🚨 Trump's Reciprocal Tariff Announcement and Possibility of Korea-US FTA Renegotiation

Today Korean Economic News | 2025.02.14

📌 Reciprocal Tariff Announcement Coming Soon... Concerns about Korea-US FTA Renegotiation

💬 As President Trump is about to announce reciprocal tariffs, the possibility of renegotiating the Korea-US FTA has emerged. While Korea may be initially excluded as most goods are imported and exported without tariffs due to the FTA, concerns are growing that it could become a target in the future due to the size of its trade surplus with the US.

1️⃣ Easy to Understand

President Trump is about to announce a reciprocal tariff policy, raising the possibility of renegotiating the Korea-US FTA. I'll explain what this means for our economy and daily lives in simple terms.

Reciprocal tariffs are a policy of imposing similar levels of tariffs between countries to resolve trade imbalances. Simply put, it's the principle of "if you tax our goods, we'll tax your goods at the same level." President Trump is pursuing this policy to reduce the US trade deficit.

South Korea and the United States have been freely trading most goods without imposing tariffs through the Korea-US FTA since 2012. This is like having a special trade discount between the two countries. Thanks to this, Korean companies have been able to export cars, electronics, and steel to the US market without tariffs, and US companies have also been able to freely sell agricultural products, pharmaceuticals, and services to Korea.

In the current situation, the Korea-US FTA means that Trump's reciprocal tariff policy is unlikely to be applied to Korea immediately. However, the problem is that Korea records a significant surplus in trade with the United States. Korea's trade surplus with the US in 2024 is estimated at about $30 billion, which is a scale that the Trump administration might take notice of.

This situation is similar to exchanging items with a friend, but always giving them more valuable items and receiving less valuable ones in return. Just as your friend might eventually say, "This is unfair, let's change the rules," the Trump administration might also demand a renegotiation of the Korea-US FTA.

If the Korea-US FTA is renegotiated or reciprocal tariffs are imposed, what impact would this have on our lives? First, it could become more difficult for Korean cars, electronics, steel, etc. to be exported to the US, which could affect jobs and corporate performance in related industries. From a consumer's perspective, the prices of products imported from the US could rise, and there could also be a negative impact on overall economic growth. Therefore, the government and businesses are preparing response strategies for these possibilities.

2️⃣ Economic Terms

📕 FTA (Free Trade Agreement)

FTA is an agreement that promotes free trade by lowering trade barriers between countries.

• It seeks to expand trade through tariff elimination or reduction, removal of non-tariff barriers, and opening of service markets.
• The Korea-US FTA came into effect in March 2012, eliminating tariffs on most goods traded between the two countries.

📕 Tariff

Tariffs are taxes imposed on imported goods, used for protecting domestic industries and adjusting trade balance.

• They are generally imposed as a percentage of the value of imported goods (ad valorem) or as a fixed amount based on quantity (specific).
• When tariff rates increase, import prices rise, increasing the burden on domestic consumers and potentially reducing import volumes.

📕 Trade Surplus

Trade surplus refers to a state where export value exceeds import value and is an important indicator of economic relations between countries.

• Trade surplus has a positive impact on domestic production and employment, but sustained large surpluses can cause trade friction.
• Korea's trade surplus with the US is led by exports of automobiles, semiconductors, and electronic products.

📕 Reciprocal Tariff

Reciprocal tariffs are tariffs imposed according to the principle of reciprocity between countries, aimed at resolving trade imbalances.

• It is a method of imposing similar levels of tariffs on products from a country that imposes tariffs on one's own products.
• The Trump administration emphasizes reciprocal tariff policy to resolve trade deficits and protect domestic industries.

3️⃣ Principles and Economic Outlook

💡 Trump Administration's Trade Policy Stance and Reciprocal Tariff Strategy

• President Trump's second administration is expected to strengthen trade policies based on 'America First,' with reciprocal tariffs emerging as a key means of this policy stance.

  • First, looking at the Trump administration's trade policy stance, resolving trade imbalances and protecting US manufacturing are set as core objectives. During his first term (2017-2021), President Trump pursued strong protectionist policies such as a trade war with China, renegotiation of NAFTA (replaced by USMCA), and invoking Section 232 of the Trade Expansion Act for steel and aluminum. In his second term, this stance is expected to become more systematized and expanded. In particular, the policy direction emphasizing 'reciprocity' is becoming clearer, demanding the same level of treatment that the US provides to market access for other countries.

