezed on all sides. Japan, our primary rival, benefits from a lower 15 percent tariff, creating a 10-percentage-point price disadvantage in the fiercely competitive U.S. market. The simulation quantifies this disparity, with South Korea's total auto exports forecast to shrink by 17.5 percent, while Japan's would decline only 10.4 percent. Korean cars will be too expensive to compete with tariff-free vehicles from Canada and Mexico, yet unfairly priced against technological rivals from Japan and Europe.
The data paints a clear and urgent picture. The differential tariffs are a material threat to the foundation of South Korea’s automotive industry. Global auto giants like the Hyundai Motor Group, the third-largest car producer in the world, and its suppliers are now forced to compete on an uneven playing field.
Ironically, the United States also emerges as a net loser. While tariffs would boost domestic auto production by 6.6 percent, this gain comes at an exorbitant cost to the wider economy. American consumers will face higher prices, while inefficient resource allocation leads to a national loss of $26.9 billion and a real GDP contraction of 0.16 percent. This demonstrates protectionism's Pyrrhic nature, where narrow industry benefits are dwarfed by costs imposed on the entire nation.
The core intent of U.S. policy is to construct a "North American automotive bloc." As exports from Korea, Japan and China are choked off, the vacuum is rapidly filled by American partners. The simulation shows exports from Canada and Mexico surging by 27 percent and 21 percent, respectively, as they reap trade diversion benefits. Global supply chains are being redrawn not by efficiency, but by geopolitics.
For Korea, these findings present urgent strategic challenges. The simulation exposes a critical vulnerability due to over-concentration in the U.S. market. The path forward demands a five-pronged approach: First, the Korean government and industry must launch a coordinated diplomatic and lobbying effort to finalize the 15 percent tariff agreement and advocate for fair, rules-based trade.
Second, Korean automakers must increase production within the U.S., moving "inside the tariff wall." This is no longer optional but essential.
Third, leaders must accelerate market diversification, strengthening trade ties with the Association of Southeast Asian Nations, India and other economic blocs to reduce single-partner dependency.
Fourth, Korean automakers need expanded investment in North American manufacturing facilities, particularly in Canada and Mexico, to serve the U.S. market from within the tariff-free zone.
Finally, Korea must achieve an undeniable "super-gap" in next-generation automotive technologies. By leading in electric vehicles, autonomous driving and advanced batteries, Korean automakers can create competitive advantages that overcome even substantial tariff penalties.
Faced with this colossal tariff barrier, the Korean auto industry requires urgent strategic action. Now is the time for wisdom and resolve to not only survive but leap forward once again.
Ko Jong-hwan is professor emeritus of economics at Pukyong National University in Busan and an adjunct professor at National Dong Hwa University in Taiwan.