South Korea Braces for Growth Hit as US Tariffs Rise to 15 Percent

A trade deal softens the blow, but leaves a heavy cost

South Korea faces a loss of 0.45 percentage points of economic growth in 2025 and 0.60 points in 2026 from new US tariffs, according to the Bank of Korea (BOK). A deal reached in late July lowered the threatened tariff from 25 percent to 15 percent, but still left Asia's fourth largest economy facing a sharp increase in the cost of selling goods to the United States.

As of August 29, 2025, the central bank has revised its growth forecasts to 0.9 percent for 2025 and 1.6 percent for 2026, marking the slowest expansion since the pandemic. Automobiles, steel, semiconductors and machinery are among the industries exposed, with consequences for factories, employment, investment and the businesses that supply exporters.

South Korea previously enjoyed zero tariffs on most exports to the US under the Korea-US Free Trade Agreement (KORUS). The average US tariff on South Korean goods has now risen from zero to 15 percent. That change places a new cost on trade relationships built over years of largely tariff-free access.

The United States is South Korea's second largest trading partner. For an economy that depends heavily on selling products abroad, weaker access to that market can spread beyond export companies: reduced orders can mean less production, smaller investment budgets and weaker demand across the domestic economy.

President Donald Trump argues that tariffs will protect American jobs, strengthen US manufacturing and reduce the trade deficit. South Korea's experience shows the immediate pressure that policy places on a close trading partner, even after negotiations secure a lower rate than Washington initially threatened.

What changed under the July agreement?

Seoul's agreement with Washington set a broad tariff of 15 percent on South Korean goods, compared with the 25 percent rate previously threatened. The negotiated rate remains above the baseline tariff of 10 percent now applied to most US trading partners.

The Bank of Korea says South Korea received the ninth largest tariff reduction among 50 major exporters to the US when measured against the rates initially threatened. Even with that reduction, its resulting tariff burden remained higher than that of more than half of those exporters, including Japan and the European Union.

South Korea's exposure reflects both the scale of its exports to the US and its earlier access under KORUS. A country accustomed to paying little or no tariff faces a substantial change when a broad charge applies across much of its export business.

Product duties had already created pressure on particular industries. The newer broad tariffs extend the disruption across nearly all sectors, while automobiles and parts also face a separately announced tariff of 25 percent.

The sequence has left companies responding to several stages of policy change:

• Before the latest US measures, most South Korean exports entered the US without tariffs under KORUS.
• After returning to office, Trump announced a new wave of tariffs targeting dozens of countries, alongside duties affecting particular products.
• In late July 2025, Seoul and Washington agreed to a 15 percent rate instead of the threatened 25 percent.
• During July, South Korean exports rose temporarily as companies rushed shipments ahead of the tariffs.
• By August 29, the Bank of Korea was forecasting weaker growth in both 2025 and 2026 as the effects spread.

Why growth and inflation are both expected to weaken

The BOK's estimated growth losses of 0.45 percentage points in 2025 and 0.60 points in 2026 describe a reduction in the pace of economic expansion. A percentage point measures the difference between two percentage rates. The bank still forecasts growth, but at a slower pace as trade becomes more costly.

Exporters can respond to tariffs by cutting their prices, accepting smaller profits or selling fewer goods. Each option creates pressure somewhere in the economy. Smaller profits can constrain investment, while fewer overseas orders can reduce demand for workers, materials and services.

Consumer inflation in South Korea is also expected to be lower by 0.15 percentage points in 2025 and 0.25 points in 2026. Higher import costs put upward pressure on some prices, while weaker export demand slows economic activity and spending. The central bank's forecast points to a lower rate of price growth after those forces are taken together.

July's increase in exports offered temporary support as companies brought forward shipments. Analysts expect a slowdown in the following months. Sending goods early can shift business from one month to another, leaving a quieter period once the initial rush ends.

Automakers face pressure on vehicles and parts

Hyundai, Kia and GM Korea are at the center of the trade shock. South Korean automakers have spent decades building their position in the US, while passenger vehicles account for nearly half of South Korea's total automobile export revenue.