  • Second, analysis of the specific content and application targets of the reciprocal tariff policy is needed. President Trump mentioned during his campaign that he could impose tariffs of 10% on all imports and over 60% on Chinese products. If such policies are realized, the primary targets are likely to be countries recording large trade deficits with the US (China, Mexico, Germany, Japan, Vietnam, etc.). Also, industry groups competing with domestic manufacturing in the US, such as automobiles, electronics, and steel, could be concentrated targets.

  • Third, the approach to FTA countries also needs attention. The Trump administration has expressed its willingness to review and renegotiate existing trade agreements, including FTAs, based on the perception that they have worked unfavorably for the US. In the short term, FTA countries may be exempt from reciprocal tariffs, but in the medium to long term, pressure for renegotiation may increase for FTA partner countries with large trade imbalances (including Korea).

  • Fourth, the impact of such trade policies on the global trade order should also be considered. Unilateral tariff imposition by the US is likely to trigger retaliatory measures from other countries, which could lead to the spread of global trade conflicts and weakening of the World Trade Organization (WTO) system. There is also a possibility of accelerating the reorganization of global supply chains and regionalization.

• The Trump administration's trade policy stance and reciprocal tariff strategy are expected to bring considerable uncertainty to the global trade environment. Particularly for Korea, which has high export dependence on the US, this is a time that requires close analysis and preemptive response.

💡 Possibility and Impact Analysis of Korea-US FTA Renegotiation

• As the possibility of renegotiating the Korea-US FTA emerges, analysis of the economic impact and major issues is needed.

  • First, to judge the possibility of Korea-US FTA renegotiation, it is necessary to objectively examine the current trade relationship. Korea's trade surplus with the US is estimated at about $30 billion as of 2024, which is a considerable level considering the scale of trade between the two countries. Korea maintains a competitive advantage in major export items such as automobiles, semiconductors, and electronic products. Considering that the Trump administration has set resolving trade imbalances as a core objective, the pressure for Korea-US FTA renegotiation may increase. A revision of the Korea-US FTA was already negotiated during Trump's first term, when US demands were reflected mainly in the automobile and steel sectors.

  • Second, predicting the major issues that could emerge during renegotiation, the automobile industry is likely to be the most central issue. Korea's automobile exports to the US account for a significant portion of the trade surplus, and protecting the domestic automobile industry is a major concern for the Trump administration. Electric vehicle batteries and related parts, semiconductors, and steel could also be major negotiation targets. Additionally, new trade issues such as digital trade, intellectual property rights, and environmental and labor standards may also come to the negotiating table.

  • Third, analyzing the impact of Korea-US FTA renegotiation or reciprocal tariff imposition on the Korean economy, differentiated impacts by industry are expected. Industries with high export dependency on the US, such as automobiles, electronics, and steel, could be directly hit, which could have negative effects on production, employment, and investment. For example, if a 10% tariff is imposed, the price competitiveness of Korean automobiles in the US could be significantly weakened. Various industries connected through global supply chains are also expected to be indirectly affected. Macroeconomically, negative effects such as deterioration of the current account balance due to export decline, decrease in economic growth rate, and job losses are concerns.

  • Fourth, response strategies of the Korean government and businesses are also important considerations. At the government level, preemptive efforts to resolve trade imbalances (expanding imports of US products, increasing investment in the US, etc.) along with strengthening trade negotiation capabilities and utilizing multilateral cooperation systems are needed. At the business level, risk management through expanding production bases in the US, diversifying supply chains, and strengthening product competitiveness is required. Exploring new growth markets to diversify exports can also be an important strategy.

• Thus, renegotiation of the Korea-US FTA is a significant issue that could have a wide-ranging impact on various industries and economic entities. The government and businesses should proactively prepare for the possibility of renegotiation while seeking ways for mutually beneficial development of Korea-US economic relations.

💡 Response Strategies and Opportunity Factors for the Korean Economy

• Changes in the Trump administration's trade policy and the possibility of Korea-US FTA renegotiation are challenging factors but could also be opportunities for improving the quality of the Korean economy and strengthening competitiveness.

  • First, risk diversification through export market diversification and strengthening domestic demand is needed. Dependency on the US market should be reduced and export diversification to emerging markets (India, ASEAN, Middle East, etc.) should be pursued. This requires the conclusion of new FTAs and improvement of utilization of existing FTAs, and the establishment of customized market entry strategies. Efforts to reduce external dependency through domestic market activation should also be pursued in parallel. Advancement of the service industry, strengthening the competitiveness of small and medium-sized enterprises, and structural reforms to stimulate consumption can be part of this strategy.

