Following a pattern observed with other trading partners in Asia, the United States reached an agreement in late July with South Korea to reduce the ‘reciprocal’ tariff rate levied on Korean goods from 25% to 15%¹. Given its security dependencies on the US military umbrella, a relatively high degree of export dependency on the US market², and the fact that it runs a persistent trade surplus in goods with the US, South Korea had more reasons than most to reach a deal.

South Korea was the US’ sixth largest trading partner in 2024, running a surplus of around US$66 billion³. Major exports include vehicles, machinery, and electrical or electronic equipment, all critically important to the Korean economy⁴. Yet a core component of the agreement — the US demand for South Korea to invest US$350 billion into the US — became a major obstacle to its implementation. In short, South Korea balked the scale of the financial commitment and found that its space for strategic maneuvering was highly constrained. Korea’s dilemma, then, was how to secure a reduction in the tariff rate while addressing the demand for investment in the US. While Korea wrestled with this dilemma, tariffs on Korea auto exports, accounting for approximately one third of all exports by value, remained at 25% putting the sector at a competitive disadvantage.

As deeper structural changes in trade and investment relations drive the emerging new world order between the US and its closest allies in the region, geoeconomics can turn friendships transactional or even weaponized, and strategy must evolve.

From geopolitics to geoeconomics

South Korea is inextricably locked into the US security architecture. The alliance between the two countries stems from the Korean War (1950-53) and “serves as a linchpin for security and stability in the Indo-Pacific.”⁵ South Korea faces both conventional and nuclear threats across its border in North Korea, which have been amplified by the deepening military ties between Moscow and Pyongyang. For Seoul, therefore, maintaining the security alliance with Washington is a cornerstone of its grand strategy.

Along with a strategic pivot away from China in recent years, this geopolitical reality affords Seoul little leeway to resist demands from its primary security patron. While previous US administrations sought to compartmentalize security and economic relations, President Trump has instead sought to leverage South Korea’s security dependencies to secure what he terms a more ‘reciprocal’ and ‘balanced’ trade relationship.

This shift in US policy explicitly links trade and investment relations with security guarantees. It is geoeconomic in that it is a clear example of the “application of economic means of power by states so as to achieve geostrategic objectives”⁶. Allies are expected to both increase their own spending on defense and do more to defray the costs to the US of deploying troops in the region. At the same time, Trump is deploying tariffs in an attempt to reduce the chronic US trade deficit, address market access concerns, and stimulate inward direct investment to the US. In response, Seoul chose a path of pragmatic appeasement rather than confrontation. Unlike China, Europe, and Canada, which met Trump's actions with varying degrees of resistance and retaliation, South Korea acted proactively to seek a solution to lower US tariffs without criticizing its ally or violating the existing US-Korea Free Trade Agreement (KORUS FTA).

The outcome was a framework agreement reached on July 30, 2025, which reduced the threatened tariff rate to 15%, matching the terms offered to Japan and the European Union, and lowering the sectoral tariff on automobiles and auto parts to 15%. The price paid for this relief was the demand for Korea’s investment commitment of US$350 billion.

Anatomy of the US$350 billion pledge

The proposed US$350 billion investment fund is, to say the least, substantial: it amounts to over 18% of South Korea’s 2024 gross domestic product and 72% of the government budget for the current year⁷. Beyond the investment fund, South Korea also committed to an additional US$100 billion in liquefied natural gas (LNG) purchases from US sources, cementing a comprehensive geoeconomic package.

Critically, this investment is strategically targeted toward sectors of industrial and technological importance to the US. The total pledge is broken down with US$150 billion specifically dedicated to shipbuilding cooperation. This commitment supports President Trump's "Restoring America’s Maritime Dominance" and President Lee Jae Myung’s accompanying "Make America Shipbuilding Great Again" (MASGA) proposal, signaling a new frontier of economic-security cooperation. Examples of this cooperation include Hanwha Ocean's purchase of the Philly Shipyard and a planned investment strategy involving HD Hyundai, Cerberus Capital, and the Korea Development Bank to focus tens of billions into revamping the US shipbuilding industry.

The remaining US$200 billion is earmarked for high-tech and strategic areas where South Korea’s chaebol conglomerates (such as Samsung, Hyundai, LG, and SK) possess significant competitive advantages, including:

Semiconductors and AI: Samsung is expanding its Texas foundry and SK Hynix is building a new packaging plant in Indiana for high-bandwidth memory (HBM) chips, critical for the AI industry.
Electric vehicles and batteries: Hyundai Motor added US$5 billion to its previous commitment, boosting its total US investment to US$26 billion to establish a full value chain from steel to finished vehicles.
Nuclear and other energy: Commitments include agreements related to small modular reactors (SMRs), nuclear fuel enrichment, and LNG imports, strengthening South Korea’s role in the US energy build-out.
Critical minerals: Korea Zinc signed a contract to supply germanium to Lockheed Martin, which Seoul hailed as a "first success story" in critical minerals cooperation.

For the chaebol, this surge in investment deepens dependencies on the US market, restricting options elsewhere, but aligns with a strategic pivot encouraged by Seoul since 2017 to diversify away from China⁸. These investments underscore a growing US-Korea economic-security alliance that extends far beyond the traditional focus on semiconductors. As such, it also resembles the similar arrangement reached between the US and Japan⁹.

