🚨 US Tariff Bombshell - Can a Supplementary Budget Provide a Breakthrough?

Today Korean Economic News | 2025.04.07

📌 US Tariff Bombshell - Can a Supplementary Budget Provide a Breakthrough?

💬 While the Constitutional Court's decision to impeach President Yoon Suk-yeol has resolved short-term uncertainty, concerns remain about the economic aftershocks from high US tariffs. Experts advise responding to this situation through a supplementary budget. The 25% tariff imposed by President Trump on Korean goods is higher than those on Japan (24%) and the European Union (20%), making the weakening of competitiveness in major export industries inevitable.

1️⃣ Easy to Understand

The US has imposed a 25% tariff on Korean products, dealing a significant blow to our economy. The government is trying to overcome this crisis through a supplementary budget. I'll explain what this situation means in simple terms.

On April 2, the US imposed a 25% tariff on major Korean export items including automobiles and semiconductors. A tariff is a tax imposed on imported goods, which has significantly increased the price of Korean products in the US market. This tariff rate is notably higher than those imposed on Japan (24%) and the European Union (20%), further weakening the price competitiveness of our products.

This situation poses a major challenge to the Korean economy. The US is Korea's second-largest export market, and automobiles and semiconductors are our core export items. According to expert analysis, these tariffs could reduce Korean exports to the US by up to 30%, potentially lowering GDP growth by 0.8-1.0 percentage points.

Political uncertainty has also compounded the situation. The Constitutional Court's decision to impeach President Yoon Suk-yeol has intensified political turmoil. Although this decision has resolved short-term uncertainty, it remains difficult to implement stable economic policies in the current situation.

In response, the government is trying to overcome the crisis through a supplementary budget. A supplementary budget is additional funding allocated beyond the already confirmed budget, a tool for active government intervention during economic crises. The currently discussed supplementary budget is approximately 15 trillion won, focusing on supporting export companies, creating jobs, and stimulating domestic demand.

Experts believe this supplementary budget will help mitigate short-term shocks. However, they advise that more fundamental responses such as strengthening industrial competitiveness, diversifying export markets, and negotiations with the US will be necessary in the long term.

This situation has revealed the structural vulnerabilities of the Korean economy. Our economy, highly dependent on specific markets and industries, is inevitably vulnerable to external shocks. Therefore, along with short-term financial support, long-term structural improvements such as industrial diversification, strengthening technological competitiveness, and revitalizing the domestic market are needed at this juncture.

2️⃣ Economic Terms

📕 Supplementary Budget

A supplementary budget is an additional budget formulated beyond the already established budget.

• It is formulated during economic crises, natural disasters, or urgent fiscal needs, and is finalized through National Assembly deliberation and approval.
• It serves as a tool for expansionary fiscal policy during economic downturns to stimulate the economy.

📕 Trade Competitiveness

Trade competitiveness refers to the advantage a country's products have over those of competing countries in international markets.

• Various factors comprehensively influence it, including price, quality, technological capability, and brand value.
• It can be significantly affected by external factors such as exchange rates, tariffs, and non-tariff barriers.

📕 Reciprocal Tariffs

Reciprocal tariffs refer to tariffs that two countries impose on each other's imports.

• They typically appear as responses to the other country's tariff impositions with similar levels of tariffs during trade disputes.
• They can cause reduced trade volume and economic losses between the two countries, ultimately requiring resolution through negotiation.

📕 Expansionary Fiscal Policy

Expansionary fiscal policy refers to government action to stimulate the economy by increasing spending or reducing taxes.

• It works by increasing aggregate demand to revitalize the economy during economic downturns.
• It takes forms such as supplementary budget formulation, tax reduction measures, and expanded public investment, with the advantage of high responsiveness to economic conditions.

3️⃣ Principles and Economic Outlook

💡 US High Tariffs and the Korean Economic Crisis

• Let's analyze in depth the background and impact of the 25% tariff imposed by the US on Korea.

  • First, the meaning and background of discriminatory tariff imposition on Korea. President Trump imposed a 25% tariff on Korea, higher than those on Japan (24%) and the European Union (20%). This discriminatory tariff application reflects the strategic intentions of the US. It can be seen as a result of complex factors including trade deficit size, dissatisfaction with currency policies, and economic connections with China. Particularly, with the Korea-US FTA benefits effectively nullified, the tariff-free trade system built over the past decade has taken a serious hit. The US is targeting Korea's main export items such as automobiles and semiconductors to maximize negotiation leverage. This needs to be understood in the context of overall bilateral relations and global economic order reorganization rather than as a simple trade measure.

