- Tariff reduction puts South Korean manufacturers on par with Japanese competitors.
- Investment pledge includes loans and loan guarantees, limitting capital outflow pressures.
- Semiconductor tariffs remain a key area to watch.
- Details on domestic market access—particularly in agriculture—remain uncertain.
A “comprehensive” trade deal
US President Trump announced a “comprehensive” trade deal with South Korea. Under the agreement, the US will lower the reciprocal tariff on South Korean goods from 25% to 15%, while South Korea will invest USD 350 billion in the US.
According to the South Korean government, the US has also agreed to reduce automobile tariffs to 15%. South Korea’s investment in the US will be directed toward key sectors including semiconductors, nuclear energy, biotechnology, and shipbuilding.
Additional media reports suggest that South Korea will purchase USD 100 billion worth of LNG from the US and will open its domestic market to more US products, including automobiles and agricultural goods.
The good and the uncertain
The reduction in reciprocal and automobile tariffs to 15% places South Korean manufacturers and carmakers on equal footing with their Japanese competitors in the US market. Just last week, Japan also reached a trade agreement with the US that reduced both reciprocal and automobile tariffs to the same level. Passenger cars are South Korea’s largest export to the US, with exports reaching USD 37.4 billion in 2024. Following the imposition of 25% automobile tariffs in April, South Korea’s passenger car exports declined by -3.4%y/y on average between April and June, while total exports to the US also fell by -5.2%y/y during the same period.
Semiconductor tariffs remain a watch point. So far, news reports only indicate that South Korea will not face worse treatment than other countries in the semiconductor sector. Semiconductors are South Korea’s third-largest export to the US, totaling USD 8.5 billion in 2024. The broader ICT category reached USD 17.5 billion in the same year.
Similar to the Japan-US trade deal, South Korea’s USD 350 billion investment pledge likely includes loans and loan guarantees. This helps contain pressure from capital outflows. The US is already South Korea’s largest destination for outward direct investment, which totaled USD 22.3 billion in 2024.
Details on expanded domestic market access remain unclear. While South Korea and the US generally have complementary trade structures, they compete in several sectors, including automobiles and petrochemicals. Increased US imports could heighten competitive pressure on local manufacturers. At the same time, agriculture remains a politically sensitive area for liberalization and could face strong opposition from farming groups.
Forecast implications
Overall, the trade deal reduces tariff-related uncertainties facing the South Korean economy. However, it does not change the outlook for a slowdown in exports in 2H25 and 2026—tariffs remain higher than pre-April levels, and global demand is expected to weaken.
Given softening exports and a likely rebound in domestic demand—driven by post-election confidence and fiscal stimulus from the new administration—we maintain our GDP growth forecasts at 1.0% for 2025 and 1.9% for 2026.
The reduction in trade-related uncertainties lessens the pressure on the Bank of Korea to cut interest rates further. Combined with a tentative recovery in domestic demand and property prices, the likelihood of additional rate cuts has declined. We continue to expect one more rate cut this year, lowering the base rate from 2.50% to 2.25% by end-3Q.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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