Analysis Tariff deal levels Korean firms’ footing in US, uncertainty remains

Automobiles and cargo containers are piled up for exports at Pyeongtaek Port in Gyeonggi Province, Thursday, when Korea and the United States reached an agreement on a 15 percent tariff. (Yonhap)

The Korea-U.S. agreement on a 15 percent tariff on Korean imports to the United States is seen as an above-average outcome, as it sets the trade barrier to levels imposed on major competitors such as Japan and the European Union, helping to ensure a more level playing field.

The agreement partially cleared a cloud of uncertainties that had hampered Korean companies from making business plans, while easing financial burdens by securing a lower tariff rate than the 25 percent initially threatened by U.S. President Donald Trump.

However, the deal came with strings attached, as Korea pledged to establish a $350 billion investment fund, which Trump said would be “owned, controlled and selected” by the U.S. The amount accounts for nearly 20 percent of the country’s 2024 gross domestic product.

Experts and industry officials said that close attention is needed to how the tariffs will be applied to individual items, especially in key sectors such as semiconductors and biopharmaceuticals.

“The agreement will have effects in two ways — one from the tariffs being directly imposed by the U.S., and the other from the impact of relative price competitiveness due to tariff differentials,” said Kim Jong-duk, executive director of the Korea Institute for International Economic Policy’s (KIEP) International Trade, Investment and Economic Security Team.

“Following the agreement, Korea will have new tariffs on exports to the U.S., but the deal eliminates discriminatory pricing gaps with major competitors, which brings greater certainty.”

Last week, the U.S. and Japan reached a deal imposing a 15 percent “reciprocal” tariff on Japanese imports along with the same 15 percent tariff on auto imports in return for accepting conditions such as U.S. investments. The European Union also struck a 15 percent agreement covering automobiles on Sunday.

A staff member distributes an extra edition of the Yomiuri Shimbun newspaper reporting that President Donald Trump announced a trade framework with Japan, July 23, in Tokyo. The headline reads: U.S. (sets) a 15-percent tax (on goods imported) from Japan. AP-Yonhap

As Thursday’s deal sets a 15 percent tariff on Korean automobiles — the country’s largest export item to the U.S. — they will be able to maintain price competitiveness against Japanese and European cars.

“Hyundai Motor and Kia had estimated that a 1 percent tariff increase could lead to an annual profit decline of around 150 billion won ($107.8 billion) each. However, following the latest deal, expectations for their combined annual operating profit have risen by approximately 1.5 trillion won,” Hyundai Motor Securities said in a report on the tariff deal.

Thursday’s deal did not set duties on Korea’s other key export items, semiconductors and pharmaceuticals, but Kim expected that Korea will likely get most favored nation status, given U.S. Commerce Secretary Howard Lutnick’s comment that “they will also not be treated any worse than any other country on semiconductors and pharmaceuticals.”

Given that status, multiple industry officials speculate that Korea may face a 15 percent duty on chips and medicine, given the EU precedent.

“Imposing high tariffs on semiconductors could drive up the price of iPhones in the U.S. and increase investment burdens for servers and data centers, and this is one of the reasons why the U.S. is unlikely to impose tariffs higher than reciprocal levels,” Hana Securities analyst Kim Rok-ho said.

“The memory chip industry is largely driven by the balance between supply and demand. So even if tariffs negatively affect end-product demand, the potential impact on chipmakers may be limited due to restricted supply,” the analyst said.

Kim Yong-beom, presidential chief of staff for policy, answers reporter questions during a briefing at the presidential office in Yongsan District, Seoul, Thursday. Yonhap

Korea’s top six business associations — including the Korea Chamber of Commerce and Industry and Federation of Korean Industries — said in a joint statement that “the agreement holds significant meaning as it not only reduces uncertainty in the export environment but also creates conditions for Korean companies to compete on equal or even better terms with major countries.”

“The investment fund announced is expected to serve as a crucial turning point for Korean companies to gain a foothold in strategic industries such as shipbuilding, semiconductors, secondary batteries, biotech and energy in the U.S. and global markets.”

Industry officials also said that Thursday’s deal marks an above-average outcome.

“It is hard to say the deal was an absolute win for Korean businesses, but it did improve visibility and bring some relief, as the tariffs were set at levels similar to those of major countries like Japan and the EU,” a conglomerate official said.

“However, it remains unclear how tariffs will be applied to individual items, and Korean companies are also expected to face considerable pressure to make substantial investments.”

The Korean government explained that out of the $350 billion investment package it proposed, $150 billion will be used for the shipbuilding industry, to be led by Korean companies.

Within the remaining $200 billion, the portion that involves direct equity investment will be extremely limited. Most of the package will consist of loans and guarantees, with guarantees expected to take up the largest share due to their significant leverage effect.

Regarding Lutnick’s remarks about “90 percent of the profits (from the fund) going to the American people,” Kim Yong-beom, presidential chief of staff for policy, said “our interpretation is that we view it as a form of reinvestment.”

“If the U.S. recommends profitable projects and provides purchase guarantees so that our businesses can generate returns and remain involved in the long term, then it would be acceptable,” he added.

Another industry official described the situation by saying, “Korea has just brought the required buy-in to join Trump’s table.”

“It remains to be seen how much of its promise will turn into actual bets (investments), but what’s important is that the Korean government should protect firms facing excessive pressure to invest.”

KIEP director Kim also said Korea should find out what it can gain from the ongoing talks and ensure that any investments made yield the greatest possible return.