  • Second, the direct impact on the Korean economy and major industries. The US is Korea's second-largest export market, with annual exports reaching about $110 billion. If the 25% tariff is fully applied, Korean exports to the US could decrease by up to 30%, which would have the effect of lowering GDP growth by 0.8-1.0 percentage points. In the automotive industry, Hyundai and Kia exported about 900,000 vehicles to the US last year, and with the tariff imposition, a reduction of up to 300,000 vehicles is expected. The steel industry is also expected to take a major hit, while semiconductors might face relatively limited impact due to the difficulty in finding substitutes. This export reduction is expected to negatively impact the domestic economy through deteriorating corporate performance, reduced investment, and decreased employment.

  • Third, political uncertainty and difficulties in implementing economic policies. The Constitutional Court's decision to impeach the president has intensified political confusion, making the US tariff bombshell an even greater challenge. The policy vacuum makes it difficult to pursue consistent and strong economic policies. There are concerns about weakened momentum in foreign economic policies such as bilateral negotiations with the US and WTO complaints. Additionally, urgent economic response measures such as supplementary budget formulation and regulatory reform may be delayed due to political conflicts between ruling and opposition parties. This overlap of political and economic uncertainties is a risk factor that could accelerate economic recession by dampening corporate and consumer sentiment.

• The US's 25% tariff imposition presents a serious challenge to the Korean economy. Weakened competitiveness in major export industries, lower growth rates, and reduced employment are among the various negative impacts expected. Moreover, political uncertainty is compounding difficulties in policy responses. In this complex crisis situation, a strategic approach is needed for effective short-term responses and medium to long-term economic strengthening.

💡 Economic Crisis Response Strategy Through Supplementary Budget

• Let's examine the necessity of a supplementary budget in response to the US tariff shock and effective implementation plans.

  • First, the necessity and economic effects of a supplementary budget. The supplementary budget currently under discussion is about 15 trillion won, equivalent to 0.7% of GDP. This fiscal injection could partially offset the export reduction shock from US tariffs. If the supplementary budget supports export companies, stabilizes employment, and stimulates domestic demand, it could raise GDP growth by 0.3-0.4 percentage points. Support for export companies and cooperative small and medium enterprises facing short-term liquidity crises is particularly important to prevent the collapse of the industrial ecosystem. Additionally, by promoting consumption and investment to stimulate the domestic economy, it could be an opportunity to alleviate the structural vulnerability of the export-dependent Korean economy. However, a cautious approach is needed considering the balance with fiscal soundness, efficient resource allocation, and policy lag.

  • Second, the main contents and priorities of the supplementary budget. Strategic resource allocation to core areas is important for effective supplementary budget execution. First, financial support and tax benefits for export companies should be expanded to immediately resolve liquidity crises and alleviate cost burdens. Tailored support is particularly needed for the automotive and steel industries and related small and medium enterprises most affected by tariffs. Second, focus should be on employment stability and job creation. Expanded employment maintenance subsidies, strengthened vocational training, and expanded public jobs are needed to mitigate employment shocks due to export reduction. Third, consumption stimulation measures and investment incentives should be strengthened to revitalize domestic demand. Private consumption and investment can be promoted through consumption vouchers, tax reductions, and expanded investment tax credits. Fourth, R&D investment and digital transformation support should be expanded to strengthen industrial competitiveness. This can contribute to improving long-term growth potential while advancing industrial structure.

  • Third, tasks and considerations for effective supplementary budget execution. There are several key tasks for the supplementary budget to lead to substantial economic recovery. First, swift execution is important. If there's a delay from budget confirmation to actual execution, the economic effect could be halved, necessitating administrative procedure simplification and strengthened execution monitoring. Second, targeting for policy effectiveness is important. A sophisticated support system should be established to concentrate support on companies and vulnerable groups actually experiencing difficulties. Third, balance with fiscal soundness should be considered. Finding a balance between short-term economic stimulation and long-term fiscal sustainability is important. Fourth, political consensus building is necessary. Efforts are needed to build consensus between ruling and opposition parties on the necessity of a supplementary budget despite the current political uncertainty.

