Navigating South Korea-U.S. Trade Crossroads: Near-Term Tariff Risks and Long-Term Equity Gains

The U.S.-South Korea trade relationship stands at a crossroads, with stalled negotiations over tariffs and geopolitical alliances shaping the trajectory of Korean equities. While near-term risks loom due to unresolved trade disputes, long-term strategic partnerships in semiconductors and defense are creating opportunities for investors. Here's how to navigate this complex landscape.

Near-Term Tariff Risks: Delays and Uncertainty

South Korea's domestic political constraints have pushed back the possibility of a U.S. trade agreement into 2026, with Vice Minister Park Sung-taek calling a late 2025 deal “theoretically impossible.” This delay leaves key sectors exposed:

• Automotive Sector: U.S. Section 232 tariffs (25% on light vehicles) remain in place, though exempt for USMCA-compliant goods. South Korea's automotive exports face headwinds, with companies like Hyundai and Kia bracing for compliance costs.
• Semiconductors: New Section 232 investigations into semiconductors and critical minerals could trigger fresh tariffs. Meanwhile, U.S. courts have struck down some Trump-era tariffs, but appeals keep the threat alive.

The uncertainty is weighing on investor sentiment. While South Korea's KOSPI index rose to an 11-month high in June :

...near-term volatility remains tied to the July 8 deadline for resolving non-tariff barriers. A failure here could reignite fears of broader trade sanctions.

Long-Term Strategic Partnerships: The Defense and Tech Boom

While tariffs linger, U.S.-South Korea alliances in semiconductors and defense are driving sustained equity gains. Key sectors to watch:

1. Semiconductors: The CHIPS Act and South Korea's Dominance

The U.S. CHIPS Act and South Korea's own K-CHIPS Act are fueling investment in advanced chip manufacturing.

• SK Hynix: Surpassed Samsung in Q1 2025 to claim the DRAM market lead (36% share) thanks to its HBM3E memory chips for AI.
• Samsung: Plans a $200 billion U.S. investment in semiconductor facilities, leveraging its 10-nanometer production edge.

2. Defense: Hanwha's Global Surge

South Korea's defense exports are booming, with Hanwha Aerospace leading the charge:

• K9 Howitzer Contracts: Poland's $6 billion purchase of 368 K9 units and Australia's $1 billion deal for advanced artillery systems have propelled Hanwha's stock up 175% in 2024.
• U.S. Partnerships: Hanwha's Philly Shipyard acquisition (2024) and U.S. Navy maintenance contracts solidify its role as a “critical technology wingman.”

Investment Strategy: Play the Long Game, Hedge the Risks

Core Positions:
- Semiconductors: Buy SK Hynix (000660.KS) for its DRAM leadership and Samsung Electronics (005930.KS) for its AI chip partnerships. Both benefit from U.S. policy tailwinds.
- Defense: Hanwha Aerospace (054620.KS) remains a high-risk, high-reward bet due to geopolitical demand.

Defensive Plays:
- Consumer Staples: Lotte Chemical (006400.KS) and Samsung Biologics (207940.KS) offer stability amid macroeconomic headwinds.

Avoid Until Trade Clarity:
- Steel/Automotive: POSCO (005490.KS) and Hyundai Motor (005380.KS) face tariff risks until July 8.

Risks to Monitor

• U.S. Tariff Expansion: A Section 232 semiconductor tariff could slash SK Hynix's margins.
• Geopolitical Tensions: China's chip advances (e.g., SMIC's wafer capacity) and Japan's Rapidus (2nm chips by 2027) challenge South Korea's leadership.
• Domestic Stagnation: South Korea's Q1 GDP contraction (-0.2%) underscores weak domestic demand.

Conclusion: A Dual-Edged Market

South Korea's equities are caught between near-term tariff risks and long-term strategic upside. Investors should prioritize semiconductor and defense plays while hedging with defensive stocks. The July 8 deadline is critical—if resolved, it could unlock a sustained rally. If not, volatility will dominate. For now, the chips (and K9s) are down, but the game isn't over.

Invest wisely.