With the South Korea-U.S. summit as a turning point, tariff negotiations between the two countries were effectively concluded.
Kim Yong-beom, Presidential Chief of Staff for Policy, held a briefing at the Gyeongju International Media Center on the 29th and said, "We agreed on the details of the tariff negotiations with the United States," adding, "The memorandum of understanding (MOU) text is almost finalized, and the fact sheet has also been finalized between the two countries."
South Korea and the United States reached a broad agreement on July 30 on tariff negotiations centered on a reciprocal tariff and item tariff cuts and financial investment in the United States. But the two sides continued tug-of-war talks over the details of the $350 billion U.S.-bound financial investment package. Deputy Minister Kim said, "During the summit, U.S. officials called Minister Kim Jung-kwan of the Ministry of Trade, Industry and Energy a 'tough negotiator,' which shows how intense the process was," adding, "Thanks to the full efforts of the presidential office and the relevant ministries, we were able to reach today's agreement."
Deputy Minister Kim also laid out the details of the $350 billion (about 497.385 trillion won) financial investment in the United States. Deputy Minister Kim said, "The $350 billion consists of $200 billion in cash investment and $150 billion in cooperation in the shipbuilding industry," explaining, "What matters is that we set an annual investment cap of $20 billion." Deputy Minister Kim said, "The $200 billion investment will not be made all at once but will be invested within the annual cap of $20 billion depending on project progress, so it is within what our foreign exchange market can handle and the impact on the forex market can be minimized."
The $150 billion cooperation in the shipbuilding industry will be led by Korean corporations. Guarantees are included in the $150 billion along with investment. Ship finance, which raises funds through long-term financing when introducing newly built vessels, is also included. Deputy Minister Kim said, "We reduced the burden on our foreign exchange market and raised the likelihood of our corporations winning ship orders."
The two countries will set up an Investment Committee and a Consultative Committee to discuss specific investment projects. The U.S. secretary of commerce will serve as chairperson of the Investment Committee, and the South Korean minister of trade, industry and energy will serve as chairperson of the Consultative Committee, so the two countries will jointly select investment projects.
Tariffs on automobiles and auto parts will be lowered from 25% to 15%. For semiconductors, tariffs will be applied at a level not disadvantageous compared with Taiwan, a competitor. Deputy Minister Kim added, "Among item tariffs, pharmaceuticals and wood products will receive most-favored-nation treatment, while aircraft parts, generic drugs, and natural resources not produced in the United States will be subject to zero tariffs."
The earliest timing for the actual reduced tariffs to take effect is expected to be in Nov. Deputy Minister Kim explained, "To implement the MOU, laws on creating a fund or issuing government-guaranteed bonds must be enacted," adding, "We decided to retroactively lower tariffs to the first day of the month that includes the date when the bill is submitted to the National Assembly."
Deputy Minister Kim said safeguards were put in place to recover the principal of the U.S.-bound investment. Deputy Minister Kim explained, "We decided to stipulate in the MOU text that only commercially rational projects with guaranteed principal and interest will be pursued," adding, "Until principal and interest are repaid, South Korea and the United States will split revenue 50-50, but if it appears South Korea will not be able to recover full principal and interest within 20 years, the revenue split ratio can also be adjusted." He added that they set annual funding caps and designed a special purpose vehicle structure so that losses in a particular project can be offset by gains in other projects.
However, the revenue-sharing ratio may change going forward. On the revenue-sharing method, Deputy Minister Kim said, "This was a core sticking point for both countries until the very end," adding, "We raised very strong objections to the 50-50 part until the end, but we could not bring about an agreement to specify the ratio we wanted." He explained, "Cash flow is not the same every year. In business, some projects generate a lot early on, and others generate little for three to five years, so once the situation becomes clearer, we agreed to make adjustments."
Deputy Minister Kim added, "There are implicit understandings in bilateral consultations that are hard to state explicitly," and "It is unfortunate that we could not include the numbers very clearly."
A currency swap between the two countries for forex stability fell through. Deputy Minister Kim said, "The currency swap idea came up when the United States demanded $350 billion in cash investment without an annual cap, which our foreign exchange market could not possibly bear," adding, "As mutual understanding grew regarding the forex market issues South Korea raised, and as we discussed annual caps in concrete terms, the need for a currency swap diminished."
Instead, Deputy Minister Kim offered the idea of raising $20 billion a year for U.S.-bound investment from the investment revenue of Korea's foreign currency assets. Deputy Minister Kim explained, "The Korea Development Bank or the Export-Import Bank of Korea plans to raise funds in overseas capital markets in the form of government-guaranteed bonds," adding, "There will be no shock to the domestic forex market."
Deputy Minister Kim said, "The United States will, where possible, select Korean firms and hire Korean managers during project implementation," adding, "Going forward, the government will do its utmost in follow-up procedures so that the South Korea-U.S. financial package further advances industrial competitiveness and strengthens the two countries' industrial supply chains."
Wi Sung-lac, deputy minister for national security, said the leaders of South Korea and the United States also agreed on modernizing the alliance. Deputy Minister Wi said, "President Trump highly valued South Korea's active role in the alliance and, given changes in circumstances such as North Korea's construction of nuclear submarines, expressed agreement that South Korea needs nuclear-powered submarine capabilities, suggesting follow-up consultations," he said. On the South Korea-U.S. nuclear cooperation agreement, he said, "Through existing consultations, there had been an understanding on a certain direction," adding, "Today's agenda was to ask for leaders' attention because working-level consultations are needed to specifically advance that direction, and there was agreement."