South Korea's Free Trade Agreement Could Shield It From Trump's Tariffs

South Korea's Free Trade Agreement Could Mitigate Impact of US Tariffs

Economists at major investment banks believe that South Korea's free trade agreement (FTA) with the United States could help mitigate the country's exposure to reciprocal tariffs threatened by President Donald Trump.

Trump imposed tariffs on all imports of steel and aluminum, effective March 12, 2025. South Korean officials have also warned about potential risks from tariffs on Chinese goods and restrictions on car and semiconductor imports.

However, economists at Barclays and Citi believe that South Korea's FTA may limit the impact of these tariffs. Among the top 15 US trading partners, South Korea has the second-highest tariff rate after India. However, nearly all of these tariffs were eliminated by the FTA, which was first signed in 2007 and revised in 2018 during Trump's first term.

Barclays economists noted that the impact on Korea is even more negligible than previously estimated, considering the near-zero Korea-US tariff rates. They added that tariff rates stood at 0.002% and 0.003% on US exports to South Korea and vice versa.

Despite concerns about tariffs dominating global financial markets, South Korea's benchmark KOSPI has risen 1% this week, trading around its highest level since early November. It has outperformed the emerging Asian market, which has fallen 0.5%, boosted by optimism that the domestic impact of tariffs would be less severe than initially feared.

Citi economists believe that the United States could potentially impose reciprocal tariffs on specific South Korean goods related to vegetables, fruits, animal products, and food products. However, they believe that the direct negative impact on South Korea's exports would be limited, as the share of food-related Korean exports to the United States is only 0.3% of Korea's total exports or 1.5% of Korea's exports to the US in 2024.

South Korea is among 20 countries that have comprehensive free trade agreements with the United States. In the Asia-Pacific region, these include Australia and Singapore, while the agreement with Japan focuses on critical minerals.

On Wednesday, Acting President Choi Sang-mok said that South Korea would respond pre-emptively to any domestic impact from US tariffs by preparing support measures for potentially affected firms and seeking to diversify export markets.