How U.S. Tariffs Could Impact Trade with South Korea

On February 1, President Donald Trump signed an executive order imposing a 25% tariff on imports from Mexico and Canada, as well as an additional 10% tariff on products made in China, effective February 4. However, the tariff’s effective date has been postponed for one month, during which the U.S. and the affected countries will negotiate. It is clear that the trade war between the U.S. and China has begun to heat up again, and the scope of U.S. tariffs is expanding to include other countries. Trump’s tariff war will directly and indirectly impact the global supply chain and sales of many companies. In this article, we will discuss how U.S. tariffs could impact South Korean companies and exports from South Korea.

For a long time, the U.S., Mexico, and Canada have operated under a de facto tariff-free system for supplying products to the U.S. Over 500 South Korean firms, including Samsung, LG, Hyundai/Kia, and POSCO, have operations in Mexico, taking advantage of the country’s cheap labor. South Korea is the second-largest Asian investor in Mexico, after Japan. South Korea’s investment in Mexico exceeds $1.2 billion, surpassing investments in China. South Korean companies further increased their investments in Mexico for the U.S. market when the U.S.-China trade war intensified in 2018. South Korean companies also invested in Canada due to its abundant battery-related minerals such as nickel and cobalt. These manufacturing companies benefited from the tax-free infrastructure, but now they are facing unexpected challenges. A steep 25% tariff will likely be applied to the products sold in the U.S.

What is the impact on overall Korean exports? This will largely depend on the types of products manufactured in South Korea and their destination markets. The trade relationships are more complex than they appear. The decrease in Chinese exports to the U.S. due to the tariffs could inadvertently impact Korean companies that manufacture parts for Chinese products exported to the U.S. On the other hand, the tariffs could present a good opportunity for some Korean companies that export directly to the U.S., allowing them to gain a competitive advantage in terms of price. However, there is a chance that China may depreciate its currency to maintain price competitiveness. Additionally, if China’s exports to the U.S. decrease, it could take a more aggressive approach to route unsold products to other markets, such as the EU and Asia, exacerbating competition globally.

The U.S. tariff war is just beginning. The next target is likely to be the EU. Given that four Asian countries—Vietnam, Japan, South Korea, and Taiwan—appear in the top 10 countries with which the U.S. has the highest trade deficits, these countries may soon be next in line. Specifically for South Korea, Trump has mentioned the possibility of imposing tariffs on specific items such as steel and semiconductors, which are key export products.

Certain industries may actually benefit from the proposed U.S. tariffs. As of 2023, the top six exporters of beauty and skincare products (HS Code 3304) to the U.S. are France, South Korea, Italy, Canada, China, and Mexico. If tariffs are imposed on products from Canada, Mexico, and the EU, all countries except South Korea would have to raise their product prices. Korean beauty products have gained a strong reputation for their quality. With a depreciated Korean currency and competitive pricing, beauty products made in South Korea could perform very well in the U.S. — that is, unless President Trump changes his mind.