Trump’s reciprocal tariffs could reshape global trade

Standing in the Rose Garden at the White House, U.S. President Donald Trump announced new reciprocal tariffs that mark the end of decades-long U.S. trade policy dedicated to lowering tariff barriers around the world. In doing so, Trump is taking a significant gamble that higher tariffs will spur renewed manufacturing in the United States. But those tariffs also have significant implications for U.S. allies like Korea.

In announcing the new tariffs, the Trump administration has put in place a 10 percent universal tariff along with separate tariffs for around 60 countries that are designed to address barriers to U.S. exports related to a country’s average tariff rate, value-added taxes and a range of non-tariff barriers.

The new 25 percent reciprocal tariff rate on Korean exports will not apply to products such as steel and automobiles, which have separate tariffs in place. However, that is little comfort as Korean manufacturers will still face 25 percent tariffs on those items.

While Korea’s tariff rate is 25 percent, a White House chart indicated that the Trump administration had determined barriers in the Korean market were equivalent to a 50 percent tariff.

Because the White House has not released details of how each country’s tariff rate was calculated it is unclear how the Trump administration valued different barriers. One estimate suggested that Korea’s VAT could add 5 percent to the tariff calculations. The administration’s recently released National Trade Estimate (NTE), which details foreign barriers to U.S. trade, lists potential factors such as a lack of transparency on implementation and testing related to chemical regulations, difficulty in receiving approval for biotechnology products, the failure to lift the prohibition on U.S. beef from cattle over 30 months old and potential barriers such as network usage fees and new regulations for online platforms.

Any of these or others listed in the NTE could have contributed to the calculation of the new reciprocal tariff, but there is one specific barrier mentioned that targets Korea’s economic model. Trump's executive order notes that a country’s domestic policies can suppress domestic consumption to promote exports to the U.S. The order notes that domestic consumption accounts for 68 percent of the U.S. gross domestic product, in contrast to 49 percent in Korea. Korea’s economy has long been export-oriented, and the specific inclusion of Korea in this regard may suggest that the U.S. is looking for broader changes to Korea’s economic model.

While the 26 percent tariff is higher than many anticipated, Korea is in a relatively good competitive position compared to its neighbors. Despite efforts by Japanese Prime Minister Shigeru Ishiba to gain Trump’s favor, Japan was hit with a 24 percent tariff. Other countries in the Indo-Pacific are facing higher tariffs than Korea. India received a 27 percent tariff, Indonesia 32 percent and Vietnam 46 percent. China was given a 34 percent tariff, but this comes on top of the 20 percent put in place since the second Trump administration began and additional tariffs from the first Trump administration.

While the 25 percent tariff is clearly a disappointment, Korea could have found itself in a much worse position.

The question now is what to do next. The order makes explicit that countries introduce tariffs in response to the U.S. tariffs could face higher rates in an effort to blunt any retaliation against the United States. It also suggests that countries that take steps to align their policies with the United States could see reduced tariff rates. However, it is unclear if the new 10 percent universal tariff is permanent or something that can be negotiated away.

One thing that has become clear from the early rounds of tariffs on Canada and Mexico is that there seems to be little difference in the outcome between Canada’s retaliatory approach and Mexico’s more conciliatory approach. However, Mexico was able to get commitments from the Trump administration to address the flow of military-grade weapons across the border. China has taken the approach of retaliating, but because of the larger economic issues and geostrategic competition with the United States, it may not be a good example for Korea.

The initial best approach for Korea is to follow Mexico’s strategy of engaging in low-key diplomacy but also viewing the discussions as a negotiation. It is important for Korean policymakers to consider what they want out of talks beyond lower U.S. tariffs. This should be viewed as a negotiation in the truest sense. However, the United States has yet to demonstrate that there is a clear path to the removal of tariffs and Korea would also be prudent to take steps to adjust to a world where reciprocal tariffs are the new normal.

Troy Stangarone is the director of the Hyundai Motor-Korea Foundation Center for Korean History and Public Policy and the deputy director of the Indo-Pacific Program at the Woodrow Wilson Center.