A person holds a South Korean flag in front of the National Assembly in Seoul, South Korea. Picture taken on December 6, 2024.

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Korea's economy faces looming challenges amid political turmoil

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Photo Credit: REUTERS/Kim Hong-ji

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South Korea’s grass-roots democracy has proven its resilience, surviving the short-lived martial law invocation on December 3, 2024. However, the political turmoil continues after the successive impeachments last month of both the president and acting president, leaving the deputy prime minister as the country’s interim leader, and the president was arrested on insurrection  charges on January 15. The Constitutional Court is required to render a final verdict on the president’s impeachment within six months, and if the impeachment is confirmed, a new presidential election should be held within two months after that.

This means that South Korea's political uncertainty could last several months, leaving the country without a clear leader to face several looming economic challenges, including improving its industrial competitiveness and dealing with US and Chinese trade policies.

Two South Korean impeachments under the two Trump administrations

South Korea impeached former president Park Geun-hye in 2017 at the start of then president Donald Trump’s first administration. In a strange déjà vu eight years later, South Korea has entered another impeachment process ahead of Trump’s second administration, which begins January 20. Despite seeming similarities between the two impeachments, the impact on the economy cannot be more different this time around.

The South Korean economy at the time of the early 2017 impeachment was facing multiple challenges: two consecutive years of faltering exports, China’s economic retaliation in response to the US-Korea decision to deploy the Terminal High Altitude Area Defense (THAAD) system, and the Trump administration’s threats to terminate the Korea-US Free Trade Agreement (KORUS FTA). However, the economy turned around with unexpected tailwinds in the end. Global demand picked up quite strongly in 2017, boosting Korea’s exports in major industries such as information technology (IT), machinery, petrochemicals, and shipbuilding. Semiconductor exports increased especially, by 57.4 percent. Total exports stood at $573.9 billion, the highest level since trade statistics records started in 1956, contributing to a robust 3.16 percent GDP growth in 2017. South Korea was the first country to strike a deal with the Trump administration with the KORUS FTA amendment and Section 232 steel quotas. In retrospect, the 2017 impeachment saw politics and the economy mostly decoupled by the combination of the global economic up-turn and sheer luck.

Today, in contrast, the economy faces headwinds on multiple fronts. The political environment is polarized, and the impeachment process is expected to be more uncertain and prolonged than the 2017 version, negatively affecting consumer as well as business confidence. According to a survey by the Federation of Korean Industries[1] taken after the martial law fiasco, household consumption is forecast to decrease by 1.6 percent in 2025.

External factors are unfavorable this time around. According to the forecast by the South Korean government, exports may slow down to only 1.5 percent growth in 2025, reflecting overall uncertainty with the two largest trading partners. US trade policy is a big risk factor. If Trump’s threatened across-the-board tariffs are imposed on allies and partners, South Korea may find itself in a tricky, leaderless position, when other countries retaliate or attempt to negotiate deals to get exemptions from the tariffs. The China factor is more serious. Major South Korean industries such as steel and petrochemicals have been struggling to compete with China’s industrial overcapacity and surging exports for years and are going through downsizing and restructuring. South Korea’s anti-dumping investigations against China almost doubled from four in 2023 to seven in 2024.

South Korean economy at a crossroads

South Korea’s trade, investment, and supply chains have gradually shifted from relying on China to becoming more diversified, de-risked, and focused on the United States. In recent years, South Korea’s exports to China as a share of total exports have dropped from around 25 percent to 19.5 percent in 2024, while South Korea’s exports to the United States have surged from around 12 or 13 percent to 18.7 percent in 2024. South Korea’s trade balance with China flipped dramatically from a surplus of $44.3 billion in 2017 to a deficit of $6.4 billion in 2024, while South Korea’s surplus with the United States increased 2.8 times in the same period due to stronger demand from the US market and investment-linked exports. In 2023, South Korea’s investment in the United States was almost 15 times bigger than its investment in China. In fact, South Korea emerged as the biggest foreign investor in the United States in 2024, with $21.5 billion.

There is a risk that if Trump’s threatened tariffs are imposed on South Korea, they will significantly disrupt the structural momentum of the diversification happening in trade, investment, and supply chains. Moreover, Chinese manufactured goods, if subject to new US tariffs, could be diverted to third nations including Korea, potentially exacerbating the current woes in Korea’s manufacturing sectors. This new geo-economic landscape must be considered both by the incoming Trump administration as well as the post-impeachment political leadership in Korea.

Structural reform to boost South Korea’s industrial competitiveness is an urgent policy matter that should not be dragged out during the impeachment process. The semiconductor industry that lies in the geopolitical fault line is a case in point. It has faced multiple challenges amid a rapidly changing, competitive landscape, with the United States, the European Union, and Japan expanding their chip manufacturing and China rapidly catching up with an economy of scale. South Korea has struggled to narrow the gap in non-memory chips with Taiwan, the dominant technology and market leader. A recent Bloomberg report points out that Taiwan has a more vibrant, rich tech start-up ecosystem booming with artificial intelligence (AI), semiconductor, and IT sectors compared to that of South Korea. Taiwan’s GDP is about half the size of South Korea’s, but its market capitalization has surpassed that of South Korea.

However, a new special semiconductor bill introduced last November to enhance the competitiveness of South Korea’s industries has been stuck in the divided National Assembly. The critical issues being debated include provisions to exempt research and development workers from the 52-hour workweek limit and allow for direct government subsidies to semiconductor firms. The bill should be taken seriously and passed as soon as possible. It will be a much-needed, symbolic move, sending a positive signal that economic policymaking and action can be decoupled from political paralysis—even during the impeachment process.

Correction: The South Korean government forecast that export growth may slow to 1.5 percent in 2025. A previous version of this post incorrectly said the government forecast that growth may slow to 1.8 percent.

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1. Federation of Korean Industries, “Survey on the national consumption plan,” December 19, 2024.

Data Disclosure

This publication does not include a replication package.

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