Geopolitical Crossroads: U.S.-South Korea Tensions and the Future of Foreign Direct Investment in the ROK

In the volatile landscape of 2025, South Korea stands at a geopolitical crossroads. As a linchpin in the U.S.-China tech rivalry and a global semiconductor powerhouse, the Republic of Korea (ROK) faces mounting pressures from U.S. trade policies, domestic political instability, and shifting investor priorities. These dynamics are reshaping foreign direct investment (FDI) flows and corporate strategies, with implications for multinational corporations (MNCs) and global capital.

Diplomatic Tensions and Trade Policy Shifts

Recent U.S. tariffs on South Korean exports—ranging from chip manufacturing equipment to steel—have intensified scrutiny of the ROK’s economic ties with Washington. The Trump administration’s 13.5% effective tariff rate on South Korean goods, while comparable to the U.S. average, has sparked concerns about long-term competitiveness [1]. Compounding this, the U.S. Commerce Department’s revocation of export waivers for South Korean firms operating in China has forced companies like Samsung and SK Hynix to navigate stricter approval processes for critical equipment purchases [1]. These measures, framed as part of broader efforts to counter China’s technological rise, have created operational uncertainties for South Korean firms central to global AI infrastructure.

Meanwhile, South Korea’s political landscape has added to the volatility. The suspension of President Yoon Suk Yeol and deepening societal polarization have eroded investor confidence, even as the government attempts to offset risks with cash incentives and regulatory streamlining [2]. This duality—between strategic geopolitical alignment with the U.S. and domestic governance challenges—has left MNCs recalibrating their risk assessments.

FDI Trends: Resilience Amid Uncertainty

Despite these headwinds, South Korea’s FDI landscape has shown surprising resilience. In Q1 2025, the country recorded $6.41 billion in pledged FDI, the second-highest quarterly total on record, though down 9.2% year-on-year [3]. Actual investments, however, surged by 26.4% to $3.51 billion, reflecting sustained demand for the ROK’s advanced manufacturing ecosystem [3]. Greenfield investment pledges hit a record $4.66 billion, underscoring confidence in sectors like AI and services [3].

Yet sectoral shifts reveal deeper trends. Manufacturing investments fell 24.5% to $2.33 billion, as firms hedged against U.S. tariff risks and rising labor costs [3]. Conversely, the services sector saw a 68.7% spike in actual FDI, signaling a pivot toward less capital-intensive models [3]. This divergence highlights how geopolitical and economic pressures are driving corporate strategies toward flexibility and diversification.

Corporate Responses and Strategic Alliances

South Korean firms are adapting to the new reality. Samsung and SK Hynix, for instance, have accelerated partnerships with U.S. tech allies to secure supply chains while complying with export controls [1]. Meanwhile, the ROK government has doubled down on its role as a U.S. technology ally, leveraging its AI and semiconductor expertise to strengthen Indo-Pacific ties [3]. These efforts aim to mitigate the impact of U.S. tariffs and China’s economic slowdown, though challenges remain in addressing regulatory opacity and chaebol dominance [2].

For MNCs, the calculus is complex. While the U.S.-Korea Free Trade Agreement (KORUS) provides a stable framework, heightened scrutiny of foreign investments in sensitive sectors—such as semiconductors—has increased compliance costs [4]. This mirrors global trends where national security concerns are reshaping FDI flows [2].

Investor Sentiment: A Delicate Balance

Investor sentiment remains mixed. The European Union’s 163.6% surge in pledged FDI to $1.49 billion in Q1 2025 suggests confidence in South Korea’s long-term fundamentals [3]. However, U.S. tariff negotiations have introduced volatility. A 10% tariff reduction on Chinese imports, for example, briefly boosted South Korean stocks by 1.15% as foreign investors recalibrated risk [2]. Such swings underscore the fragility of market confidence in an era of geopolitical brinkmanship.

Conclusion: Navigating the New Normal

South Korea’s FDI trajectory in 2025 reflects a nation balancing geopolitical loyalty with economic pragmatism. While U.S. tariffs and domestic instability pose risks, the ROK’s technological prowess and strategic partnerships offer a counterweight. For MNCs, the key lies in agility—leveraging South Korea’s open market while hedging against regulatory and geopolitical shocks. As the U.S.-China rivalry intensifies, the ROK’s ability to navigate these crosscurrents will determine its role as a global investment hub.

Source:[1] J.P. Morgan Global Research, US Tariffs: What's the Impact? [https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs][2] South Korea: New challenges [https://economic-research.bnpparibas.com/html/en-US/South-Korea-challenges-11/2025,51312][3] Foreign investors show confidence in Korea as FDI arrivals rise [https://www.koreaherald.com/article/10457424][4] Foreign direct investment reviews 2023: Korea [https://www.whitecase.com/insight-our-thinking/foreign-direct-investment-reviews-2023-korea]