🚨 US Automobile Tariff Announcement and Impact Analysis on Korean Automobile Industry

Today Korean Economic News | 2025.02.17

📌 US Aims 'Tariff Bombardment' at Korea, Effectively #1 in US Auto Import Market

💬 US President Donald Trump has announced automobile tariffs starting April 2, with Korea, which effectively ranked first in the US automobile import market last year, being identified as a major target. If tariffs are imposed, the Korean automobile industry and overall economy, which heavily depend on automobile exports to the US, are expected to experience significant shock.

1️⃣ Easy Understanding

US President Donald Trump has announced that he will impose tariffs on imported automobiles from April 2. Korea, which shows a high market share in the US automobile market, has been specifically targeted. I will explain how this situation will affect the Korean economy and automobile industry in simple terms.

A tariff is simply a 'tax' imposed on imported goods. For example, if a 10% tariff is imposed, the price of a car that originally costs 30 million won will rise to 33 million won. This price increase lowers consumers' purchase intentions, consequently reducing imports of these products.

President Trump has announced tariff impositions to reduce the US trade deficit and protect the domestic automobile industry. In particular, Korea ranked among the top countries in the US automobile market last year along with Canada, Japan, and Mexico, and Hyundai Motor Company and Kia have steadily increased their market share in the US market. The Trump administration considers this situation a threat to the US automobile industry and jobs.

What impact will the Korean automobile industry face if tariffs are actually imposed? First, the selling price of Korean cars in the US will rise, reducing price competitiveness. Currently, Korean cars are exported to the US without tariffs according to the Korea-US FTA, but if a 10% or higher tariff is imposed, sales could decrease significantly. Approximately 30% of Hyundai Motor Company and Kia's total exports are directed to the US market, so this impact will significantly affect corporate performance and the overall Korean economy.

To explain this situation with an everyday example, it's similar to if 30% of your store's sales came from a specific regular customer, and that customer suddenly declared, "From now on, I'll buy all items 10% more expensively." You would immediately see reduced income and, in the long term, need to find other customers or reduce costs.

The Korean government and companies are considering various strategies to respond to this. These include expanding production plants in the US to increase local production, maintaining competitiveness despite price increases through premium strategies, and efforts to prevent or minimize tariff imposition through diplomatic channels. However, if tariffs are actually imposed, the Korean automobile industry and related parts companies are expected to experience considerable damage, at least in the short term.

2️⃣ Economic Terms

📕 Tariff

Tariffs are taxes imposed on imported goods, used for domestic industry protection and trade balance adjustment.

• Generally imposed as a percentage of the imported product's value (ad valorem duty) or a fixed amount based on quantity (specific duty).
• When tariffs increase, the price of imported goods rises, reducing imports and relatively increasing the competitiveness of domestic substitutes.

📕 Trade War

Trade war refers to an economic conflict situation through strengthening tariffs and trade barriers between countries.

• When one country imposes tariffs on products from a specific country, the counterpart responds with retaliatory tariffs, deepening the conflict.
• Trade wars can have widespread economic impacts including global supply chain disruption, economic growth slowdown, and price increases.

📕 Trade Deficit

Trade deficit is a state where imports exceed exports, an important indicator of economic relations between countries.

• Continuous trade deficits can burden the national economy, leading to policy efforts to resolve them.
• The US has been facing large-scale trade deficits for a long time, which is one of the main motivations for the Trump administration's protectionist policy.

📕 Trade Pressure

Trade pressure refers to economic and diplomatic pressure that one country exerts on another to resolve trade imbalances.

• It can appear in various forms such as tariff imposition threats, anti-dumping investigations, and trade agreement renegotiation demands.
• The US has historically exerted trade pressure on trading partners, especially countries with trade surpluses, and this tendency has been strengthened under the Trump administration.

3️⃣ Principles and Economic Outlook

💡 Background and Intentions of the Trump Administration's Automobile Tariff Imposition

• The Trump administration's intention to impose tariffs on automobile imports has various strategic intentions including protecting US manufacturing, resolving trade imbalances, and strengthening negotiation power.

