South Korean-U.S. Bilateral Tensions and the Implications for FDI Flows in the EV Sector

The U.S.-South Korea relationship in the electric vehicle (EV) sector has become a focal point of geopolitical and regulatory turbulence in 2025, with cascading implications for foreign direct investment (FDI). Recent developments—including U.S. immigration raids at South Korean EV battery plants, Trump-era tariffs, and policy uncertainty surrounding the Inflation Reduction Act (IRA)—have created a volatile environment for cross-border capital allocation. This analysis examines how these tensions are reshaping FDI dynamics, leveraging data from trade agreements, corporate strategies, and geopolitical risk assessments.

Geopolitical Incidents and Investor Confidence

The September 2025 immigration raid at the Hyundai-LG battery plant in Georgia, which resulted in the arrest of 475 South Korean workers, marked a turning point in U.S.-South Korea relations. According to a report by The New York Times, the operation—led by U.S. Immigration and Customs Enforcement (ICE)—exposed systemic challenges in labor compliance and diplomatic trustUS Plant Raid Jolks South Korea and Stirs Investor Anxiety^[1]. South Korean firms, including LG Energy Solution and Hyundai, temporarily suspended operations and business travel to the U.S. in responseICE's Raid on Korean Workers and Trump's Clashing ...^[2]. This incident not only disrupted a $7.6 billion joint venture but also signaled to investors the fragility of U.S. regulatory frameworks for foreign manufacturing.

The fallout extended beyond operational delays. South Korea's Ministry of Trade expressed concerns that such enforcement actions could deter future investments, particularly in labor-intensive sectors like EV battery productionTrump's Immigration Crackdown on South Korean Workers at ...^[3]. Data from the U.S. Department of Commerce reveals that Asian FDI into the U.S. declined by 40% in 2024, with South Korea accounting for the largest drop in new spendingSouth Korea leads Asian foreign investment decline into US^[4]. While the July 2025 trade deal—a 15% tariff on South Korean goods in exchange for a $350 billion investment pledge—aimed to stabilize relationsTrump Forges New Trade Path with South Korea: 15% Tariff and ...^[5], the raid underscored lingering risks for capital-intensive projects.

Tariff Policies and Capital Reallocation

Trump's expansive tariff regime has further complicated FDI flows. The administration's 145% tariff on Chinese EV components, including lithium-ion batteries, indirectly pressured South Korean firms to realign supply chainsUS electric vehicle market amid trade and policy uncertainty^[6]. South Korea's EV sector, already reliant on U.S. federal incentives under the IRA, now faces dual challenges: navigating Trump's “America First” trade policies and mitigating exposure to potential IRA rollbacks.

A report by the U.S. International Trade Commission estimates that a 20% increase in global tariffs on Chinese EVs could boost South Korean EV exports by 10%South Korean EV manufacturers gain traction as Chinese ...^[7]. However, this optimism is tempered by political uncertainty. U.S. lawmakers have repeatedly voted to limit IRA spending, with Trump's proposed 10% tariff on EV imports adding another layer of riskTrump's EV Tariffs Divide Carmakers and Consumers over ...^[8]. For instance, nearly half of IRA-eligible EVs in the U.S. use batteries from South Korean firms like LG Energy Solution and SK OnSouth Korean EV manufacturers gain traction as Chinese ...^[9]. If these incentives are curtailed, South Korean investments in U.S. battery manufacturing could see diminished returns.

Regulatory Uncertainty and Strategic Adjustments

South Korean firms are recalibrating their strategies to mitigate regulatory volatility. The country's $350 billion U.S. investment plan, announced in July 2025, includes a $150 billion focus on EVs, semiconductors, and clean energySouth Korea Commits $150 Billion in U.S. Investments as ...^[10]. However, this commitment comes with caveats. South Korean policy institutions are prioritizing supply chain diversification, reducing dependencies on Chinese materials, and adjusting joint ventures to meet IRA requirementsSouth Korea's $350 Billion U.S. Investment Plan to Be ...^[11]. For example, firms with operations in China must restructure ownership by 2026 to qualify for U.S. subsidies—a transition period that introduces operational complexitySouth Korean EV manufacturers gain traction as Chinese ...^[12].

Meanwhile, Trump's immigration crackdown has forced companies to rethink labor strategies. Many South Korean workers in U.S. EV plants hold visas that prohibit manual labor, creating a mismatch between workforce needs and legal complianceUS immigration officials raid Hyundai-LG Energy factory in ...^[13]. This has led to delays in construction timelines and increased costs, as firms scramble to hire domestic labor or relocate operations.

Quantifying the Impact

While precise metrics on FDI shifts remain elusive, trends suggest a recalibration of capital flows. The U.S. Report 2025 by fDi Intelligence notes that South Korean investments in the EV sector have slowed compared to 2023, with firms favoring regional hubs in Southeast Asia over the U.S. due to regulatory clarityThe US Report 2025 - fDi Intelligence^[14]. Conversely, the EU and China have seen a 12% and 8% increase in South Korean FDI, respectively, as companies hedge against U.S. policy risksCentral Europe-East Asia EV nexus Tracking Chinese, South Korean and Japanese electric vehicle and battery investment in the V4 countries^[15].

Conclusion

The interplay of geopolitical incidents, tariff policies, and regulatory uncertainty has created a fragmented landscape for U.S.-South Korea EV sector FDI. While strategic investments like the $350 billion pledge signal long-term optimism, short-term volatility remains high. Investors must weigh the risks of U.S. policy shifts against the potential rewards of aligning with South Korea's green energy ambitions. As the Supreme Court prepares to review the constitutionality of Trump's tariffs in November 2025Trump tariffs live updates: US-South Korea trade talks stall as ...^[16], the coming months will be critical in determining whether this bilateral relationship can stabilize—or further unravel.