Korean economy at crossroads as tariff talks remain stalled ahead of Trump’s visit

Cars for export are parked at Pyeongtaek Port, Gyeonggi Province, Friday. Yonhap

The Korean economy is bracing for financial market volatility amid stalled tariff negotiations between Korea and the U.S. over a $350 billion investment fund.

While the two sides sought to finish up the negotiations before U.S. President Donald Trump’s visit to Korea later this week during Asia-Pacific Economic Cooperation (APEC) events, the likelihood of a deal being reached during his summit with President Lee Jae Myung appears slim.

The U.S. demand for a $350 billion investment from Korea was part of a July agreement that saw the two countries set the U.S. blanket tariff on Korean goods at 15 percent, down from 25 percent. The U.S. insists the full amount be paid up front, while the Korean government argues that doing so would trigger a massive dollar outflow, and that a significant portion should instead come in the form of loans and guarantees.

This uncertainty has since led the Korean currency to depreciate against the U.S. dollar, hitting a six-month low of 1,440 won per dollar last week.

After returning from meetings with U.S. officials on Friday, presidential chief of staff for policy Kim Yong-beom told reporters that the two countries remain sharply divided over key issues.

Similarly, Minister of Trade, Industry and Resources Kim Jung-kwan said the two countries are deeply divided over the amount of cash investment, even though the U.S. showed a considerable understanding about the potential impact of the U.S. demand on Korea’s foreign exchange market.

On Friday (local time), Trump said the July deal with Korea was “pretty close to being finalized,” and added that "if they [Korea] have it ready, I'm ready."

According to government sources, Deputy Prime Minister and Finance Minister Koo Yun-cheol maintained that Korea can realistically source only up to $20 billion a year.

However, Trump is expected to demand up-front cash investment as a way to strengthen his flagship “America First” agenda, framing it as a win for U.S. manufacturing and investment.

For Korea, the U.S. demand could cause further financial market volatility and uncertainty for manufacturing exports.

The won has slumped more than 2 percent against the dollar this month, hitting its weakest level in six months. The won weakening to the 1,440 won range was the first time it had done so since April, meaning the won has remained one of the worst-performing currencies in October.

The won’s depreciation was second only to Japan’s yen, which dipped more than 3.2 percent on expectations of expansionary fiscal policy under new Prime Minister Sanae Takaichi.

As for manufacturing exports, the steel industry has taken a major blow, with exports to the U.S. already dropping 26 percent year-on-year as of July. The chipmaking industry is also unnerved by Trump’s threat of a 100 percent semiconductor tariff.

While many say the 100 percent semiconductor tariff is unlikely to pass amid ongoing U.S. artificial intelligence investment needs, few are willing to rule out further surprises.

“Nothing is certain until the deal is inked and put in writing,” an industry watcher said.

“The two countries are likely to remain divided over specifics of the U.S. investment fund demand. Further weakening of the won also remains a concern, since even a partial payout would cause an investment outflow. Such outflows could heighten foreign exchange market volatility.”