Navigating uncertainty in US-ROK economic ties

Victor Cha:
The premise of the bilateral trade and investment framework outlined in a November 2025 joint fact sheet was to reduce the 25% tariffs that Trump had put on South Korea. We’re now in a situation where the legal rationale for tariffs has been undermined by the Supreme Court. Yet it’s most likely that the Lee government will not want to change or reopen the agreement that it has made with the United States. So, even though there might be an opportunity for President Lee Jae Myung to say, “Hey, we’re not at 15% anymore. We’re at zero,” South Korea is in a position where the Lee government may prefer to just keep tariffs at 15%. But that’s largely because of all the other equities in the joint fact sheet that are valuable to both countries, such as shipbuilding and potentially nuclear submarines for the U.S. side. Seoul and Washington worked very hard to make a trade deal happen, and I don’t think any side wants to reopen those issues.

Lee, however, might face domestic criticism from people within his own party, who are actually saying, “No, we want to reopen trade negotiations.” Not because they want to lose the shipbuilding or nuclear submarine agreement, but because they want to lower the $350 billion in investments Lee pledged to initially reduce tariffs from 25% to 15%. But reopening trade negotiations could be a disaster for Seoul. If Trump is already upset that the investments are not moving quickly enough, and he hears that the Korean side wants to reduce that number because of the Supreme Court ruling, he’ll go ballistic.

Dukgeun Ahn:
As Victor explained, I don’t think the overall trade and investment framework between the two countries will be affected too much. The agreement was not based on any international rules or norms but was essentially a deal negotiated bilaterally. Now that IEEPA measures no longer work, Trump may use other domestic, legal measures. He’s turned to Section 122 of the Trade Act of 1974 to impose a 10% global tariff on countries. If that doesn’t work, they will change it to Section 301 that addresses trade agreement violations or unreasonable or discriminatory practices burdening U.S. commerce, or Section 232 of the Trade Act of 1962.

The Trump administration will try to determine the tariff level depending on the domestic situation, and the Korean side essentially has little choice but to simply accept that. Moreover, based on the language in the memorandum of understanding, the investment package is independent from these tariff arrangements. So, other arrangements will not be affected by the ruling on IEEPA. But as Victor mentioned, Trump’s tariffs for many other countries may provoke a huge domestic political controversy if opposition parties in those countries try to raise this issue.

Victor Cha:
The IEEPA ruling creates more uncertainty in the markets and for businesses. There are 10% tariffs now, but no one knows what’s going to come after that. Countries and businesses will have to hold still and tread water for the next four to five months.

Whether economic uncertainty spills over to the security side, right now, it doesn’t look like it. The additional spending on buying U.S. military equipment, the additional spending on improving combined U.S. and South Korean discussions on wartime operational control—all these things appear to be moving forward. South Korea has committed to increasing defense spending by 3.5%, and in virtually every public forum, Elbridge Colby at the Pentagon refers to South Korea as a model ally.

So, overall, the alliance modernization effort seems to be progressing. The wildcard, of course, is if there’s something that upsets Trump again, such as the National Assembly not advancing the legislation needed to release the first tranche of the $20 billion investments to the United States. Trump might try to leverage something on the security side, but I don’t think you can draw a direct line between the Supreme Court IEEPA ruling and something negative happening in terms of the security equities of the relationship.

Dukgeun Ahn:
I believe the IEEPA ruling will cause much more uncertainty. Currently, Section 122 can last for only 150 days. After that, the Trump administration will have to find another mechanism. Now, it looks like the administration may try to take action using Section 301 (note: the U.S. Trade Representative employs 301 tariffs against countries it deems as having “discriminatory” or “unfair” trade practices). But 301 targets particular countries and basically blames a country for doing bad things.

