South Korea Secured 15% Tariff and Auto Relief, Avoiding a Worst Case Scenario

The Korea deal was imminently coming when Japan sealed the 15% with auto sectoral reprieve. As the country with the highest exposure to the US for the auto sector at 2.4% of GDP, Korean automakers and the economy cannot afford to lose out to Japanese and German competitors who already secured a lower rate. For South Korea, with USD135bn trade and 7.2% of GDP exposure to the US market, it was never a question of whether but how it will strike a deal to secure a lower tariff rate. Rising Chinese competition globally and a deteriorating trade balance with China are reasons South Korea needs to secure favorable access to US markets.What are the details of the deal? South Korea got 15% tariff rate and lowered auto tariff to 15%. Existing 50% tariffs on steel and aluminum tariff remains. No details yet on other sectors, which are currently exempted such as semiconductor and electronics. Key politically sensitive sectors such as rice and beef remain unchanged for South Korea. Defense was not mentioned.What did Trump get in return for the tariff reprieve? South Korea is a key US ally and an important trade and investment partner. Already, the US is the largest destination for Korean investors – deploying USD250bn so far. The Korean government promised USD350bn of investment in the next 3.5 years with USD150bn for the shipbuilding sector and USD100bn for the energy sector.In 2024, South Korea imported USD23.2bn in US energy and so the USD100bn pledge over 3.5 years would require a 23% increase to USD28.6bn per year. This would lead to lowering of purchases from other countries such as Saudi Arabia and UAE.The good news is that there is no direct mentioning of the Korean won in the negotiation, which is a relief to South Korea. Excessive appreciation of the FX is not preferred as Korea is already wearied about China’s deflation and over capacity eroding its competitive and a stronger currency would add another blow.Overall, similar to other deals, details are still being worked out but South Korea avoided the worst and maintained a competitive position in the auto sector with its key competitors – Japan and Germany. This puts South Korea tariff rate amongst the lowest in Asia excluding China, especially relative to Southeast Asia and India.