U.S. Demands vs. South Korea's Reserves: Trade Pact on the Brink

The U.S. and South Korea face mounting pressure to resolve their stalled tariff and investment agreement, as the economic toll on small and medium-sized enterprises (SMEs) intensifies and diplomatic tensions threaten the stability of their long-standing alliance. Recent data and industry reports highlight the urgent need for a revised framework to mitigate the cascading impacts of protectionist policies and unresolved trade disputes.

South Korean SMEs, which constitute the backbone of the country's export-driven economy, are grappling with severe disruptions caused by U.S. tariff policies. Companies in sectors ranging from industrial fasteners to copper products report sudden duty hikes-from zero to 50%-disrupting cash flows and inventory management. The Korea Trade-Investment Promotion Agency (Kotra) recorded 7,722 tariff-related consultations between February and September 2025, with 5,383 focused on classification uncertainties under Section 232 of the U.S. Trade Expansion Act. These inconsistencies, compounded by abrupt policy shifts following President Donald Trump's tariff announcements, have left SMEs in a regulatory limbo, unable to secure predictable export conditions Korea Joongang Daily^[1].

The unresolved $350 billion investment fund, a cornerstone of the U.S.-South Korea trade negotiations, remains a critical sticking point. The U.S. has insisted on replicating the terms offered to Japan, which includes a 50-50 profit-sharing model and a rigid timeline for fund disbursement. South Korean officials, however, argue that such terms are economically unsustainable for their smaller economy, where the proposed investment equals 83.3% of foreign exchange reserves. The disparity in economic capacity-South Korea's $350 billion investment is equivalent to 83.3% of its foreign exchange reserves, compared to Japan's 41.6%-has fueled negotiations deadlocks, with Seoul refusing to accept conditions that would destabilize its financial markets .

The economic consequences of prolonged uncertainty are already materializing. South Korea's exports, which accounted for over 40% of GDP in 2024, contracted by 0.1% year-on-year in Q1 2025, according to the Korea Economic Institute of America. Adjusted for working-day differences, September 2025 exports fell 6.1% year-on-year, underscoring the strain of tariffs on key industries like automobiles and semiconductors. Hyundai and Kia, which face a 25% tariff on U.S. exports compared to 15% for Japanese rivals, have seen cumulative auto exports to the U.S. decline by 15.1% year-to-date .

Diplomatic tensions have further complicated negotiations. The August 2025 ICE raid on a Hyundai-LG battery plant in Georgia, which detained 300 South Korean workers, sparked rare cross-partisan outrage in Seoul and strained alliance trust. While U.S. officials expressed regret and proposed visa reforms, the incident underscored the fragility of U.S.-South Korea economic cooperation. South Korean firms have since delayed or suspended specialized worker deployments, citing fears of similar enforcement actions .

Experts urge both governments to prioritize SME support and clarify tariff exemptions to stabilize supply chains. Lee Geum-ha of Kotra's North American Regional Headquarters notes that U.S. consumers may eventually pressure policy shifts due to higher costs from tariffs. In the interim, Kwon Ji-won, a customs broker, recommends applying for U.S. customs binding rulings and adjusting contract terms to reflect tariff differentials Korea Joongang Daily^[1].

The U.S. and South Korea must reconcile their divergent economic priorities to preserve the alliance's strategic and economic value. Failure to finalize the tariff agreement and investment framework risks deepening industry volatility, eroding trust in bilateral cooperation, and undermining the broader U.S. strategy to counter China's economic influence through allied partnerships.