  • Second, there is a need to strengthen the 'localization strategy' through expanded production and investment in the US. Direct investment and expansion of production bases by Korean companies in the US have the effect of alleviating trade pressure by contributing to job creation in the US while avoiding tariffs. In particular, investment in industries that the US is strategically trying to foster, such as electric vehicles, semiconductors, and batteries, can be a win-win strategy that strengthens economic cooperation between the two countries. The expansion of investment in the US by major companies such as Hyundai Motor Group, Samsung Electronics, and SK Innovation is already showing visible results.

  • Third, a key task is to strengthen essential competitiveness through industry advancement and technological innovation. Beyond simple price competitiveness, securing differentiated competitiveness through technological capabilities, brand value, and product innovation is important. In particular, securing technological advantage in future industry areas such as artificial intelligence (AI), robotics, eco-friendly energy, and biohealth can be a fundamental solution to build resistance to changes in the trade environment. This is a time when policy support such as expanding research and development (R&D) investment, building an innovation ecosystem, and fostering high-quality talent is needed.

  • Fourth, building a strategic relationship through strengthening Korea-US economic security cooperation is also important. Supply chain cooperation in key industrial areas such as semiconductors, batteries, and rare earth elements, cooperation in clean energy and climate change response, and joint establishment of digital economy norms are opportunity factors that can develop the bilateral relationship into a comprehensive economic security partnership beyond simple trade. Building such a strategic cooperative relationship can be an approach to mitigate short-term trade friction and maximize long-term mutual benefits.

  • Fifth, responses utilizing multilateral cooperation systems and international norms should also be pursued in parallel. Efforts to maintain a rules-based trade order through multilateral cooperation systems such as the WTO, APEC, and CPTPP, along with seeking joint response measures through alliance with countries with similar positions, are necessary. In particular, it is important to prepare international legal response measures for arbitrary trade barrier setting in advance.

• Through these comprehensive response strategies, the Korean economy can turn the challenge of changes in the Trump administration's trade policy into an opportunity for economic quality improvement and industrial advancement. In a trade environment with high uncertainty, structural innovation for strengthening medium to long-term competitiveness along with short-term responses becomes even more important.

4️⃣ In Conclusion

President Trump's reciprocal tariff policy announcement and the possibility of Korea-US FTA renegotiation are important challenging factors for the Korean economy, but at the same time, they can be a turning point for improving economic quality and securing future growth engines. At the current point, as an FTA country, Korea is likely to be excluded from immediate reciprocal tariff application, but it should be kept in mind that trade pressure could be strengthened in the medium to long term due to the trade surplus with the US, which amounts to $30 billion.

From a short-term perspective, close monitoring of the specific content, application targets, and implementation timing of the reciprocal tariff policy is needed. In particular, it is urgent to prepare various scenario-based impact analyses and response measures centered on major export industries such as automobiles, semiconductors, and steel. At the government level, strengthening trade negotiation capabilities, maintaining strategic communication channels with the US, and preemptive efforts to alleviate trade imbalances are required.

From a medium to long-term perspective, it is necessary to accelerate structural innovation to improve the quality of the Korean economy and strengthen competitiveness through this opportunity. A comprehensive strategy including export market diversification, strengthening domestic demand, expanding investment in the US, industrial advancement and technological innovation, and strengthening Korea-US economic security cooperation is needed to build resistance to changes in the trade environment. In particular, it is an important time for transition to a high value-added industrial structure based on technological capability and brand value, beyond simple price competitiveness.

From a business perspective, a review of strategies for entering the US market, along with preparation through supply chain diversification, strengthening risk management systems, and expanding research and development investment is needed. In particular, expanding production bases in the US, creating local jobs, and strengthening strategic partnerships with US companies can be effective approaches to mitigating trade risks.

Policy authorities should focus on strengthening economic quality through industry-specific customized support measures and structural reforms. In particular, efforts to strengthen the domestic demand base and reduce the external vulnerability of the economy should be pursued in parallel through fostering new growth industries, enhancing the competitiveness of small and medium-sized enterprises, and advancing the service industry.

In summary, while changes in the Trump administration's trade policy may bring short-term uncertainty to the Korean economy, this is a time that requires wisdom to take it as an opportunity for improving economic quality and strengthening future competitiveness. A flexible and preemptive approach to finding opportunities in crises and achieving innovation in challenges is more important than ever. It is time for the government, businesses, and citizens to actively respond to the changing global trade environment and build a sustainable growth foundation for the Korean economy.