  • First, resolving the US trade deficit is a key goal. The US continuously records large-scale trade deficits, with the automobile sector accounting for a significant portion. As of 2024, the US trade deficit related to automobiles and parts is estimated at about $150 billion, and the Trump administration is using tariff imposition as a means to reduce this deficit. Korea, in particular, records a large surplus in the automobile sector in the US market, making it a major target.

  • Second, there is an intention to protect US automobile industry and jobs. The automobile industry in the US is historically one of the important manufacturing industries, associated with many jobs. The Trump administration perceives that as the proportion of imported cars increases, the US domestic automobile industry is contracting and jobs are decreasing. In fact, automobile industry jobs in the US have shown a decreasing trend over the past 20 years, and President Trump is connecting this to trade imbalances.

  • Third, there is also an intention to use it as a strategic card to strengthen negotiation power. The Trump administration has frequently used tariff imposition threats as a strategy to obtain concessions from trading partners. By announcing a specific implementation date of April 2, it aims to pressure major automobile exporting countries, including Korea, to comply with US demands before then. This can be seen as a negotiation strategy to obtain concessions such as FTA renegotiation, increased investment in the US, and increased imports of US products.

  • Fourth, domestic political purposes cannot be overlooked. President Trump has promised manufacturing workers in the Rust Belt region, his support base, that protectionist policies will protect jobs and revitalize industries. Automobile tariff imposition also has symbolic meaning as a measure showing the consistency of the "America First" policy and rallying this support base.

• In this context of background and intentions, the Trump administration's automobile tariff imposition has complex economic, diplomatic, and political meanings beyond a simple trade policy. Regardless of whether it is actually implemented, this threat itself is bringing considerable uncertainty to the global automobile industry and trade order.

💡 Analysis of Impact on the Korean Automobile Industry

• If US automobile tariff imposition becomes a reality, the Korean automobile industry is expected to be significantly affected in various aspects.

  • First, export decrease and corporate performance deterioration are expected. Korea's automobile exports to the US are about 900,000 units annually, amounting to about $20 billion. This accounts for about 30% of Korea's total automobile exports. If a 10% tariff is imposed, analysis shows that exports could decrease by 20-30% due to decreased price competitiveness. This could reduce the operating profit of Hyundai Motor Company and Kia by 10-15%. Particularly, SUVs and mid-size sedan models, which account for a high proportion in the US market, are expected to be hit hard.

  • Second, there will be chain effects on related parts companies and the overall supply chain. The automobile industry is connected through numerous parts companies and complex supply chains. Reduced exports of finished cars naturally affect the production and sales of parts companies. Many Korean automobile parts companies have a high dependence on finished car companies, making them more vulnerable to such shocks. Especially small and medium-sized parts companies may be hit harder as they find it difficult to develop alternative markets or diversify their business.

  • Third, structural changes due to expanded production in the US could accelerate. To avoid tariff imposition, Korean automobile companies are likely to expand their production proportion in the US. Currently, Hyundai Motor Company and Kia operate plants in Alabama and Georgia in the US, respectively, and can expand local production capacity through additional investment. This incurs additional costs in the short term but becomes the foundation for stable supply to the US market in the long term. However, there could be side effects such as weakening the domestic production base and job transfer overseas.

  • Fourth, export market diversification and product strategy reorganization are needed. In a situation with high dependence on the US market, tariff imposition further highlights the need for export market diversification. Along with developing emerging markets such as Southeast Asia, the Middle East, and South America, new growth engines such as expanded electric vehicle sales in the European market need to be sought. Also, strategies such as maintaining competitiveness through premium strategies in the US market despite price increases and accelerating the transition to future mobility such as electric vehicles are required.

• These impacts are not limited to the automobile industry alone but can have ripple effects on the overall Korean economy. The automobile industry accounts for about 13% of GDP and about 12% of manufacturing employment, making it a core industry where shocks in this sector can lead to decreased economic growth rate, reduced employment, and sluggish exports. Therefore, comprehensive response strategies at the government and corporate levels are required at this point.

💡 Response Strategies and Policy Implications

• The Korean government and companies need to explore various levels of response strategies to the US automobile tariff imposition threat.

