US tariffs and Chinese competition: Can South Korea thrive?
South Korea’s recent support package for the semiconductor industry exposes its vulnerability to the escalating uncertainty in its economic ties with the US and China, its two largest trading partners. Academic Hao Nan explains.
On 27 November, in a move aimed at fortifying one of its most crucial economic pillars, South Korea unveiled a comprehensive support package for its semiconductor industry which includes 14 trillion won (US$10 billion) worth of low-interest loans next year. This policy comes amid escalating uncertainty in its economic ties with the US and China, its two largest trading partners who both play a key role in shaping South Korea’s export-driven economy.
With a trade-to-GDP ratio of 87.9% in 2023 and the top five high-tech and industrial goods making up over 80% of its total foreign trade, South Korea’s reliance on international trade in high-tech and industrial goods makes it particularly vulnerable to external shocks, especially as global geopolitical tensions continue to rise.
Threat of US imposing tariffs and rolling back subsidies
Hence, South Korea finds itself at a crossroads. On the one hand, President-elect Donald Trump’s return to the White House in 2025 threatens to disrupt the cooperative trade environment painstakingly cultivated under President Biden.
Trump has signalled plans to roll back Biden-era subsidies for semiconductor and EV production, which currently benefit South Korean companies operating in the US.
On the other hand, China’s rapid economic and technological advances are eroding South Korea’s traditional advantages in key industries like semiconductors, shipbuilding and steel. To navigate this fraught environment, South Korea must recalibrate its strategies to preserve economic resilience while mitigating risks on both fronts.
Over the past two years under the Biden administration, South Korea has worked to deepen its economic and technological alliance with the US, its second largest trade partner accounting for 14.7% of South Korea’s foreign trade. It has actively participated in initiatives like the Indo-Pacific Economic Framework for Prosperity (IPEF) and next-generation technology dialogues which promote joint research in semiconductors, quantum computing and other cutting-edge fields.
In tandem, South Korean conglomerates such as Samsung and SK Hynix have invested billions in building semiconductor and battery plants across the US. For example, Samsung is set to complete a semiconductor factory in Texas, while SK On and Hyundai are investing US$5 billion in a new EV battery facility in Georgia.
However, Trump’s reentry into the US political landscape could upend this trajectory. Recently, he hinted at imposing extra tariffs on all imports, a move that would harm South Korean manufacturers heavily reliant on US markets. Moreover, Trump has signalled plans to roll back Biden-era subsidies for semiconductor and EV production, which currently benefit South Korean companies operating in the US. If enacted, such policies could undermine South Korea’s investments in the US and push Seoul to reassess the depth of its alignment with Washington.
Beijing’s ascent in high-tech sectors, from semiconductors to artificial intelligence, underscores the growing threat to South Korea’s economic competitiveness.
Increasing competition from China
On the other side of the equation lies China, South Korea’s largest trading partner, which accounted for 21% of its foreign trade in 2023. However, this relationship has grown increasingly strained.
For the first time since 1992, South Korea recorded a US$18 billion trade deficit with China in 2023. Direct investment in China by South Korean firms plummeted 78% to US$1.87 billion, as industries like semiconductors, shipbuilding, and steel face fierce competition from rapidly advancing Chinese counterparts.
Beijing’s ascent in high-tech sectors, from semiconductors to artificial intelligence, underscores the growing threat to South Korea’s economic competitiveness. Ten years ago, China lacked globally competitive semiconductor firms; today, companies like SMIC and YMTC have narrowed their technological gaps with South Korea’s industry leaders such as Samsung and SK Hynix. In some segments of DRAM and NAND technology, the gap has reportedly shrunk to less than two years.
Similarly, China now dominates 67% of the global shipbuilding market, leaving South Korea trailing at just 20%. South Korea’s steel giant POSCO, once a symbol of industrial strength, has been forced to shutter key facilities amid these pressures.
Compounding these challenges is the exodus of South Korean large conglomerates — taking up 40.8% of South Korea’s GDP in 2023 — from the Chinese market. Electronics giants like LG Display and Samsung have closed or sold their factories, while automakers like Hyundai and Kia have significantly scaled back their operations in China.
This retreat began in earnest following the 2017 THAAD missile defence dispute, which triggered a wave of Chinese consumer boycotts and regulatory hurdles for South Korean companies. Today, even cultural exports like K-pop and K-beauty cosmetics, once mainstays of South Korean soft power in China, are in decline.
Building robust trade and investment ties in regions like Southeast Asia or Africa will take years, if not decades...
Only option is to diversify
Amid these pressures, South Korea has sought to diversify its economic partnerships beyond the US and China. In 2024 alone, Seoul hosted a summit with African leaders, and proposed a summit with Central Asia countries, while South Korean President Yoon Suk-yeol embarked on high-profile visits to Southeast Asia and Latin America during regional and global forums like the ASEAN, G20 and APEC summits.
These efforts signal a recognition of the need to reduce dependency on its two largest trading partners. Yet such diversification efforts are unlikely to yield immediate results. Building robust trade and investment ties in regions like Southeast Asia or Africa will take years, if not decades, to match the scale of South Korea’s current economic relationships with the US and China.
The road ahead is fraught with difficult decisions. While South Korea must continue strengthening its ties with the US to safeguard access to advanced technologies and stable supply chains, it also cannot afford to alienate China, which remains critical to its export economy. Trump’s return could push Seoul to recalibrate its alignment with Washington, while a more pragmatic approach to Beijing might help restore some semblance of economic cooperation.
Domestic hurdles and instablity
However, even if strategic decisions are made, Yoon’s administration faces mounting domestic hurdles in advancing its agenda. Intensifying scrutiny from the legislative opposition, which holds a parliamentary majority, has forced Yoon to issue 25 vetoes — a record high for any South Korean president. Meanwhile, his approval ratings remain stubbornly low, hovering around 20%, further complicating his ability to implement bold policy shifts. (NB: He now faces mounting pressure to resign following his failed attempt to declare martial law, which has thrown the country into political turmoil and ignited a strong backlash.)
Ultimately, South Korea’s dilemma reflects the broader challenges faced by middle powers in today’s increasingly fragmented world. As great power rivalries intensify, countries like South Korea must skillfully navigate competing interests to avoid being caught in the crossfire. While its continued focus on technological innovation remains vital, South Korea’s ability to carve out a resilient path forward will hinge on its commitment to diversifying trade partnerships and maintaining a carefully calibrated balance in its foreign policy.
