[Economic Analysis] ROK-US Customs Agreement Concluded by Surprise

The **ROK-US Customs Agreement**, which was dramatically concluded recently, has resolved trade uncertainties and presented a new framework for economic cooperation between the two nations. The core of this negotiation is a $350 billion investment package to the US and an agreement on a 15% tariff for key items. In this post, we will analyze the main contents of the agreement based on data and facts, and delve into the economic impact on the domestic foreign exchange market and key industries.

ROK-US Customs Agreement Reached, Analysis of $350 Billion Investment and Foreign Exchange Market Risks

1. The $350 Billion Investment Package: Scale and Safety Mechanism

The largest pillar of this ROK-US customs negotiation is the investment package totaling $350 billion that the Republic of Korea has agreed to invest in the United States. This amount is not to be executed all at once but is structured in two major forms, designed to minimize the impact on the Korean economy.

The detailed composition is as follows:

• Cash Investment ($200 billion): Investment in high-tech sectors such as semiconductors and secondary batteries. Crucially, this investment is limited to $20 billion annually and is designed to be paid in installments over 10 years, establishing a safety mechanism that can minimize rapid volatility in the foreign exchange market.
• Shipbuilding Cooperation ($150 billion): Investment and guarantee amount for the shipbuilding-related cooperation project (MASGA).

[Resolving the IMF Foreign Exchange Crisis Trauma]

Since the IMF Foreign Exchange Crisis in 1997, South Korea has been highly sensitive to foreign exchange liquidity and deeply wary of the potential for a large-scale outflow of foreign currency. The $350 billion investment inherently posed a risk of foreign exchange outflow, but the negotiation successfully set a clear cash investment ceiling of **'$20 billion annually,'** which has largely alleviated these concerns. This is evaluated as a crucial safety mechanism that can proactively prevent a sharp decline in foreign exchange reserves, which would cause the exchange rate market to fluctuate wildly.

In particular, investment will only proceed for projects where commercial reasonableness is guaranteed, and the profit-sharing ratio between the two countries is set at 5:5 until the principal is repaid, focusing on enhancing the possibility of recovering the principal.

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2. Analysis of Tariff Changes and Impact by Key Industry

The most notable achievement of this agreement is the confirmed tariff rate imposed by the US on South Korea's major export items. This serves as a positive signal by resolving uncertainty.

(1) Automobile Tariff: The Two Sides of the 25% → 15% Reduction

The US tariff on finished South Korean automobiles and parts has been reduced from the previous potential threat of a high 25% tariff to 15%. This is the same tariff rate as competitor nations like Japan and the European Union (EU), avoiding the worst-case scenario of a high tariff imposition.

However, there is regret that the zero-tariff benefit previously enjoyed under the ROK-US Free Trade Agreement (FTA) has been effectively lost, resulting in the South Korean auto industry bearing the same 15% tariff burden as its competitors. The increased tariff burden raises the cost of entry into the US market and may affect long-term price competitiveness.

(2) Tariffs on Semiconductors and Other Items: Securing Most-Favored-Nation (MFN) Status

The semiconductor tariff was agreed upon not to be disadvantageous compared to key competitors like Taiwan. This means the Most-Favored-Nation (MFN) principle will be applied, making it likely that the zero-tariff trend will be maintained for now.

It was also agreed that some items, including pharmaceuticals and lumber, would receive MFN treatment, and zero tariffs will be applied to aircraft parts, generic drugs, and natural products not produced in the US, which is expected to increase the export stability of the relevant industries.

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3. Outcome Analysis and Implications

In conclusion, the ROK-US Customs Agreement is positive in that it significantly reduced trade uncertainty. In particular, the setting of an annual cap on investment in the US is viewed as a measure by which the South Korean government secured practical benefits by largely alleviating concerns about foreign exchange reserves and the competitiveness of the Korean Won.

Category	Before Negotiation (Threat)	Negotiation Result (Confirmed)	Assessment
Automobile Tariff	25% (High tariff threat)	15%	Uncertainty resolved, zero-tariff benefit lost
Investment Scale to US	Concern of $350 billion one-time investment	$350 billion (10-year installment, $20 billion annual cap)	Foreign exchange market impact minimized

However, high tariffs of up to 50% are still maintained on some items, such as steel and aluminum, which suggests that the difficulty in exporting to the US for related small and medium-sized enterprises will continue. Therefore, it is time for the government to concentrate its efforts on resolving these unresolved issues through subsequent negotiations and supplementary measures.

Key Implications:
This agreement is a success in that it brought the major risk factor of trade uncertainty into a stable framework. However, some economic price was paid compared to the previous Free Trade Agreement (FTA) system, and close 대응 (response/countermeasure) to the remaining high tariff risks is necessary.

Ultimately, the conclusion of this customs agreement has laid the groundwork for providing long-term stability to South Korea's key industries. It is judged to be important to generate practical economic synergy in the agreed-upon investment and cooperation sectors going forward.

The contents of this blog are for reference for investment decisions only, and investment decisions must be made under the individual's judgment and responsibility. In no event shall the information in this blog be used as evidence of legal liability for investment outcomes.