%20no-repeat%20center%20center;-webkit-background-size:cover;-moz-background-size:cover;-o-background-size:cover;background-size:%20cover;)
By Sangin Park
The most urgent task facing the Lee Jae-myung administration after its inauguration in June 2025 was concluding tariff negotiations with the United States. Due to the impeachment of former president Yoon Suk-yeol, the 2025 presidential election coincided with unilateral tariff actions from the Trump administration, leaving South Korea unable to conduct proper negotiations.
Within the framework of lower tariffs exchanged for massive US-bound investments — a precedent set by the US–Japan and US–European Union tariff deals — the Lee administration reached an agreement on 30 July 2025. South Korea’s ‘reciprocal’ tariff rate was reduced to 15 per cent and the government committed to provide US$350 billion in investment in the United States.
After three months of intensive negotiations, a memorandum of understanding on strategic investment was signed on 14 November 2025 and the Joint Fact Sheet on tariff and security negotiations between South Korea and the United States was finalised. By explicitly capping annual investments at US$20 billion — widely regarded as the maximum South Korea can raise annually in international capital markets — the Lee administration secured a critical safeguard absent from the US–Japan agreement.
Still, these results impose substantial fiscal burdens on South Korea and may constrain financial markets. As of October 2025, South Korea’s foreign exchange reserves stood at US$428.8 billion — well below the US$800 billion level recommended by the Bank for International Settlements and slightly below the International Monetary Fund’s adequacy assessment.
In practice, the US$20 billion annual investment will likely be financed through overseas borrowing or fiscal resources. Heavy overseas borrowing could negatively affect exchange rates and constrain domestic financial institutions’ access to foreign funding. Coupled with tariff impacts, large-scale US-bound investment may sustain a weaker won for an extended period, raising import prices and fuelling inflation. The South Korea–US agreement will make macroeconomic management — of the exchange rate, inflation and fiscal deficits — substantially more difficult.
These external pressures make expanding domestic demand a more practical and manageable goal than export diversification. Yet fiscal expansion poses its own risks. According to the 2026 budget proposal, the managed fiscal balance is projected to show a deficit of 4 per cent of GDP, with national debt reaching 51.6 per cent of GDP — significantly worse than previous projections. These figures exclude additional deficits from US-bound investment and defence spending increases toward 3.5 per cent of GDP. Assuming defence spending rises to 3.5 per cent of GDP from 2027 onward, national debt would increase by approximately 1.1 percentage points of GDP annually.
Structural remedies are therefore necessary to expand domestic demand. Since the 1997 Asian financial crisis, South Korea’s domestic industries have become increasingly monopolised and oligopolised. As monopsony and exclusive subcontracting relationships became the norm in the intermediate goods sector, practices such as unfair price-slashing and technology theft became rampant.
The gap in profit margins and wages between large conglomerates and their subcontracted small- and medium-sized enterprises (SMEs) has drastically widened. While SME workers’ wages in other advanced nations typically reach about 80 per cent of those at large enterprises, this figure in South Korea is a mere 55 per cent. Even in large corporations, employees who reach the rank of department head face de facto forced retirement. Many then turn to self-employment, only to go bankrupt within about four years, frequently falling into elderly poverty by their mid-to-late 50s.
It is no coincidence that South Korea’s private consumption accounted for only 49.9 per cent of nominal GDP in 2023 — the lowest among OECD countries. Without fundamental structural reforms to address the wage gap between SMEs and large firms, as well as the issue of early retirement, any talk of revitalising domestic demand remains empty rhetoric.
To overcome these challenges, the guiding principle of economic policy must be domestic job creation and inequality reduction. Two policy priorities follow.
First, to ensure the success of the artificial intelligence and semiconductor investment initiative led by the Lee administration, RE100 industrial clusters — industrial parks designed to run entirely on renewable electricity — should be established in South Korea’s southeastern and southwestern regions. Later stages of the Yongin semiconductor cluster, a major government-backed hub for advanced chip fabrication, should be relocated to these areas. Given grid congestion and public opposition to new construction of transmission lines, this approach offers the only viable solution, as the necessary electricity can be provided by combining solar and offshore wind power with power purchase agreements in these regions.
Second, resolving excessive conglomerate concentration is essential to introduce competition, break monopolistic structures and enable innovation. This would dismantle exclusive subcontracting systems, narrow wage gaps, encourage new entrants and generate new growth engines. As Schumpeterian growth theory emphasises, reducing concentration and lowering entry barriers is a prerequisite for innovation-driven growth.
Absent immediate implementation of these two policies, South Korea risks compounding challenges: manufacturing decline, industrial hollowing-out, regional extinction and widening inequality.
Sangin Park is Professor of Economics at the Graduate School of Public Administration and Executive Director of the Research Center for Market and Government at Seoul National University.
This article is part of an EAF special feature series on 2025 in review and the year ahead.
