Korean Economy Struggles with Weak Domestic Demand and U.S. Tariff Uncertainty

The Korean economy is currently in a challenging state, reflecting sluggish domestic demand and increasing uncertainties in the international arena. According to the Korea Development Institute (KDI), a state-run think tank, these factors are amplified by the United States’ aggressive tariff policies, which are having a cascading effect on various sectors of the Korean economy.

The KDI’s latest monthly economic assessment indicates that the Korean economy is stagnating, similar to its performance in previous months. Notably, the construction sector remains particularly depressed, while manufacturing is experiencing a discernible downturn. This situation is contributing to a notable decline in production growth and highlights worrying trends that could hinder economic recovery.

Even though the global market has seen a surge in chip sales, which is typically a stronghold for Korean exports, the overall export figures to the United States have shown signs of weakness. The automobile industry, in particular, has been hurt by the U.S.’s tariff measures, which are under the spotlight as they significantly affect production levels and trading dynamics.

Consumer sentiment appears to be slowly recovering, hinting at potentially improved domestic demand conditions. However, the KDI notes that trade-related uncertainties continue to loom large, particularly with the looming expiry of the U.S.’s mutual tariff suspension. As of now, the Korean government is focused on navigating these rough waters, hoping for a favorable resolution to the trade tensions.

In June, Korea’s exports recorded a 4.3 percent increase compared to the previous year, hitting $59.8 billion. This uptick can largely be attributed to heightened global demand for semiconductors. Yet, when it comes to exports directed towards the U.S., there was a slight dip of 0.5 percent, amounting to $11.24 billion. Such trends serve as a reminder of the complexities and vulnerabilities inherent in international trade relations.

The narrative surrounding tariffs has been particularly intensified by actions taken by the Trump administration. In April of this year, President Trump began imposing reciprocal tariffs on various partner nations, including a steep 25 percent duty on Korean goods. Although implementation of these tariffs was put on hold temporarily to allow for bilateral negotiations, the situation remains fluid, and parties are expected to revisit discussions by July.

Recently, Trump indicated that his administration would extend these tariff measures beyond the initial pause, effectively imposing a 25 percent tariff on all Korean products starting August 1. This move signals a determination to hold firm while allowing more time for negotiation aimed at reaching a potential trade deal.

Additional tariff structures are also in place, including a baseline tariff of 10 percent, along with 25 percent duties specifically targeting steel, aluminum, and automotive-related products. These ongoing trade tensions and tariffs are shaping the financial landscape for many Korean businesses, forcing adaptive strategies and, in some cases, difficult decisions about future investments.

The broader industrial climate is reflective of these challenges, with industrial production having declined by 1.1 percent month-on-month as of May. This downturn marks the second consecutive month of decline, demonstrating the sluggish performance within various sectors. Similarly, facility investment dropped 4.7 percent over the same period, signaling further declines in capital spending over the last three months.

Retail sales, often viewed as a barometer of private spending, showed no change during this period, adding another layer of uncertainty. These factors collectively present a challenging economic environment in Korea, as policymakers and industry leaders attempt to navigate the intricacies of both domestic and international economic pressures.

**Source:** Yonhap