South Korean Auto Parts Firms Face Crossroads as U.S. Tariffs Upend Supply Chains

The U.S. imposition of 25% tariffs on South Korean auto parts, effective May 3, 2025, marks a seismic shift in trans-Pacific trade relations, forcing Korean manufacturers to confront a stark choice: absorb steep costs, relocate production to North America, or risk losing their largest export market. The tariffs, part of President Trump’s Section 232 national security strategy, target a $93.5 billion U.S. auto parts trade deficit and aim to boost domestic manufacturing. For South Korean firms, however, the stakes are existential.

The Tariff Regime: A Game-Changing 10x Increase in Costs

Prior to the tariffs, South Korean auto parts faced an average 2.5% duty under the U.S.-Korea Free Trade Agreement (KORUS FTA). The new 25% levy, applied to over 150 HTS codes covering engines, batteries, and electronics, represents a tenfold cost surge. Unlike U.SMCA members Canada and Mexico, South Korean exporters cannot reduce tariffs by certifying U.S. content until May 2025—meaning the full 25% applies to the entire value of their shipments.

Data shows exports peaked at $30 billion in 2023 but are projected to fall 15-20% by 2025.

Survival Strategies: Relocation, Diversification, or Cost Cutting?

South Korean firms are scrambling to mitigate impacts:
1. Production Shifts: Hyundai Mobis and Magna International are accelerating plans to build North American plants. Hyundai’s $5.5 billion U.S. battery cell factory in Georgia—part of a $10.7 billion U.S. investment pledge—aims to qualify for USMCA exemptions.
2. Government Backing: Seoul’s 3 trillion won ($2 billion) liquidity fund and tax breaks for electric vehicle (EV) purchases aim to cushion automakers like Kia and LG Energy Solution, whose global EV battery market share dropped 5.5 percentage points to 17.7% in early 2025.
3. Market Diversification: Exports to the UAE, Mexico, and Southeast Asia are expanding, with Seoul offering export vouchers and insurance.

Hyundai’s shares fell 18% in 2024 amid tariff fears, while North American rivals like Ford rose 12%.

The Supply Chain Ripple Effect

The tariffs threaten to disrupt global automakers reliant on South Korean components. U.S. firms like General Motors and Tesla source critical parts—such as battery modules and semiconductors—from Korean suppliers. While Tesla’s vertically integrated model insulates it somewhat, smaller EV startups like Rivian face higher costs. Meanwhile, South Korea’s EV battery giants, SK On and LG Energy Solution, are racing to secure U.S. production capacity to avoid tariffs.

China dominates at 60%, while South Korea’s share drops to 18%—its lowest since 2018.

Geopolitical Tensions Complicate Negotiations

South Korea’s government faces a diplomatic tightrope. Acting President Han Duck-soo has deployed trade envoys to Washington, but U.S. demands—including increased payments for驻韩美军—complicate negotiations. The tariffs also risk fracturing the KORUS FTA, which had slashed bilateral auto tariffs to near-zero since 2012.

Conclusion: A Crucial Crossroads for Korean Manufacturing

The tariffs force South Korean auto parts firms to choose between short-term pain or long-term structural change. Companies with U.S. production footprints, like SK On (which began U.S. battery cell production in 2024), may thrive. Others face a stark calculus: absorb 25% margins or relocate.

The stakes are massive. South Korea exported $34.7 billion in vehicles to the U.S. in 2024—18.7% of total exports. If firms pivot successfully, they could strengthen their foothold in North America’s EV boom. Failure could accelerate their decline in a sector where U.S. automakers already dominate domestic content requirements.

As Seoul’s emergency measures show, the path forward hinges on agility. Investors should watch for signs of production relocation, U.S. market share shifts, and tariff-driven cost pass-through to consumers. The next 12 months will determine whether South Korea’s auto parts firms emerge resilient or become collateral damage in a escalating trade war.