The U.S.-South Korea Trade Stalemate and Implications for Cross-Border Investment Risk

The U.S.-South Korea trade relationship, once a model of economic integration, has become a battleground of competing priorities in 2025. As the Trump administration imposes a 15% tariff on South Korean imports—a compromise from an initial 25% proposal—Seoul has responded with a $350 billion pledge for U.S.-based investments and a $100 billion commitment to U.S. liquefied natural gas purchases [1]. Yet, beneath these figures lies a deeper structural tension: the collision of U.S. protectionist instincts with South Korea’s precarious balancing act between Washington and Beijing. For investors, this stalemate raises urgent questions about the risks of large-scale foreign direct investment (FDI) in politically volatile trade partnerships.

Economic Risks: Tariffs, Semiconductors, and Structural Barriers

The U.S. semiconductor industry has become a focal point of this trade friction. South Korean firms like Samsung and SK Hynix have avoided steep 100% tariffs by investing in U.S. manufacturing facilities, such as Samsung’s Texas plant and SK Hynix’s Indiana packaging site, under the CHIPS and Science Act [2]. While these moves align with U.S. strategic goals of reshoring critical industries, they also expose the fragility of global supply chains. A Brookings Institution report notes that South Korea’s semiconductor trade with China has grown due to reduced RCEP tariffs, creating a parallel dependency that complicates its alignment with U.S. export controls [3].

Structural barriers further complicate FDI. The 2025 National Trade Estimate Report highlights South Korea’s offset practices in defense procurement, where foreign contractors face mandatory technology transfers or joint production obligations for contracts exceeding $10 million [4]. Such policies, while framed as reciprocity, risk deterring U.S. firms from participating in South Korea’s defense sector. Meanwhile, digital trade barriers—such as cross-border data restrictions and amendments to the Personal Information Protection Act—threaten to disadvantage foreign tech firms, including U.S. cloud providers [4].

Geopolitical Risks: Alliances, Elections, and Strategic Uncertainty

South Korea’s geopolitical positioning adds another layer of risk. The Yoon Suk-yeol administration’s “global pivotal state” strategy seeks to de-risk economic ties with China while deepening security cooperation with the U.S. and Japan. However, domestic political instability—exemplified by Yoon’s impeachment and an impending snap election—introduces uncertainty. A potential shift to the opposition Democratic Party of Korea (DPK), which has historically criticized U.S. policies on North Korea and Japan, could strain the alliance [5].

The U.S. side is no less volatile. Trump’s return to the White House has intensified pressure on South Korea to absorb higher defense costs and accept trade terms favorable to U.S. interests. A Carnegie Endowment analysis warns that this could erode South Korea’s economic sovereignty, particularly if U.S. military commitments to the Korean Peninsula are perceived as waning [6]. For investors, the risk of abrupt policy shifts—whether in tariffs, defense burden-sharing, or supply chain realignments—poses a significant downside.

Case Studies: Semiconductor Reshoring and Defense Delays

The semiconductor sector illustrates the duality of opportunity and risk. Between October 2024 and April 2025, South Korean firms contributed $102.6 billion to U.S. semiconductor reshoring efforts, driven by the CHIPS Act and fears of Chinese competition [7]. Yet, this reshoring also reflects a defensive strategy to mitigate U.S. export controls and Chinese trade restrictions on critical materials. The result is a fragmented global supply chain, where firms must navigate a patchwork of geopolitical demands.

In the defense sector, cross-border investments have faced delays due to U.S. “Buy American” policies. A 2024 probe by the Government Accountability Office into the U.S.-South Korea defense trade pact highlights regulatory and political hurdles [8]. These delays underscore how trade policy adjustments can disrupt long-term investment plans, particularly in capital-intensive industries.

Implications for Investors

For investors, the U.S.-South Korea stalemate underscores the need for scenario planning. Large-scale FDI in politically volatile partnerships requires not only economic due diligence but also geopolitical risk assessment. South Korea’s semiconductor and defense sectors, while strategically vital, are subject to sudden shifts in U.S. policy and domestic politics. Diversification of supply chains and hedging against currency or regulatory risks may become essential.

Conclusion

The U.S.-South Korea trade stalemate is a microcosm of broader global tensions. While both nations share strategic interests in countering China’s rise, their divergent economic priorities and domestic political dynamics create a volatile environment for cross-border investment. For investors, the lesson is clear: in an era of geopolitical fragmentation, the risks of large-scale FDI in politically sensitive partnerships demand rigorous scrutiny—and a willingness to adapt to an ever-shifting landscape.

Source:
[1] The United States and South Korea Are Allies and Trade Partners [https://www.cfr.org/article/united-states-south-korea-allies-and-trade-partners-summit-lee-trump]
[2] South Korean chipmakers avoid US tariffs through domestic investments [https://dig.watch/updates/south-korean-chipmakers-avoid-us-tariffs-through-domestic-investments]
[3] Japan and South Korea's engagement in the Chinese ... [https://www.sciencedirect.com/science/article/pii/S2667111524000094]
[4] 2025 National Trade Estimate Report on Foreign ... [https://thecodit.com/blog/national-trade-estimate-report]
[5] How will South Korea navigate US-China competition in ... [https://www.brookings.edu/articles/how-will-south-korea-navigate-us-china-competition-in-2025/]
[6] Trump Isn't Helping Korea's Alliance Anxieties [https://carnegieendowment.org/emissary/2025/04/south-korea-trump-100-days-nuclear-weapons-trade-tariffs?lang=en]
[7] Restructuring the Global Semiconductor Supply Chain [https://www.jusdaglobal.com/en/article/global-semiconductor-supply-chain-trends-challenges-opportunities/]
[8] US-South Korea defense trade pact delayed amid 'Buy ... [https://subscriber.politicopro.com/article/2024/06/us-south-korea-defense-trade-pact-delayed-amid-buy-american-concerns-00163861]