Just one day before the scheduled implementation of a 25% reciprocal tariff on July 31, 2025, the governments of the U.S. and South Korea reached a sudden trade agreement, sending ripples through the domestic and international automotive industries. With the item-specific tariff on automobiles—previously announced at 25%—also being reduced to 15%, this places the cost burdens, global value chain strategies, and even the medium-to long-term industrial environment of finished-vehicle manufacturers at a critical inflection point.
 

 

The U.S. and South Korea have agreed to lower the reciprocal tariff on Korean imports to 15%  from  the  previously announced 25%, with the item-specific tariff on Korean automobiles also being reduced to 15%.1 In line with the negotiations, South Korea has committed to $350 billion in investments in the U.S. (including a $150 billion dedicated fund for cooperation in the shipbuilding industry) and the purchase of $100 billion worth of American energy, including LNG. While this agreement is significant in that it has partially alleviated trade uncertainties between the two nations, its actual effects may vary, as key details have not yet been specified and could be subject to differences in interpretation during the implementation phase. 
 

As mentioned earlier, the agreement adjusts the U.S. tariff rate on Korean automobiles and parts to 15%. This rate is now identical to that of other major automotive producers like Japan and the EU. However, compared to the era of the KORUS FTA, the tariff rate on Korean vehicles has increased by 15 percentage points from the previous 0% to 15%, whereas the rate for Japanese and EU vehicles has risen by 12.5 percentage points from 2.5% to 15%. Consequently, the tariff advantage that Korean vehicles previously enjoyed over their Japanese and EU counterparts has been eliminated. 

Meanwhile, the "reciprocal tariff" that the U.S. applies uniformly to Korean products is not applied redundantly when an item-specific tariff is already in place. Therefore, for automobiles and auto parts, which are subject to item-specific tariffs, it appears that the agreed-upon 15% tariff rate will be the final applicable rate, without the reciprocal tariff being applied. 

Impact on the Korean Automotive Industry 
(Improved Performance and Expansion of Local Production Strategies Expected Due to Reduced Tariff Costs)

With this tariff reduction, projections indicate that the annual tariff burden for Korean automakers such as Hyundai and Kia will decrease from a potential 10 trillion KRW under a 25% reciprocal tariff to approximately 6 trillion KRW. This burden is likely to be further reduced when combined with strategies to expand local production and increase sales prices. Therefore, as a result of this agreement, the projected performance of Korean automotive companies is expected to improve.

However,  some  concerns  have  been  raised  about  a  potential  decline  in  the  price competitiveness of Korean vehicles in the U.S. market, as the previous 2.5 percentage point tariff advantage over Japanese vehicles has disappeared. Contrary to these worries, analyses suggest that the competitiveness of Korean vehicles will not be diminished by this agreement. One analysis points out that the loss of the 2.5 percentage point tariff advantage  amounts  to  a  loss  of  only  about  $600  in  additional  revenue  per  vehicle; therefore, applying the same tariff rate as Japanese vehicles is unlikely to inflict serious damage on the competitiveness of Korean vehicles in the U.S. market. 

Furthermore, the local U.S. production ratio of the "Big Three" Japanese automakers (Toyota, Honda, Nissan) stands at 63% of their U.S. sales, while the ratio for Hyundai and Kia is only 42.5%. As a result, Korean companies have a higher proportion of vehicles subject  to  tariffs.  Accordingly,  the  positive  impact  on  performance  from  this  tariff agreement  is  predicted  to  be  greater  for  Korean  companies  than  for  their  Japanese counterparts. 

On the other hand, although the item-specific tariff on automobiles has been lowered, the confirmation of a high tariff rate of 15% is expected to intensify the pressure on automakers and parts suppliers to increase local production in the U.S. to minimize their tariff burden. 

In  the  short  term,  this  U.S.-Korea  trade  agreement  has  significantly  contributed  to stabilizing profits and improving market sentiment for the domestic automotive and related  industries.  At  the  same  time,  it  suggests  that  long-term,  corporate-level changes—such as those related to local production in the U.S., sales strategies, and supply chain diversification—are inevitable. With key details still requiring coordination and  numerous  variables  in  the  upcoming  implementation  process,  companies  and investors need to closely monitor policy developments and industry trends.

LIN’s Mobility Team is prepared to offer prompt and expert assistance in navigating these regulatory changes, as well as in matters of litigation, advisory services, and corporate strategy development.