Despite the successful initial optics of the August 2025 summit, the trade deal quickly hit a crucial stalemate over the implementation details of the investment. This deadlock centers on two core geoeconomic factors: financial structure and operational control. The Trump administration repeatedly asserted that the US$350 billion investment was expected "upfront" and demanded it be provided in cash. South Korean officials, however, initially envisioned the funds predominantly structured as loans and loan guarantees, with direct equity investment accounting for only a small percentage (1%–5%).

Structure of investment

South Korea’s resistance to an upfront cash payment was driven by its worry over severe financial risks. President Lee Jae Myung warned that deploying such a massive outlay without safeguards like a currency swap could plunge the country into a financial crisis akin to 1997. Given that the requested sum is equivalent to approximately 83%-85% of South Korea’s foreign exchange reserves (around US$410–422 billion as of late 2025), a short-term cash outflow poses a significant threat to currency stability and the Korean won,¹⁰ which unlike the Japanese yen is not considered a hard currency. The recent weakening of the won has already been linked to the uncertainty surrounding these unresolved tariff negotiations.

In an attempt to bridge the gap, negotiations shifted towards a compromise involving spreading payments across multiple years. South Korean officials suggested the country could raise around US$15 billion to US$20 billion annually in dollars without disrupting foreign exchange markets. Reports floated an eight-year plan, involving structured payments that may extend beyond Trump's current term, though Trump is said to prefer receiving the bulk of the funds during his tenure¹¹.

Control issues

Further complicating the matter is the US demand for control over the capital allocation. Trump indicated that Washington would select and manage the investment destinations. This position is reinforced by the US-Japan investment MOU, which formalized a model where the US Investment Accelerator (chaired by the Secretary of Commerce) oversees the projects, and Japan faces the possibility of higher tariffs if it rejects proposed investments.

If South Korea accepts terms similar to the Japan deal, it would imply accepting US control over its capital flows and accepting that the financial risk associated with potentially risky investments chosen by the US would be carried by Seoul. Furthermore, the proposed profit-sharing mechanism — where the US insists on taking the lion’s share of free cash flow after the initial investment is retrieved — is politically sensitive in Seoul, risking the perception that South Korea is being "extorted" by its ally.

Public sentiment towards the US turned hostile following the September raid by officials from the Immigration and Customs Enforcement (ICE) agency on a Hyundai Motor car battery facility under construction in Georgia. The raid resulted in the arrest and detention of approximately 475 workers. Over 300 of those detained were South Korean nationals, who were primarily specialized experts — including mechanical engineers and automation programmers — dispatched to install technology and train future employees at the joint venture facility¹². Media images of shackled Korean workers caused bewilderment and outrage in Korea. The incident severely strained the alliance, raising fundamental questions in Seoul about the nature of the partnership and the security of major Korean investments in the US¹³. It should also be noted that, given the recent political turmoil in Korea, the relationship with the US remains highly politicized.

The deal

Negotiations continued right up to the arrival of Trump in the region to attend the East Asian Summit in Malaysia and the Asia-Pacific Economic Cooperation (APEC) summit in Korea in the last week of October. On 29 October, both parties announced that they had finalized the details of the deal originally agreed in July. Tariffs on auto and auto parts are now set at 15% while other products (aircraft parts and generic drugs) will face no tariff. On semiconductors, another major Korean export, South Korean chipmakers will “not be put in a disadvantage compared to their Taiwanese competitors”¹⁴. It also appears that the US relented on demands for additional market access for agricultural products including rice and beef - issues which could have caused Lee significant political challenges domestically.

The US$350 billion investment commitment remains but is structured in a way that Korea finds less difficult to digest. The US$200 billion sum will now be spread over a number of years and capped at US$20 billion annually. The US$150 billion earmarked for shipbuilding cooperation remains in place. Interestingly, the US announced separately that Korea will, for the first time, build nuclear-powered submarines in US shipyards¹⁵.

Trade and investment in the age of geoeconomics

The US-Korea trade and investment deal underscores a fundamental truth in the contested global political economy: in an era defined by great power rivalry, even close allies must navigate transactional demands to secure their core interests.

South Korea’s US$350 billion pledge served its immediate geoeconomic purpose: securing a lower tariff rate for its critical export industries, especially automobiles, thereby maintaining market access and minimizing damage to alliance equities. Simultaneously, the scale and strategic nature of the Korean investments — in sectors like shipbuilding, chips, and energy — allow Seoul to maximize potential reward by aligning its industrial strengths with US priorities, finding new opportunities for cooperation outside traditional alliance conventions.

Ultimately, the US-Korea partnership, stripped of the "shared values" rhetoric of previous administrations, endures in a more "brittle, calculated and interest-driven form"¹⁶. South Korea’s pragmatic pivot, centered on maximizing investment opportunities while minimizing financial instability, serves as a crucial case study for how middle powers navigate aggressive economic coercion and the transactional geopolitics of the new world disorder. This strategic maneuvering is less about shared prosperity and more about strategic necessity in securing the essential American security guarantee. In other words, we are well advised “to understand the actual world as it is, not as we should wish it to be, is the beginning of wisdom.”¹⁷