Hyundai, Genesis and Kia sold about 1.7 million vehicles in the United States in 2024. Around 700,000 were produced there, with the remainder imported from South Korea and Mexico. Those figures show why investment in American factories still leaves a large share of sales exposed to border costs.

The announced 25 percent tariff on automobiles and parts adds pressure alongside the broader 15 percent tariff arrangement. Manufacturers face costs on finished vehicles and on components moving through international supply chains, threatening their competitive position.

Hyundai and Kia obtain a substantial share of their parts from the United States and Canada and have recently invested billions in US manufacturing. Their operations connect factories and suppliers across borders, so tariff changes affect more than the final shipment of a completed car.

Companies must decide how much of the extra cost to absorb and how much to pass to buyers. Absorbing it reduces profit margins. Raising vehicle prices makes purchases more expensive for American consumers and can weaken demand.

GM Korea is particularly exposed because it exports 85 percent of its output to the United States. Higher barriers to that market threaten the future of an operation so dependent on a single destination. Industry leaders warn that jobs and investment are at stake.

Support for industry meets a wider export problem

The South Korean government has announced an aid package of KRW 3 trillion for the automobile sector. It is also preparing further support for affected industries while continuing negotiations with Washington to seek additional relief.

Steel, semiconductors and electronics face new US duties as well. Together with automobiles and machinery, these industries form key parts of South Korea's export economy. Weakness across several of them would spread the pressure beyond a single group of manufacturers.

South Korean companies producing goods in Vietnam and other Asian countries are also exposed because Washington has imposed high tariffs on products from those locations. A factory outside South Korea can therefore face its own US trade barrier.

Businesses are reconsidering where to buy components, assemble products and commit new investment. Some are moving production to the United States to avoid tariffs. Others are looking for different markets or accepting higher costs. Each response changes how companies organize production across borders.

Financial markets fall as the central bank weighs its options

Hyundai's share price fell nearly 13 percent after the tariff announcement, contributing to a 5.2 percent decline in the KOSPI stock index. The market reaction reflected concerns about earnings, export demand and the cost of adjusting production.

The Bank of Korea has kept its benchmark interest rate at 2.50 percent. Governor Rhee Chang-yong has indicated that further monetary easing may be necessary if growth remains weak, while warning against adding excessive liquidity to an already overheated housing market.

Lower interest rates can make borrowing cheaper for households and businesses, helping support spending and investment. They can also encourage more borrowing for property. The central bank is balancing support for a slowing economy against the risk of putting more money into a housing market already under pressure.

Government aid and interest rate decisions address different parts of the problem. Sector support targets companies facing an immediate trade shock, while monetary policy affects borrowing conditions across the economy. Neither removes the tariff charged when goods enter the US.

What Washington wants, and who pays

Trump's America First trade agenda seeks to make imported goods more expensive relative to products made in the United States. His administration says tariffs will encourage domestic manufacturing, protect jobs, reduce the trade deficit and generate hundreds of billions of dollars in revenue.

The administration also expects the measures to encourage foreign companies to invest in American production. South Korean automakers already have substantial US investments, but the new duties increase the pressure to reconsider where future vehicles and components will be made.

A tariff is a tax on imported goods, usually calculated as a percentage of their value. An explanation of how tariffs work describes the choices companies face: absorb the charge, raise prices or import fewer goods.

US consumers and manufacturers can bear part of that cost through higher prices. A manufacturer using imported components may pay more to produce its own goods, reducing competitiveness. Economists and business leaders warn that these effects can slow growth as well as disrupt trade.

Trump's tariff policy has also changed repeatedly, with measures announced, amended, delayed or cancelled. Businesses planning factories, purchases and deliveries must account for both the tariff itself and uncertainty about the rate that will apply later.

Washington has used the threat of higher duties to seek concessions in trade negotiations. South Korea secured a lower rate through intense bargaining, but the resulting 15 percent tariff still marks a major departure from its earlier trading arrangements.

