🚨 US-Korea Tariff Agreement
Today Korean Economic News for Beginners | 2025.10.31
0️⃣ Auto Tariff Cut from 25% to 15% Boosts Exports, Steel Excluded with Continued Burden
📌 Auto Industry Gains Competitiveness, Steel Faces Continued High Tariffs - Different Outcomes by Industry
💬 South Korea and the United States reached a tariff agreement on October 29th, agreeing to lower auto tariffs from 25% to 15%. This is great news for Korean automakers like Hyundai and Kia, as they can now compete better on price in the US market. However, the steel industry was excluded from this agreement and will continue facing high tariff burdens from both the US and European Union. For semiconductors, the same tariff rate as Taiwan will apply, but the actual impact is expected to be limited due to Korea's strong technology in memory chips. This agreement is seen as choosing "stability over maximum benefits" in an uncertain international environment, and experts say balanced policy responses are needed since different industries received different benefits.
1️⃣ Easy Explanation
South Korea and the United States have finished negotiating tariff adjustments. The tax on cars was significantly reduced, which should increase exports, but steel still faces high tax burdens. Since different industries are affected differently, the government needs to provide careful policies going forward.
Let me first explain what "tariffs" are. Tariffs are taxes placed on goods coming from foreign countries. For example, when a Korean-made car is sold to the US, the US government adds a certain percentage of tax to the car's price. When this tax is high, the car becomes expensive, making American consumers more likely to buy American cars instead of Korean ones. In other words, tariffs are a tool to protect domestic industries.
Until now, the US has imposed a high 25% tariff on Korean cars. If you exported a car worth $100,000, an additional $25,000 in taxes was added, meaning it had to be sold for $125,000 in the US. This made Korean cars less price-competitive compared to Japanese or European cars.
With this agreement, the tariff has been lowered to 15%. Now, that same $100,000 car can be sold for $115,000. This gives Korean automakers room to lower prices by $10,000. For Hyundai and Kia, the competitive disadvantage they faced due to tariffs has improved, allowing them to sell more cars in the US market.
However, not all industries received good news. The steel industry was excluded from this agreement. Steel companies like POSCO still have to pay high tariffs when exporting steel to the US. In addition to the US, the European Union also imposes high tariffs on Korean steel, creating a double burden for the steel industry.
Why wasn't steel included in the negotiations? The US and Europe consider their steel industries very important. Steel is a basic material for almost all manufacturing industries including construction, automotive, and shipbuilding, so they view it as connected to national security. That's why they don't easily change their protectionist attitudes toward steel.
For semiconductors, the same tariff level as Taiwan will apply. This follows the principle of "Most Favored Nation treatment," which means providing the same favorable conditions given to one country to other countries as well. Korea now gets the same treatment as Taiwan.
In the case of semiconductors, although some tariffs are imposed, the actual impact is expected to be small. Samsung Electronics and SK Hynix have the world's most advanced technology in memory semiconductors, and American companies find it difficult to do business without these products. Major American products like Apple's iPhone and Nvidia's AI chips all use Korean-made memory semiconductors.
Another important aspect of this agreement is that Korea promised to make large-scale investments in the US. While the specific amount and method haven't been finalized yet, it's a kind of "deal" where Korean companies build factories in the US and create jobs in exchange for lower tariffs.
Experts evaluate this agreement as "not the best outcome, but avoiding the worst." Ideally, tariffs on all industries would be lowered, but realistically, achieving a tariff reduction even just for automobiles is considered an accomplishment. Especially given that the US has been strengthening protectionism recently, securing even partial tariff reductions is seen as meaningful.
In the end, this tariff agreement brings good news for the auto industry but continues to be difficult for the steel industry, creating mixed outcomes across different sectors.
2️⃣ Economic Terms
📕 Tariff
A tariff is a tax imposed on goods imported from foreign countries, used to protect domestic industries or adjust trade balance.
- The higher the tariff rate, the more expensive imported goods become, making domestic products relatively more competitive.
- In this agreement, the auto tariff was lowered from 25% to 15%, meaning Korean cars will have better price competitiveness in the US market.
