South Korea Navigates Tariff Hurdles as Chip Exports Soar

South Korea’s exports rose 1.3% in August from the previous year, according to customs data, marking a slowdown from the 5.9% increase recorded in July. The growth, though modest, reflects the resilience of the country’s export sector amid lingering concerns over U.S. tariffs and global demand trends. Exports were driven by strong shipments of semiconductors and automobiles, which partially offset the negative impact of the 15% tariff increase on certain goods imposed by Washington in late July. On a working-day adjusted basis, export growth rebounded to 5.8%, similar to the previous month’s performance. Meanwhile, imports fell 4.0% year-over-year, leading to a trade surplus of $6.5 billion in August [1].

The export gains were uneven across markets. Exports to the U.S. fell by 12.0% in August, the steepest decline since May 2020, following the implementation of the new tariffs. However, shipments to China dropped only slightly by 2.9%, while exports to Southeast Asia surged by 11.9%. Notably, exports to China Taiwan increased by 39.3%, driven by robust chip demand in the region [2]. By product category, semiconductor exports saw the strongest growth, rising 27.1% year-on-year, while auto exports gained 8.6%. Energy-related exports, including petroleum and petrochemicals, declined by 4.7% and 18.7% respectively, reflecting weaker global demand [1].

Despite the short-term support from the export upturn, officials remain cautious about the longer-term outlook. The Bank of Korea highlighted that the negative effects of the U.S. tariffs may become more pronounced in future years, especially as front-loaded deliveries ease and cost pressures mount. Governor Rhee Chang Yong noted that the upturn in the semiconductor cycle has lasted longer than expected, and if export momentum continues, it could provide additional upside for the economy. However, he also emphasized that tariffs could weigh heavily on business confidence and broader economic activity [1].

In response to the economic pressures, South Korea proposed a 2026 budget of 728 trillion won ($522 billion), representing an 8.1% increase from the current year. The budget is expected to include a significant boost in defense spending, with the defense ministry requesting an 8.2% increase in its 2026 budget to 66.29 trillion won. This marks the largest annual increase since 2019 and includes funds for advanced weapons acquisition, next-generation fighter jet development, and increased compensation for junior officers. The government also plans to issue a record 232 trillion won ($167 billion) in bonds to finance the budget, as it seeks to strengthen the country’s fiscal role amid demographic challenges and rising defense commitments [1].

The Bank of Korea, while maintaining its policy rate at 2.5%, has raised its 2025 growth forecast to 0.9% and its inflation outlook to 2.0%. The central bank cited contained inflation and modest economic growth but warned of potential risks from rising household debt and soaring housing prices in Seoul. Officials also emphasized the need for continued fiscal support, as South Korea faces mounting social spending, demographic headwinds, and the impact of U.S. trade policies on its export-dependent economy [1].

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[1] South Korea's exports hold steady on strong chips and ... (https://www.cryptopolitan.com/south-koreas-exports-hold-steady/)

[2] U.S. tariffs hit South Korea exports in August, growth slows ... (https://investinglive.com/news/us-tariffs-hit-south-korea-exports-in-august-growth-slows-sharply-to-13-20250901/)