For example, suppose that the Trump administration adopts 301 measures against South Korea, saying that it is engaged in unjustifiable trade practices that burden the U.S. economy. The Trump administration is basically blaming the Korean government for illegal trade practices. Such accusations would not just be economically but also politically difficult for the Korean side to accept. After the Supreme Court ruling, some countries, such as Brazil, India, China, or even the European Union, may not easily be able to adapt to new measures. So, the path forward looks more uncertain and dangerous.

Victor Cha:
China has been weaponizing trade with countries and companies around the world for well over 30 years. In the book, we catalog over 600 known cases of China’s use of economic coercion against 18 governments and 470 companies on issues related to Tibet, Taiwan, Tiananmen Square, and human rights in Xinjiang. In the book, we discuss that all the countries coerced by China need to de-risk by building more resilient supply chains, but they also need to come up with a deterrent strategy for stopping China from using economic coercion willy-nilly.

There are two elements of collective resilience. One is a focus on building resilient supply chains, particularly when it comes to critical minerals. And then the other is to also have some sort of coalition of countries. If China uses economic coercion as a regular tool of diplomacy, we are going to impose costs on China for using that sort of strategy.

Dukgeun Ahn:
Critical minerals are actually the flip side of the semiconductor export controls imposed by the United States. The United States is blocking semiconductors, but China is not blocking critical minerals since it also needs semiconductors, which depend on minerals. If they block critical minerals, then they cannot use semiconductors.

But China may gradually increase export controls on rare earth minerals as it becomes more autonomous in manufacturing semiconductors. If it can produce semiconductors domestically, then it has more space to block rare earth minerals. In the future, countries will need to manage the supply chain risk, but recently, more countries have seen the United States as another risk factor. As you see from the recent speech by Canadian Prime Minister Mark Carney or many reports from think tanks in the middle powers, such as the U.K., Canada, Australia, and Germany, it looks like there’s an awakening as countries try to find alternative arrangements.

Dukgeun Ahn:
Like many other countries, South Korea is cautiously watching to see whether a U.S.-China agreement or “compromise” will help only U.S. industries and companies or if this arrangement can prevent China from taking coercive measures for overall supply chains. For example, if a compromise on export controls prevents China from withholding rare earth minerals this year and next year, then other countries in the global economy will benefit.

But if this arrangement only allows U.S. companies to have exclusive access to these materials, then other countries in the global economy will suffer a lot because of supply chain disruption by this arrangement. In that case, a U.S.-China bilateral compromise might create huge distortions. It would also make it possible for China to use its deal with the United States as a negotiating chip against other countries. The latter scenario will probably push more countries toward China, contrary to what the United States may have intended or designed with the deal.

Victor Cha:
Let me add a couple of points. On semiconductor chips, there is a degree of decoupling taking place at both ends of the supply chain. At the high end, it’s export controls by the West. At the lower end, it’s the input, the minerals coming from the Chinese side. But Minister Ahn makes an interesting point about how, in that sort of tradeoff, China is disadvantaged because it can’t decouple on critical minerals, because then it will lose all access to the finished product (i.e., chips).

At the same time, that also sheds light on Trump’s recent decision to supply the H200 Nvidia chip to China, because then that is basically losing leverage on critical minerals. The second point is on the upcoming summit. I entirely agree with Minister Ahn. The scenario that I worry about as it relates to Korea is that Trump will cut some sort of deal that again staves off any critical minerals pressure from China for another year or until the next summit, in return for some market access and some agricultural products.

But, if at the same time, it does nothing for South Korea, and then China moves on to an economic coercion campaign against Korea with regard to the nuclear submarine deal with the United States—we saw early evidence of this right after the U.S.-South Korea shipbuilding agreement, where China threatened five U.S. subsidiaries of Hanwha Ocean—a truce between Trump and Xi would not help Seoul. So, for me, it’s entirely possible that, at some point, China will enact some sort of economic coercion campaign. And it could be unannounced and very subtle, perhaps on some form of critical minerals, to put pressure on the Lee government to step away from the nuclear submarine deal. China would not put pressure on the United States, but it would instead pressure South Korea. That would be a very bad scenario.