South Korea Approves 31.8 Trillion Won Budget to Shield Economy from US Trade Risks

South Korea's Parliament approved a 31.8 trillion won ($23.3 billion) supplementary budget on Friday. This move is part of President Lee Jae Myung’s efforts to stimulate a slowing economy and protect key industries from potential trade disruptions with the United States. The supplementary budget, which was passed after intense debates and an opposition boycott, exceeds the government’s initial proposal of 30.5 trillion won. Legislators added extra funding for direct cash handouts and emergency aid to struggling industries.

The Finance Ministry emphasized the importance of implementing more efficient support measures in response to the dual risks of a domestic economic slowdown and international shocks. The new relief package comes at a pivotal moment as Seoul and Washington face a July 9 deadline to resolve outstanding issues in the revised US-Korea Free Trade Agreement. US President Donald Trump has threatened to impose duties on imports from major trading partners, including South Korea, if the negotiations fail.

Any escalation in tariffs from 10% to 25% would significantly impact Korean exports, particularly in sectors such as automobiles, batteries, and semiconductors, which are crucial to the economy. President Lee's administration is also addressing a revenue gap with a stimulus budget that includes a 10.3 trillion won fund to compensate for tax revenue shortfalls. The government has faced reduced corporate tax collections due to poor earnings in key sectors like manufacturing and retail, along with decreased consumer demand, which has further strained public finances.

The government plans to fund this primarily through borrowing, with the majority of the funds coming from new sovereign bond issuance, spending cuts, and reallocating existing budget lines. Low-income families and struggling businesses will receive cash coupons and targeted relief. Additional funds have been allocated for industrial innovation, export assistance, and job creation. Despite opposition lawmakers boycotting the legislation, citing a lack of long-term vision and transparency, the ruling party successfully passed the bill through parliament. This marks a significant early victory for President Lee, who was sworn in last month following a snap election win.

An impending trade deadline has heightened the urgency. A temporary agreement that has largely protected Korean exports from increased American tariffs is set to expire soon. Without a new agreement, tariffs on targeted goods would automatically rise to 25%. President Trump has indicated that he may issue unilateral tariff notices to US trading partners as early as this weekend, leaving Seoul with little time to respond or negotiate concessions. South Korea’s trade minister is traveling to Washington in a last-ditch effort to avoid a worst-case scenario.

President Lee described the trade talks as frustrating and opaque, noting that it is unclear what each side wants. Failure to reach an agreement could result in significant near-term losses for Korean exporters, diminished global competitiveness, and potential layoffs. With over 40% of GDP dependent on exports, South Korea is highly vulnerable to external shocks. An overnight increase in duties could erode margins in various industries, including automotive, electronics, steel, and shipbuilding. Market analysts warn that any short-term disruption could slow GDP growth for the year and shake investor confidence.

The political stakes are also high. During his presidential campaign, Lee emphasized economic reform and inclusive growth. His administration's credibility could be undermined early in his tenure if he fails to mitigate the impact of US tariffs. The supplementary budget aims to provide a financial cushion against potential trade disruptions, ensuring that vital industries and the broader economy remain resilient in the face of external pressures.