  • First, efforts to prevent or minimize tariff imposition through diplomatic and trade responses should be prioritized. Negotiations are needed to maintain tariff exemption for automobiles based on the Korea-US FTA. Also, a strategy is needed to weaken the justification for tariff imposition by presenting preemptive measures (e.g., expanded imports of US products, increased investment in the US, strengthened defense industry cooperation, etc.) to resolve trade imbalances as demanded by the US. If necessary, responses using multilateral trade norms such as WTO complaints can also be considered.

  • Second, companies need to establish various risk management strategies. They should strengthen 'localization strategies' through expanded production in the US and minimize tariff impacts by diversifying parts procurement structures. Also, they need to build a long-term growth foundation by strengthening competitiveness in future mobility fields such as electric vehicles and hydrogen vehicles. A strategy to focus on high value-added models that can maintain competitiveness even under tariff imposition by readjusting the product portfolio is also needed.

  • Third, risk dispersion through export market diversification is important. Efforts are needed to lower dependence on the US market and expand market share in emerging markets such as ASEAN, India, the Middle East, and South America. This requires a comprehensive market strategy including the development of vehicle types suited to emerging market characteristics, expanded local production, and strengthened marketing. Also, a plan to relatively lower US market dependence by strengthening competitiveness in the European market, where they are already present, can be considered.

  • Fourth, strengthening the domestic industry ecosystem and structural advancement should be paralleled. To prevent industry ecosystem weakening due to tariff shock, policies are needed to support the strengthening of small and medium-sized parts companies' competitiveness and their transition to new growth areas. Policies should be designed to increase the structural competitiveness of the industry through expanded R&D investment, digital transition support, and eco-friendly mobility ecosystem construction. Also, it's important to secure human resources that can respond to industrial structure changes by increasing labor market flexibility and strengthening vocational training.

  • Fifth, establishing a mid to long-term national strategy in response to changes in the trade environment is necessary. US automobile tariffs can be seen as part of the strengthening of global protectionism and the reorganization of the international trade order. In response to these environmental changes, a mid to long-term national strategy such as strengthening trade negotiation power, reestablishing industrial policy from an economic security perspective, and securing a strategic position within the global value chain should be established. Policy efforts are required to strengthen the constitution of the Korean economy, which has a high trade dependency, and increase resilience to external shocks.

• Through these multi-layered response strategies, the short-term shock should be minimized while taking the opportunity to strengthen mid to long-term industrial competitiveness. Cooperation between the government and companies is important at this point to find new opportunities in the crisis and build a stronger industrial ecosystem through structural innovation.

4️⃣ In Conclusion

President Trump's automobile tariff announcement is expected to act as a significant challenge for the Korean automobile industry and the overall economy. The US market is a core market accounting for about 30% of Korean automobile exports, and tariff imposition on this can have widespread impacts such as reduced exports, deteriorated corporate performance, and chain effects on related industries.

In the short term, prompt and effective responses from the government and companies are needed. The government should make efforts to prevent or minimize tariff imposition through diplomatic and trade channels, and consider responses using multilateral trade norms such as WTO complaints if necessary. Companies should prepare strategies to minimize tariff shock through expanded production in the US, product portfolio adjustment, and price policy review.

In the mid to long term, this crisis should be taken as an opportunity for industrial structure advancement and competitiveness strengthening. While lowering excessive dependence on the US market and diversifying export markets, competitiveness in future mobility fields such as electric vehicles and hydrogen vehicles should be further strengthened. Also, the resilience of the overall industrial ecosystem should be strengthened by enhancing the competitiveness of domestic parts companies and supporting their transition to new growth areas.

In a situation where trade environment uncertainty is increasing, this automobile tariff issue is becoming an opportunity to once again confirm the vulnerabilities and challenges of the Korean economy. It's important to lower dependence on specific markets and industries and build capacity to respond to various risk factors. Also, efforts to strengthen cooperation with the international community and support rule-based trade order should be paralleled in a situation where trade conflicts are intensifying.

Ultimately, while the US automobile tariff threat is a burden on the Korean economy in the short term, if it's taken as an opportunity for industrial structure improvement and competitiveness strengthening, it can be a turning point for creating a stronger economic constitution in the long term. The wisdom and cooperation of the government, companies, and society as a whole are more important than ever at this point.