US Threatens 'Bomb' of Semiconductor Tariffs: An Analysis of Trade Tensions

Following a temporary reprieve from Trump-era tariffs, South Korea faces a new wave of trade challenges. The recent US court ruling and potential use of Section 232 pose a significant threat to its key semiconductor exports.

The Legal Landscape of US Trade Tariffs

The recent US court decision declared that the use of the International Emergency Economic Powers Act (IEPA) to impose reciprocal tariffs was unlawful. However, this ruling is separate from the more potent trade tools the US administration retains.

The US continues to enforce tariffs based on other laws:

• Section 232 of the Trade Expansion Act: Allows the president to impose tariffs on imports deemed a threat to national security. This is the basis for the 25% tariff on automobiles and 50% tariff on steel.
• Super 301: A unilateral, protectionist clause from the 1988 Omnibus Trade Act that allows for broad retaliatory measures against a country's "unfair" trade practices.
• Trade Act Section 122: Grants the president the right to impose a 15% tariff for 150 days to correct a trade deficit, another potential card the Trump administration could play.

The court ruling on IEPA is expected to be appealed to the US Supreme Court. With a conservative majority, the likelihood of these reciprocal tariffs being canceled soon is low, indicating that the US will continue to use trade leverage for the foreseeable future.

Behind the Scenes of the US-Korea Summit and MOUs

The recent US-Korea summit was broadly evaluated as a success, leading to the signing of several Memoranda of Understanding (MOUs) on industrial cooperation. Contrary to initial concerns, these agreements are not entirely unfavorable to Korea.

Key MOU highlights include:

• Commitments from Korean companies like HD Hyundai and Samsung Heavy Industries to participate in projects to revitalize the US shipbuilding industry.
• Significant cooperation in the nuclear energy sector between Korea Hydro & Nuclear Power (KHNP), Doosan Enerbility, and US firms like X-energy and Fermi for the development of Small Modular Reactors (SMRs) and related equipment.
• An agreement for Korea Zinc to supply germanium—a critical mineral—to the US, strengthening bilateral supply chain cooperation.

An official from the Ministry of Trade, Industry and Energy emphasized that these MOUs were carefully crafted and would not have been signed if there was no mutual need, suggesting a more balanced outcome than often portrayed.

August Trade Data: A Mixed Picture

South Korea's export performance in August showed resilience but also revealed areas of vulnerability. Overall exports grew by 1.3% year-on-year, marking three consecutive months of growth.

• Semiconductors: Exports surged 27.1% to a record $15.1 billion, the highest monthly figure ever.
• Automobiles: Boosted by eco-friendly and used car exports, the sector also hit a record high for August at $5.5 billion, an 8.6% increase.

However, exports to the United States told a different story, declining by 12% to $8.74 billion. The Ministry attributed this drop to decreased exports of items already subject to tariffs, such as automobiles, general machinery, and steel, despite growth in tariff-exempt items like semiconductors and wireless communication equipment.

The Looming Threat of Semiconductor Tariffs

The most significant concern is the potential for the US to impose tariffs on semiconductors under Section 232. Currently, most semiconductor items enjoy 0% tariffs globally under the WTO's Information Technology Agreement (ITA).

The US has already concluded its investigation into whether semiconductor imports threaten national security. The looming decision could see tariffs imposed, with analysts speculating they could be as high as 50%, mirroring the steel tariffs.

While some analysts downplay the immediate impact due to the nature of the semiconductor market (a seller's market), the potential for a "market-shrinking" effect is significant. A 50% tariff could also be applied derivatively to products containing semiconductors, such as mobile phones, which would massively amplify the impact on Korean exports.

Ongoing Negotiations and Future Risks

The post-summit negotiation landscape remains challenging. The US is using the promise of reducing auto tariffs as leverage to secure more concessions from Korea, such as further opening its agricultural market and ensuring that pledged investment funds benefit the US.

This strategy is also being applied to Japan. If the current stalemate continues, Korea's export performance to the US is likely to worsen, disproportionately affecting SMEs that are more vulnerable to tariff shocks. In response, the Korean government is preparing to announce support measures for export-oriented SMEs in early September.

The situation remains fluid, and the outcome of the US's potential semiconductor tariff decision will be a critical determinant for the future of Korea's export economy.