Korea scrambles for new markets after FTA collapse

The Korea-U.S. tariff deal was finally reached after prolonged negotiations, but it effectively renders the free trade agreement (FTA) between the two nations meaningless. Canada and Mexico, members of the North American trade pact CUSMA with the United States, have yet to finalize their talks, though duty-free access is widely expected to end. The global free trade system that helped South Korea become the world's fifth-largest exporter is now unraveling under U.S. President Donald Trump's aggressive tariff policy.

With the Korea-U.S. deal finalized, Korean goods that once entered the American market duty-free under the FTA will now face a 15 percent reciprocal tariff. Korean automobiles and parts, previously protected by the agreement, will be taxed at the same rate as Japanese and EU products, erasing the so-called FTA premium. Korean steelmakers, already paying a 50 percent tariff, risk losing access to their largest export market. Tariffs on semiconductors and pharmaceuticals are also expected soon. Popular exports such as K-beauty products and spicy instant noodles will become more expensive in the United States, weakening their price advantage. The Korea-U.S. FTA, which had fueled exports since its launch in 2012, has effectively lost its value.

Washington’s message is blunt: “If you don’t want to pay tariffs, build factories in America.” But even Hyundai and Kia, which already operate plants in the United States, cannot fully localize production. Their relatively low domestic manufacturing share compared to Japanese competitors leaves them vulnerable to tariff penalties. Hyundai Steel is planning a new mill in Louisiana but lags behind Japan’s Nippon Steel, which has already acquired U.S. Steel. Samsung and LG, which have been producing appliances in Canada and Mexico for export to the U.S., are also likely to face new tariff costs if CUSMA is dissolved.

This has made it urgent for South Korea to diversify its export markets beyond the United States. The European Union, Southeast Asia, South America, and the Middle East should now be pursued more actively. Korea must also accelerate its bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, the largest existing mega FTA. Although Seoul was previously hesitant because of Japan’s leading role in the pact, it can no longer afford to delay.

Yeo Han-koo, chief trade negotiator at the Ministry of Trade, Industry and Energy, said, “We only dodged a bullet this time. Fundamental preparation is needed.” Regardless of who leads the United States in the future, Washington is expected to maintain its protectionist and tariff-focused trade policy. Without a long-term overhaul of South Korea’s export and industrial strategies, the country’s export-led growth model may not survive the next 10 to 20 years.