🚨 High Tariffs Remain Despite US-Korea Trade Deal
Today Korean Economic News for Beginners | 2025.11.04
0️⃣ Current Account Surplus Will Shrink Next Year, Exchange Rate Concerns
📌 Record Surplus Expected This Year, But High Tariffs and Export Pullback Will Reduce It Next Year
💬 Korea's current account is expected to record its largest surplus this year, but next year the surplus will shrink significantly due to continuing high tariffs and a pullback from front-loaded exports. While US-Korea tariff negotiations were completed, car tariffs only dropped from 25% to 15%, and major industries still face high tariffs: steel (50%), aluminum (50%), and semiconductors (25%). This year, exports increased greatly due to front-loaded exports before tariffs took effect and surging AI semiconductor demand. But starting next year, these one-time effects will disappear and high tariff burdens will fully kick in, making a reduction in the current account surplus inevitable. A smaller surplus means less dollars flowing in, which could weaken the Korean won and increase pressure on the exchange rate.
1️⃣ Easy Explanation
This year, Korea's current account will likely record its highest surplus ever because companies rushed to export goods before US tariffs took effect (called "front-loaded exports") and AI semiconductor demand exploded. However, next year these one-time effects will disappear and high tariff burdens will become real, so the surplus will shrink significantly.
First, let me explain what a current account is. A current account shows the result of all transactions between a country and foreign countries - buying and selling goods, trading services, and earning investment income. Simply put, it's the money Korea earned from overseas minus the money Korea paid to overseas. A large surplus means we earned a lot of money from abroad.
There are two main reasons why this year's current account surplus grew so much. First is "front-loaded exports." When the US announced it would impose high tariffs starting early this year, many companies exported as much as possible before the tariffs took effect. For example, car companies sent more cars early, and steel companies did the same. It's like buying things before a sale ends.
Second, semiconductor exports exploded. As AI services like ChatGPT became popular, demand for high-performance semiconductors needed to run AI surged. Memory semiconductors made by Samsung Electronics and SK Hynix sold like hotcakes, making this year's semiconductor exports the highest ever.
But next year will be different. The biggest problem is tariffs are still high. Even though the US-Korea deal was completed, car tariffs only dropped from 25% to 15%. In the past, car tariffs were 2.5%, so now they're 6 times higher. For example, if you export a $30,000 car to the US, you must pay $4,500 in tariffs, compared to just $750 before.
Steel and aluminum face an even worse situation. The 50% tariff remains unchanged, so if you export $100 million worth of steel, you pay $50 million in tariffs. This makes Korean products much less price-competitive, so exports will inevitably decrease. From US companies' perspective, Korean products become too expensive, so they'll buy from other countries or produce domestically.
Also, this year's front-loaded exports are one-time only. Since companies already sent many goods this year, exports will naturally decrease next year. It's like buying a year's supply during an end-of-year sale - you won't have anything to buy next year.
What happens when the current account surplus shrinks? A large surplus means many dollars are flowing in from abroad. But when the surplus shrinks, fewer dollars come in and dollars become scarce in the foreign exchange market. When dollars become scarce, the dollar price (exchange rate) rises. When the exchange rate rises, prices of imported oil, gas, and raw materials increase, leading to inflation.
In the end, this year's boom is likely temporary, and starting next year, the current account will worsen due to high tariff burdens and reduced exports, which experts worry could increase pressure on the exchange rate.
2️⃣ Economic Terms
📕 Current Account
The current account shows the result of all transactions between a country and foreign countries over a period - goods, services, investment income, etc.
- It combines trade balance (exports minus imports), services balance, primary income balance, and secondary income balance.
- A surplus means money earned from abroad exceeds money paid abroad, increasing foreign exchange reserves.
- When the current account shrinks significantly, dollar supply decreases in the foreign exchange market, increasing pressure on the exchange rate.
📕 Front-loaded Exports
Front-loaded exports is a strategy where companies rush to export goods before tariffs or trade restrictions take effect.
- Companies try to export as much as possible before unfavorable trade conditions arrive.
- Exports surge in the short term, but then drop sharply afterward as a reaction.
- This year, Korean companies did massive front-loaded exports before high US tariffs took effect.
📕 Tariffs
Tariffs are taxes that countries impose on imported goods to protect domestic industries or adjust trade balance.
- Higher tariff rates increase import prices, making domestic products more competitive.
- But for exporting countries, price competitiveness drops and exports decrease.
- The US imposed 15% tariffs on Korean cars and 50% on steel, greatly burdening Korean companies.
📕 Exchange Rate
The exchange rate shows the ratio at which one country's currency exchanges for another country's currency.
- If the won-dollar rate is 1,400 won, you need 1,400 won to buy 1 dollar.
- When the current account surplus shrinks and dollar inflows decrease, the exchange rate can rise (won weakens).
- When the exchange rate rises, import prices increase, creating pressure on domestic inflation.
3️⃣ Principles and Economic Outlook
✅ Background of This Year's Surge in Current Account Surplus
Let's analyze the structural factors behind this year's record current account surplus.
First, front-loaded exports were the main cause of the export surge. When the US announced it would gradually raise tariffs starting early this year, Korean companies rushed to export goods before tariffs took effect. This was especially prominent in cars and steel. Hyundai and Kia saw US exports increase 35% year-over-year in the first three quarters, and POSCO and Hyundai Steel also greatly increased steel exports to the US. This wasn't normal demand growth but one-time volume increases to avoid tariffs, so exports will likely drop sharply next year.
