US tariff pause offers temporary reprieve to Korean economy

Containers are stacked at a port in Pyeongtaek, Gyeonggi Province, Wednesday. Yonhap

Korea bought time to negotiate on U.S. tariffs, as President Donald Trump on Wednesday (local time) suspended "reciprocal" tariffs on dozens of countries, including Korea, for 90 days.

However, risks to the Korean economy still remain amid escalating retaliatory measures by the U.S. and China against each other, with the U.S. levies on China, Korea’s largest trading partner, amounting to 125 percent.

In a social media post, Trump said more than 75 countries have reached out to the U.S. for tariff negotiations and he “authorized a 90 day PAUSE and a substantially lowered Reciprocal Tariffs during this period of 10 percent.”

At the same time, he increased duties on China to 125 percent following Beijing's retaliatory move.

Korea's Minister of Trade Cheong In-kyo, right, poses with U.S. Trade Representative Jamieson Greer at the latter's office in Washington, Tuesday (local time). Courtesy of Ministry of Trade, Industry and Energy

Korea was initially faced with a 25 percent reciprocal tariff, which took effect on Wednesday. To defy the impacts on its export-reliant economy, the Korean government has been striving to engage with the U.S., with Seoul’s Minister of Trade Cheong In-kyo meeting U.S. Trade Representative Jamieson Greer in Washington Tuesday (local time).

“The latest reprieve can be seen as a positive development, as it secures room for continued negotiations with the U.S. and provides an opportunity to minimize the potential impact on Korean industries,” Cheong told reporters a day after his meeting with Greer.

However, he noted that the 125 percent tariff imposed on Chinese imports still poses risks for Korea.

“Considering the potential indirect impact on Korea’s exports to China and the balloon effect on our exports to third countries, swift and continued consultations with the U.S. remain necessary to minimize damage,” he said. The balloon effect refers to when Chinese products slapped with high tariffs are dumped into Korea or other neighboring countries instead.

The 10 percent tariff is widely viewed as a relief for the Korean economy, as not only Korea but also other countries can compete in the U.S. market on the same level if the current tariff scheme sustains.

“Following the latest measure, the direct impact on Korea’s exports to the U.S. will be limited, given that they are set to compete with imports from other countries on a level playing field,” said Lee Tae-kyu, a senior fellow at the Korea Economic Research Institute.

“Except for cars and steel products, which faced separate 25 percent tariffs, the impact from the 10 percent levy on other consumer goods will not likely be significant, though we still have to monitor how the situation will unfold in the future.”

Korea’s exports to the U.S. stood at $127.8 billion last year, up 10.45 percent from a year earlier. Cars were the biggest export item, accounting for 27.1 percent.

Though the initial 25 percent tariff on cars remains the same, Korean carmakers and auto parts companies are casting a positive view that the reprieve for the reciprocal duties has provided room for negotiations on the car tariff as well.

Industry officials say that Trump backed off the reciprocal tariffs due to concerns over their impact on the U.S. economy, and the car tariff was anticipated to deal a hefty blow to the U.S. auto supply chain.

A man rides an electric motorbike past a Samsung Electronics billboard in Vietnam's Bac Ninh province, Tuesday. AFP-Yonhap

The 10 percent tariff is also a favorable sign for the smartphone industry. It is estimated that around half of Samsung Electronics’ Galaxy smartphones are produced in Vietnam, which initially was slapped with a 46 percent tariff.

As Trump lowered the tariff on Vietnam to 10 percent, this gives a competitive edge to the Galaxy smartphone over Apple’s iPhone. Around 80 percent of iPhones are believed to be produced in China.

Concerns are now shifting to the indirect impact of the 125 percent tariff imposed on China.

According to the Korea International Trade Association, Korea’s exports to China amounted to 133 billion won last year, with nearly 86 percent consisting of intermediary goods such as semiconductors and displays.

This means that firms exporting intermediary goods to China could be affected by Beijing’s restricted exports to Washington. Korean companies operating manufacturing plants in China also face rising risks as the U.S. and China continue to engage in retaliatory trade measures.

“Another important concern is the potential dumping of Chinese goods into other markets, including Korea, as exports to the U.S. are virtually blocked,” Lee said.

“This is already becoming evident in the steel industry, where Korean steelmakers are urging the government to impose safeguard tariffs to protect the domestic market. However, such measures take time, leaving the economy exposed to further risk in the meantime.”