BOK set to revise economic outlook following Korea-U.S. tariff agreement, external factors

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BOK set to revise economic outlook following Korea-U.S. tariff agreement, external factors

Published: 01 Aug. 2025, 18:46 Updated: 01 Aug. 2025, 21:13

Audio report: written by reporters, read by AI

U.S. President Donald Trump, center, members of Trump's administration and Korea’s trade delegation pose for a group photo at the White House in Washington, on July 30 after reaching a tariff agreement. [WHITE HOUSE]

With the Korea-U.S. reciprocal tariff rate set at 15 percent — in line with major competitors like Japan and the European Union — attention is now turning to the Bank of Korea's (BOK) upcoming revised economic outlook for this month.

Although tariff uncertainty has been reduced, experts say further scrutiny is needed on upcoming U.S.-China tariff negotiations and product-specific duties such as those on semiconductors.

Back in May, the BOK slashed its 2025 real GDP growth forecast from 1.5 percent to 0.8 percent. At the time, it stated that if tariffs were significantly lower than 15 percent, growth could increase by 0.1 percentage point, while a 25 percent tariff would lower it by the same margin.

With the latest agreement, Korea has effectively avoided the downside risk to growth from a 25 percent tariff scenario. In addition, BOK expects the second supplementary budget to boost growth by another 0.1 percentage point.

A senior BOK official said on Friday that the Korea-U.S. tariff deal was “a solid outcome,” adding, “The more important factor now is the outcome of the U.S.-China negotiations, which have been delayed until late October under a 90-day grace period.”

As of last year, around 20 percent of Korea’s total exports went to China. Korea primarily exports intermediate goods like semiconductors to China, which then processes them into final goods for sale — a supply-chain dynamic that makes Korea vulnerable to shifts in Chinese exports.

Containers ready for export are piled up at a port in Pyeongtaek, Gyeonggi on July 31. [NEWS1]

A total of 78.4 percent of Korea’s exports to China in 2023 were intermediate goods, according to a report by the Korea International Trade Association (KITA).

Hence, if U.S. tariffs reduce Chinese exports to the United States, Korea’s intermediate goods exports to China — particularly those used in finished goods — will also decline. China may also reroute products originally bound for the United States to third countries at lower prices.

Analysts say it will also be crucial to watch how tariffs are applied to specific items like semiconductors, with the announcement expected as early as this month.

“Just like separate tariffs are applied to steel used in appliances, it matters not only what the tariff rate is for semiconductors in smartphones, but how it is applied,” said Joo Won, head of economic research at Hyundai Research Institute.

White House Press Secretary Karoline Leavitt shows a letter from U.S. President Donald Trump during a press briefing at the White House in Washington on July 31. [REUTERS/YONHAP]

“Even if a 10 percent tariff is imposed on semiconductors and pharmaceuticals, the effective tariff rate, which considers tariffs on both finished goods and raw materials, would rise only slightly from 15.2 percent to 15.8 percent — roughly in line with the BOK’s original assumptions,” said Korea Investment & Securities.

However, the firm added, “If a large portion of Korea’s $350 billion investment in the U.S. consists of Overseas Direct Investment (ODI), concerns may grow that domestic investment will shrink, pulling down Korea’s future growth rate and potential growth rate.”

The BOK’s preliminary GDP estimate for the second quarter showed a rebound, up 0.6 percent quarter-on-quarter, following the contraction in the first quarter, driven by a base effect. The bank says Korea must grow 0.8 percent quarter-on-quarter in both the third and fourth quarters to achieve full-year growth in the 1 percent range.

Another BOK official said that the revised outlook is now “closer to the May forecast thanks to the reduction of auto and auto parts tariffs — which account for one-third of Korea’s exports to the U.S. — from 25 to 15 percent,” but also stressed that “other external factors and the degree of domestic demand recovery must be taken into account.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY PARK YU-MI [[email protected]]