U.S. tariffs inflict heavy damage on South Korean economy

South Korea's economy, which is the fourth-largest in Asia, faces significant challenges due to newly imposed U.S. tariffs. In August 2025, tariffs on Korean imports rose sharply from zero to 25%, a stark shift from previous years when South Korea enjoyed favorable trade terms under a free trade agreement established in 2012. The International Monetary Fund (IMF) projected that these tariffs would substantially impact economic growth, predicting a growth rate of only 0.9% for 2025, which is less than half of the average growth recorded over the past three years. The central bank has estimated that the tariff policy would decrease South Korea's economic growth by 0.45 percentage points in the current year and by 0.6 percentage points in the following year. These tariffs have triggered concerns among local industries, particularly in the manufacturing sector, especially for major players like Hyundai Motor and Kia, which face a competitive disadvantage against Japanese and European firms that only incur 15% duties. This slowdown has significant implications for employment and domestic investment. Additionally, the political landscape in South Korea has further complicated economic prospects. Following the impeachment of former President Yoon Suk-yeol in April 2025, which was precipitated by controversial decisions such as declaring martial law late last year, the government faces instability during crucial negotiations with the United States. The discussions regarding the terms of a potential reduction in tariffs to 15% in exchange for South Korea’s commitment to a $350 billion investment are currently stalled. As noted by Lee Phil-sang, an economic adviser, uncertainty in these negotiations could lead to an even harsher tariff environment, as the U.S. government might consider imposing higher tariffs than those currently in place. As Hyundai and Kia anticipate substantial losses in operating profits due to these tariffs, the South Korean economy is under intense pressure to revitalize domestic demand and diversify its export structure to ensure more resilient growth in the future. The evolving tariff landscape necessitates urgent and strategic responses from the South Korean government and businesses to mitigate potential long-term damage.