- However, if tariffs are too high, it increases the burden on consumers and can lead to trade disputes.
📕 Most Favored Nation Treatment (MFN)
Most Favored Nation treatment is a principle where the most favorable trade conditions given to one country are equally applied to all trading partners.
- It is one of the basic principles of the World Trade Organization (WTO), ensuring no country is discriminated against.
- In this agreement, Korean semiconductors receiving the same tariff rate as Taiwan is an example of this.
- However, countries with Free Trade Agreements (FTAs) can apply even more favorable conditions to each other.
📕 Foreign Direct Investment (FDI)
Foreign Direct Investment is when a company from one country builds factories or acquires shares in another country to participate in business management.
- Unlike indirect investment (buying stocks or bonds), FDI involves operating actual business facilities and creating jobs.
- Korea's promise to make large-scale investments in the US as part of this agreement is a form of FDI.
- The receiving country gains jobs and technology, while the investing country gains market access and tariff benefits.
📕 Protectionism
Protectionism is a policy that tries to protect domestic industries from foreign competition through tariffs or import restrictions.
- In the short term, it can protect domestic industries, but in the long term, it can weaken competitiveness and cause trade disputes.
- Recently, the US and Europe have been strengthening protectionism in steel, semiconductors, and other sectors, creating difficulties for Korean exports.
- Historically, during the Great Depression in the 1930s, increased protectionism made the global economy worse.
3️⃣ Principles and Economic Outlook
✅ Impact of Tariff Reduction on the Auto Industry
Let's analyze what specific effects the 10 percentage point auto tariff reduction will have on Hyundai and Kia.
First, improved price competitiveness will increase market share. Until now, Korean cars faced a 10 percentage point higher tariff burden in the US market compared to Japanese or European brands. For example, Toyota paid 15% tariff while Hyundai paid 25%. Now that conditions are equal, there's room to lower prices or increase margins. The industry expects average vehicle prices can be reduced by about 5-10%.
Second, investment in US local production may accelerate. Even with lower tariffs, the US still maintains policies favoring local production. Hyundai is already building an electric vehicle factory in Georgia, and Kia is also considering additional investments. While immediate burden is reduced through tariff cuts, a strategy to increase US production ratio for stable market position is needed in the long term.
Third, competition in the electric vehicle market will intensify. Hyundai's Ioniq and Kia's EV series can now challenge Tesla's dominance in the US electric vehicle market with price competitiveness. Korean cars are especially expected to advance in the mid-size electric vehicle market priced between $30,000-$50,000. However, Chinese low-cost electric vehicle brands are also eyeing US entry, so competition will continue to intensify.
The auto tariff reduction is an important change that goes beyond simple cost savings to affect overall market strategy.
✅ Steel Industry's Double Burden
Let's examine why steel was excluded from negotiations and the difficulties the industry will face.
First, US and European steel protectionism is a structural problem. Steel is considered a key infrastructure industry directly connected to national security, and no country easily opens its market. The US has imposed a 25% tariff on steel under "Section 232 measures" since the Trump administration, and the Biden administration has maintained this. The European Union is also effectively restricting steel imports through the Carbon Border Adjustment Mechanism (CBAM), creating simultaneous difficulties for Korean steel companies like POSCO in two major markets.
Second, China's low-price offensive is distorting the global market. China accounts for more than half of global steel production and is in oversupply. Chinese steel exported at low prices with government subsidies causes international price declines, leading to reduced profitability for Korean steel. As the US and Europe block their markets with high tariffs, Korean steel is also losing price competitiveness in third-country markets where it must compete with China.
Third, declining domestic demand is also a negative factor. With the construction industry slumping, domestic steel demand is decreasing, forcing the industry to seek solutions through exports, but they face tariff barriers in major export markets. The industry is calling for urgent measures such as tax support or expanded export financing from the government. There are also voices saying steel companies need to shift from price competition to technology competition by transitioning to high-value-added special steel or eco-friendly steel.
The steel industry faces a structural crisis with multiple negative factors overlapping, including not just tariff issues but also Chinese oversupply and declining domestic demand.
