US PIIE: “Korea’s increased investment in the US should demand 10% exemption from universal tariff if Trump is re-elected”

Report by Yeo Han-gu, Senior Research Fellow, PIIE
“Agreements must be concluded for each semiconductor, mineral, and bio sector”
The necessity of concluding the ROK-US Mutual Defense Procurement Agreement (RDPA)
“Import tariffs cannot replace income tax… exchange rate adjustment expected”

An American think tank has suggested that if former President Donald Trump is re-elected in the US presidential election in November, South Korea should request an exception to the “universal 10% tariff” due to its status as a signatory to the Free Trade Agreement (FTA) with the US and its increased investment in the US. The argument is that since investment in the US has increased during the de-risking process with China, and as a result, exports and trade surplus with the US have increased, it is necessary to persuade the US to exempt it from the universal tariff. There has also been advice that South Korea and the US should strengthen cooperation in industrial sectors such as semiconductors, key minerals, and bio, while also speeding up the conclusion of the ROK-US Mutual Defense Procurement Agreement (RDPA).

On the 24th (local time), the Peterson Institute for International Economics (PIIE) in the United States released a report titled, “South Korea’s Trade Policy Agenda in an Uncertain U.S. Trade Environment,” which included such content. The authors were Yeo Han-gu, a senior research fellow at PIIE and former director-general of the Trade Negotiation Headquarters at the Ministry of Trade, Industry and Energy, and Alan Wolf, a research fellow at PIIE and former deputy director-general of the World Trade Organization (WTO).

The senior member said, “If the Republican Party takes power, the most critical issue for Korea will be whether the U.S. will impose a 10% universal tariff on its FTA partners or whether it will be an exception to the Korea-U.S. FTA,” adding, “If the U.S. imposes a 10% universal tariff, it is possible that it will use it as leverage in negotiations with countries with large trade deficits in goods.”

Trump’s second term’s priorities are expected to be, rather than the revision of the Korea-U.S. FTA that he was obsessed with during his first term, whether to extend the tax cuts that expire at the end of 2025, public policy, and preparations for the review of the United States-Mexico-Canada Agreement (USMCA) scheduled for 2026. In the process, it is explained that Korea’s key trade issue with the U.S. will be whether it will be granted an exception to the 10% universal tariff. Former President Trump previously announced a 10% universal tariff on all countries around the world, a super-high tariff of over 60% on all Chinese imports, and the abolition of most-favored-nation treatment for China.

“Korea has seen a sharp increase in its investment in the U.S. as it has diversified away from China in terms of trade and supply chain structure,” said Rep. Yeo. “We need to focus on highlighting to the U.S. that the increased investment in the U.S. has led to an increase in exports to the U.S. and a trade surplus.” She continued, “If this momentum is interrupted by a sudden change in U.S. policy, it could hinder U.S. manufacturing investment, job creation, and the acceleration of diversification away from China,” and emphasized that “the Korea-U.S. FTA should be excluded from the imposition of universal tariffs.”

There is also speculation that former President Trump may take measures to strengthen the dollar in order to reduce the trade deficit. There is speculation that this could be a second version of the Plaza Accord, in which the US, Japan, Germany, France, and the UK artificially lowered the value of the dollar against each country’s currency in 1985.

The senior member said, “PIIE analysis results show that it is theoretically impossible to cut income taxes and replace the decrease in tax revenues with import tariffs, as former President Trump claims,” ​​and predicted, “Because it is difficult to resolve the trade deficit in goods with tariffs alone, exchange rate adjustments can be actively utilized as a new policy tool.”

He predicted that regardless of which administration is in power, whether Democratic or Republican, domestic manufacturing promotion, industrial policies for job creation, containment of China, and recovery of supply chains will become the “new normal.” However, if the Democratic Party takes power, the Biden administration’s policy keynotes, such as the Semiconductor Support Act (CSA) and the Inflation Reduction Act (IRA), will be extended, reducing uncertainty.

The senior member also advised that as the U.S. shifts to an America First policy, the two countries could strengthen sector-by-sector cooperation in key industries rather than comprehensive market opening.

He said, “In the changed political environment in the U.S., it is realistically difficult to resume free trade agreements including comprehensive market openings such as the Korea-U.S. FTA and the Trans-Pacific Partnership (TPP).” He added, “Semiconductors, key minerals, and bio industries could be considered priority areas for promoting sectoral agreements between Korea and the U.S.”

He also insisted that the Korea-US RDPA should be concluded quickly. The US recognizes an exception to the ‘Buy American’ clause for countries that have signed the RDPA and treats them like its own companies.

The senior member emphasized, “Korea can be an important defense industry partner for the U.S., as it lags far behind China in key defense industry competitiveness such as steel and shipbuilding,” and “Defense industry cooperation with allies like Korea can ultimately lead to strengthening the U.S. industrial base and national security, so the prompt conclusion of the Korea-U.S. RDPA is necessary.”

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