A global dispute reshapes supply chains

US tariffs ranging from 10 to 50 percent now affect dozens of countries, including allies such as Japan, the European Union and the Philippines. Brazil and India have announced retaliatory measures, while other governments have pursued exemptions or negotiated concessions.

The European Union has proposed eliminating tariffs on imported US industrial goods in exchange for Washington removing duties on European cars. Mexico has joined the United States in raising tariffs on Chinese goods, while Vietnam and other Asian economies face disruption from the wider dispute.

The end of the $800 duty-free exemption for small imported packages extends the changes to lower value shipments. Goods that previously entered through that exemption now face tariffs of 10 to 50 percent, bringing another part of international commerce into the dispute.

Companies deciding where to produce goods must now compare tariffs across several possible locations. A move that reduces exposure in one country may create costs in another, especially for businesses whose suppliers and customers are spread across Asia and North America.

The International Monetary Fund and the Organization for Economic Co-operation and Development have both lowered their forecasts for global growth in 2025, citing tariffs and trade uncertainty. South Korea's expected slowdown sits within that broader weakening of the international economy.

Higher tariffs can also strain diplomatic relationships. The experience of the Philippines and other US allies illustrates how trade barriers imposed unilaterally, or used to seek wider concessions, can erode trust alongside their commercial effects.

Regional talks and legal challenges add uncertainty

Finance and central bank officials from China, Japan, South Korea and Southeast Asian countries have met to discuss the economic effects of the tariffs and coordinate their responses. Their priorities include stronger financial safety nets, closer regional cooperation and support for economic recovery.

South Korea's acting President Han Duck-soo called for talks with US officials to protect the economy and ordered emergency support for affected businesses. Industry Minister Ahn Duk-geun called for continued consultation and negotiation while describing the tariffs:

regrettable

Analysts suggest South Korea may seek relief by offering to buy more American goods or increase military spending. Such concessions would connect the trade negotiations with other parts of the relationship between Seoul and Washington.

US courts are reviewing challenges to the administration's use of emergency powers to impose some tariffs, and a Supreme Court appeal is possible. The outcome could determine whether those measures remain in place or are rolled back. No date for a final legal decision or further negotiated relief has been given.

Why the full price effect may take time

Tariffs have so far had a muted effect on inflation, partly because exporters accelerated shipments before new rates took effect and some businesses absorbed the costs. Those responses can delay the point at which consumers see higher prices.

The Yale Budget Lab estimates that tariffs will raise US consumer prices by 1.8 percent in 2025. The average US tariff rate is now at its highest level since 1934, making the current changes a substantial break with the trading conditions businesses had come to expect.

South Korea faces a different combination of pressures: weaker export demand, lower expected growth and a forecast reduction in consumer inflation. American buyers may pay more for some imports while Korean producers receive fewer orders or accept smaller profits.

For South Korean firms, the practical choices include expanding into new markets, investing more heavily in US production and absorbing costs while negotiations continue. Those decisions put decades of economic integration under strain and challenge a growth model built around access to international markets.

The immediate picture is a negotiated reduction in the threatened tariff, followed by a lasting increase from previous rates. Government assistance, central bank policy and diplomatic talks are now focused on limiting the damage to companies, workers and investment.

Key Points

• South Korea secured a 15 percent US tariff in late July, below the threatened 25 percent but above its previous largely tariff-free access.
• The Bank of Korea estimates growth losses of 0.45 percentage points in 2025 and 0.60 points in 2026.
• The central bank forecasts economic growth of 0.9 percent in 2025 and 1.6 percent in 2026.
• Automobiles and parts face an announced 25 percent tariff, while steel, semiconductors, electronics and overseas factories also face pressure.
• Seoul has announced KRW 3 trillion in automobile industry aid and is pursuing further support and negotiations.
• The BOK has held its benchmark rate at 2.50 percent while weighing weak growth against housing market risks.
• Regional policy talks and US legal challenges remain part of an unsettled trade outlook.