✅ Why Are Semiconductors Less Affected by Tariffs?
Let's analyze why semiconductors are relatively less sensitive to tariff changes from both technology and market structure perspectives.
First, Korean memory semiconductors have very strong technology monopoly. Samsung Electronics and SK Hynix account for more than 70% of the global memory semiconductor market. Particularly in High Bandwidth Memory (HBM) essential for AI servers, they hold virtually monopolistic positions. Since Nvidia's AI chips cannot function properly without Korean HBM, even if tariffs are imposed, American companies have no choice but to buy Korean semiconductors.
Second, for semiconductors, performance and reliability are more important than price. Unlike cars or steel, even slightly inferior quality semiconductors can break entire systems, making it difficult to change suppliers based on price alone. When Apple chooses memory for iPhones, it prioritizes performance, reliability, and supply stability over price. Therefore, a few percentage points of tariff difference doesn't significantly affect purchasing decisions.
Third, the US cannot achieve semiconductor self-sufficiency in the short term. Although the US is trying to increase domestic semiconductor production through the CHIPS Act, it still heavily depends on Korea in the memory semiconductor field. American companies like Intel and Micron also lag behind Samsung and SK Hynix technologically in memory semiconductors. Therefore, the US government doesn't want to impose excessive tariffs on Korean semiconductors, which would reduce its own companies' competitiveness.
Semiconductors have high technology barriers and few substitutes, making them relatively less affected by tariff changes.
✅ Future Outlook and Policy Tasks
Let's summarize the tasks that the Korean government and companies need to prepare for after this tariff agreement.
First, industry-specific customized support policies are needed. The auto industry needs marketing and local production investment support to maximize tariff reduction effects, steel needs export financing and tax support to ease high tariff burdens, and semiconductors need expanded R&D investment to maintain technology advantages. Since one policy cannot support all industries, detailed approaches tailored to each sector's characteristics are important.
Second, US investment plans need to be specified. As a condition of this tariff agreement, Korea promised large-scale investment in the US, but specific scale and methods haven't been determined yet. Decisions need to be made quickly on which industries to invest in, how much, and what ratio of cash versus indirect investment. If investment plans are delayed, the US might reconsider tariff reductions, making this an urgent task.
Third, trade negotiations with other countries must proceed in parallel. Solving US issues isn't the end. Similar negotiations with the European Union, Japan, China, and other major trading partners are needed. Especially, the EU's Carbon Border Adjustment Mechanism could affect not just steel but also automobiles, chemicals, and other industries, requiring response measures. Also, improving relations with China to increase Korean products' access to the Chinese market is important.
The tariff agreement is just the beginning, and follow-up measures such as industry-specific support, investment implementation, and multilateral negotiations are essential to achieve real effects.
4️⃣ In Conclusion
This US-Korea tariff agreement is a meaningful achievement Korea has obtained in an uncertain international trade environment, but it resulted in mixed outcomes across industries.
The auto industry benefits from tariff reduction from 25% to 15%, recovering price competitiveness and strengthening its position in the US market. This is great news for Hyundai and Kia, with particular expectations for improved competitiveness in the electric vehicle market. However, in the long term, expanding local production in the US to build a stable market position is important.
On the other hand, the steel industry was excluded from this agreement and must continue bearing high tariff burdens from the US and Europe. With Chinese low-price offensive and declining domestic demand creating a triple burden, the steel industry needs active government support policies. Strategies should also be explored to compete through technology rather than price by transitioning to high-value-added products like special steel or eco-friendly steel.
For semiconductors, while the same tariff rate as Taiwan applies, actual impact is expected to be limited thanks to strong technology and market dominance. However, continued R&D investment and talent development are needed to maintain technology advantages.
Another task from this agreement is to specify the US investment Korea promised. Investment scale, methods, and industries need to be quickly determined and implemented for tariff benefits to remain stable. Also, negotiations with other major trading partners like the EU, Japan, and China must proceed in parallel.
Ultimately, this tariff agreement is just the beginning. Only by properly executing follow-up measures such as industry-specific support, US investment implementation, and multilateral trade negotiations can it lead to true success.
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