Second, exploding AI semiconductor demand drove semiconductor exports. As generative AI services like ChatGPT, Claude, and Gemini spread worldwide, demand for high-performance memory needed for AI training and inference exploded. SK Hynix's High Bandwidth Memory (HBM) became the exclusive supplier for Nvidia AI chips and sales surged. Samsung Electronics also started full HBM production and benefited. This year's cumulative semiconductor exports will exceed $150 billion, setting a new record.
Third, stable raw material prices slowed import growth. Oil prices stabilized around $70-80 per barrel, and natural gas and coal prices also fell significantly from their peaks, reducing the energy import burden. Since Korea depends almost entirely on imports for energy and raw materials, when these prices stabilize, import costs decrease and the current account improves. This year, exports increased greatly while imports grew moderately, greatly expanding the trade surplus.
Three favorable factors overlapped - front-loaded exports, AI semiconductor boom, and stable raw material prices - leading to this year's record current account surplus.
✅ Why Next Year's Surplus Reduction Is Inevitable
Let's examine the structural factors that will inevitably reduce next year's current account surplus.
First, high tariffs will seriously restrict exports. This year, exports temporarily increased because goods were sent early before tariffs took effect, but starting next year, high tariffs will become real barriers blocking exports. The 15% car tariff will significantly raise Korean car prices in the US market, reducing sales. For example, if a $30,000 car becomes $34,500 with tariffs, it becomes less competitive against Japanese or American cars. Tariffs on steel (50%), aluminum (50%), and semiconductors (25%) will also greatly hurt exports in those sectors.
Second, a rebound effect from front-loaded exports will appear. Next year's export demand was already reflected this year because goods were sent early. For example, if US importers already stockpiled a year's supply this year, additional orders will sharply decrease in the first half of next year. Looking at past cases, exports typically dropped sharply for 6 months to 1 year after front-loaded exports. A typical example was when China bought large quantities of US soybeans in advance during the 2018 US-China trade dispute, then imports nearly stopped for a year.
Third, overall export conditions may worsen due to global economic slowdown. The US economy is slowing due to high interest rates and expanding fiscal deficits, and Europe's manufacturing recession continues. China is also struggling with a real estate crisis and weak domestic demand. When major export markets all weaken simultaneously, Korea's exports will inevitably suffer. Export declines in economically sensitive sectors like cars, machinery, and chemicals are particularly concerning.
Three negative factors overlap - high tariffs taking full effect, front-loaded export rebound, and global economic slowdown - so next year's current account surplus is expected to shrink significantly.
✅ Impact of Smaller Current Account Surplus on the Economy
Let's analyze how a shrinking current account surplus affects Korea's economy.
First, pressure on the exchange rate will increase. A large current account surplus means many dollars are flowing in from abroad. But when the surplus shrinks, dollar supply decreases and dollars become scarce in the foreign exchange market, raising the exchange rate. In 2018, when the current account surplus dropped sharply, the won-dollar rate jumped from the 1,100 won range to the 1,200 won range. If next year's surplus shrinks significantly, the rate could exceed 1,450 won and possibly reach the 1,500 won range.
Second, a rising exchange rate leads to higher import prices. Korea depends on imports for most essentials like crude oil, natural gas, coal, and grains. When the exchange rate rises 10%, import prices also rise about 10%. This leads to higher gas prices, utility bills, and electricity rates, ultimately increasing overall consumer price pressure. The Bank of Korea may raise interest rates to stabilize prices, which increases interest burdens on households and businesses, burdening the entire economy.
Third, decreasing foreign exchange reserves could weaken external credibility. When the current account surplus shrinks, foreign exchange reserve growth may slow or even decrease. Foreign exchange reserves are a key indicator of a country's external payment capability. If reserves decrease, international credit rating agencies may downgrade Korea's credit rating. If the credit rating falls, overseas borrowing costs increase and foreign investment decreases, starting a vicious cycle.
A shrinking current account surplus can trigger chain effects leading to rising exchange rates, inflation, and weakening external credibility, requiring proactive responses.
4️⃣ In Conclusion
Although Korea's current account is expected to record its largest surplus this year, this result heavily depends on temporary factors like front-loaded exports and the AI semiconductor boom. Starting next year, high tariffs will take full effect and front-loaded export rebounds will appear, making a significant surplus reduction inevitable.
Although the US-Korea tariff deal was completed, high tariffs remain: cars 15%, steel 50%, aluminum 50%, semiconductors 25%, continuing to burden Korean companies' exports. Considering that car tariffs increased 6 times from 2.5% to 15%, the deal didn't provide a fundamental solution.
This year's boom resulted from companies rushing goods before tariffs took effect, which just reflected next year's exports in advance. Like advancing future consumption with a credit card - selling a lot this year means nothing to sell next year. If global economic slowdown is added, the export decline could be even greater.
A shrinking current account surplus isn't just a statistical change but directly affects the real economy. When dollar inflows decrease, the exchange rate rises. When the exchange rate rises, import prices increase. When prices rise, interest rate pressure increases. This creates a vicious cycle burdening both households and businesses.
What's needed in this situation is diversifying export markets and products. We should reduce US dependence and strengthen development of emerging markets like Southeast Asia, Middle East, and Africa. Also, we should increase the proportion of high-value technology products rather than commodity products, competing with technology rather than price.
The government should also pay more attention to exchange rate stabilization and foreign exchange market management. If the current account surplus drops sharply, shocks like decreasing foreign exchange reserves or soaring exchange rates may occur, requiring proactive foreign exchange market intervention and foreign currency liquidity management.
In the end, we shouldn't be complacent about this year's current account boom but need proactive responses for next year's expected deterioration. A strategic shift focusing on long-term competitiveness rather than short-term performance is required.
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