UBS Economics-APAC Economic Perspectives _Korea large tariff shock, ampli...-114579692

ab8 April 2025Global ResearchAPAC Economic PerspectivesKorea: large tariff shock, amplified downward growth pressureKorea faces 25% reciprocal tariff despite the Korea-US Free Trade Agreement The US revealed reciprocal tariffs on April 2, and Korea will face one of the higher headline tariff rates at 25% (revised figure compared to 26% in the initial release), effective from April 9. This is much higher than general expectations; our feedback suggests that Korea would be in the low tariff bracket. Given the Korea-US Free Trade Agreement (KORUS), Korea has eliminated tariffs on most of the industrial and consumer goods and the majority of agricultural products while maintaining tariff-rate quotas on a handful of US agricultural products, according to the latest 2025 National Trade Estimate Report published by the USTR on March 31, 2025. Export revenue to the US is equivalent to 7.1% of Korea's GDP, and the top exporting items widely spread across different production sectors, from autos, to machineries and cosmetic products. The effective rate should be slightly lower given the tariff exclusionsThe current tariff setup suggests that those products which are already subject to the 232 tariffs on steel, aluminum and autos of 25% would not need to pay the reciprocal tariff, though the current reciprocal tariff rate faced by Korea is equal to the current 232 tariff rate. 11% of Korea's exports to the US fall into the Annex 2 exemption. In summary, our preliminary estimation suggests exports from Korea to the US would be facing an incremental weighted average tariff rate of 22.3%.Less of a relative competitiveness shock Given that the combined new tariff against mainland China is 54%, the gap between US tariff rates for Chinese products compared with Korean products has widened. Korea's incremental weighted tariff rate is the same as that for Japan and slightly lower than that for Taiwan. Korea faces slightly higher incremental tariffs compared to the Philippines and Malaysia. However, we doubt such differences (4.5 ppt and 3.3 ppt, respectively) would be sufficient to alter the relative competitiveness given Korea's existing lead in the industrial sectors.There was a deal in 2018; there could be some scope for improvement nowIn September 2018, the US and Korea reached a trade deal to revise the KORUS; the deal was regarded as the first bilateral trade deal signed by President Trump. The trade deal includes key modifications such as increases in auto exports from the US to Korea, voluntary export volume restrictions on steel exports from Korea to the US. Under the KORUS, Korea's overall effective tariff rate on imports from the US is approximately 0.79% as of 2024, according to the Ministry of Economy and Finance. For the remaining tariffs, many have already been scheduled to be reduced further to zero in the coming years. For example, the import tariff on US beef is set to be cut to 0% by 2026 from the current rate of 2.6%, whereas the safeguard volum