• While a supplementary budget is an important policy tool to respond to the US tariff shock, it cannot solve all problems by itself. A comprehensive approach is needed with medium to long-term industrial structure improvement, export market diversification, and domestic base strengthening alongside short-term shock mitigation. It's particularly important to maximize policy effects and restore economic actors' confidence through efficient and swift execution. Ultimately, the supplementary budget should be both a starting point for crisis overcoming and an opportunity for improving the Korean economy's constitution.

💡 Long-term Economic Strengthening and Future Strategy

• Let's explore strategies to strengthen the Korean economy and seek future advancement in the wake of the US tariff shock.

  • First, strengthening industrial competitiveness and advancing structure are key. Price barriers like tariffs must be overcome through the intrinsic competitiveness of products. The automotive industry should accelerate the transition to electric and autonomous vehicles and expand into mobility services combined with software capabilities. The semiconductor industry should secure technological leadership through advanced processes, strengthened system semiconductors, and AI semiconductor development. This requires government-wide expansion of R&D investment, regulatory innovation, and talent cultivation. Establishing an open innovation ecosystem with cooperation between companies, academia, and government is particularly important. Additionally, new growth engines should be secured by proactively responding to global megatrends such as digital transformation and green transition.

  • Second, diversifying trade structure and reconstructing global networks. Excessive dependence on specific markets inevitably makes an economy vulnerable to external shocks. Therefore, efforts are needed to accelerate entry into emerging markets such as India, ASEAN, the Middle East, and Latin America, and to diversify export items and services. Global production networks should also be reconfigured to respond to geopolitical risks. Strategies to bypass trade barriers like tariffs through expanded local production, supply chain diversification, and strengthened strategic alliances are important. Meanwhile, regional trade agreements like RCEP and CPTPP should be actively utilized, and export structures should be expanded into new areas such as digital trade and service trade. The government should support companies' market diversification efforts through providing overseas market information, financial support, and trade negotiations.

  • Third, strengthening domestic base and building a balanced economic structure. To improve the constitution of the export-dependent Korean economy, it's important to increase the vitality of the domestic market. This requires service industry promotion through regulatory reform, strengthening small businesses and startup ecosystems, and expanding consumption base through income growth. Cultivating new industries and creating jobs in healthcare, culture, and leisure is particularly important as society enters an aging phase. Additionally, increasing resilience to economic shocks through reducing income polarization and strengthening social safety nets is necessary. Above all, building an economic structure with balance between exports and domestic demand, large and small businesses, and manufacturing and service industries is key to long-term stability and securing growth potential.

• The US tariff shock reveals vulnerabilities in the Korean economy while potentially serving as an opportunity for constitutional improvement. Beyond short-term crisis response, medium to long-term tasks such as strengthening industrial competitiveness, diversifying trade structure, and expanding domestic base must be addressed. This requires consistent policy implementation by the government, innovation efforts by companies, and social consensus. Ultimately, the future of the Korean economy will depend on how this crisis is overcome.

4️⃣ In Conclusion

As the US imposes a 25% high tariff on Korean products, the Korean economy faces a serious challenge. This is higher than the rates imposed on Japan (24%) and the European Union (20%), effectively nullifying the tariff-free benefits of the Korea-US FTA. Major export industries such as automobiles, semiconductors, and steel are directly affected, with GDP growth expected to decline by 0.8-1.0 percentage points.

Political uncertainty due to the Constitutional Court's decision to impeach President Yoon Suk-yeol is making it more difficult to respond to the economic crisis. In this situation, the government is trying to overcome the crisis through a supplementary budget of about 15 trillion won. The supplementary budget focuses on supporting export companies, stabilizing employment, and revitalizing domestic demand, and if successfully executed, it is expected to raise GDP growth by 0.3-0.4 percentage points.

However, a supplementary budget alone cannot solve all problems. In the long term, fundamental constitutional improvements such as strengthening industrial competitiveness, diversifying trade structure, and expanding domestic base are necessary. The automotive industry must develop essential competitiveness that overcomes price barriers like tariffs through transition to electric and autonomous vehicles, while the semiconductor industry must secure advanced technology.

Diversifying export markets through pioneering emerging markets such as India, ASEAN, and the Middle East, reconfiguring global production networks, and expanding service trade are also important tasks. Efforts to increase domestic market vitality through regulatory reform, service industry promotion, and income growth should be pursued in parallel.

This crisis reveals structural vulnerabilities in the Korean economy while potentially serving as an opportunity for constitutional improvement. A strategic approach is needed with long-term competitiveness strengthening alongside short-term financial support. It is time for the government, companies, and citizens to overcome the crisis together and use it as an opportunity for new advancement.