A tariff regime change ahead of the 10% tariff’s expiration, and a Middle East crisis that won’t settle down — both unfolding at once
Korea’s economy is currently facing two major variables at the same time. One is that the Trump administration’s tariff policy is approaching a pivotal transition. The other is that the US-Iran war keeps reigniting rather than fully settling down. As it happens, both issues affect the Fed’s monetary policy — and Korea’s economy — through the same common denominator: inflation. Today we walk through where both issues currently stand, what they mean for Korea, and how experts are assessing each.
1. Tariff Policy: The 10% Tariff Expires, Section 301 Tariffs Take Over
On February 20, the US Supreme Court ruled in Learning Resources v. Trump that President Trump’s reciprocal tariffs, imposed under the International Emergency Economic Powers Act (IEEPA), were unlawful. Immediately after the ruling, the Trump administration invoked Section 122 of the Trade Act to impose a temporary 10% tariff on imports from around the world. That measure, however, can legally remain in effect for a maximum of 150 days — meaning it expires on July 24.
As a replacement, the US has been using Section 301 of the Trade Act since March to investigate “overproduction” and “forced labor” practices in various countries. Sixty countries, including Brazil, are under investigation for forced labor, and new tariffs are expected to be imposed on each country once the investigations conclude. The market widely expects forced-labor tariffs to take effect first, with overproduction tariffs layered on afterward.
Around the same time, President Trump signed a proclamation imposing an additional 50% tariff — on top of existing duties — on specific Canadian imports worth roughly $20 billion. He simultaneously rolled out an incentive cutting tariffs in half for companies investing in US aluminum production facilities, deploying both carrot and stick at once.
2. The Impact on Korea: Will the 15% Cap Hold?
Last July, Korea agreed to a $350 billion investment pledge in the US (with $150 billion of that earmarked for shipbuilding cooperation) in exchange for lowering its reciprocal tariff from 25% to 15%. A Korea-US Shipbuilding Cooperation Center recently held its opening ceremony in Washington, DC, reflecting that deal in action.
The concern is that the newly introduced Section 301 tariffs could be applied on top of, rather than within, that 15% cap. Korea is facing an anticipated 12.5% forced-labor tariff, and if an overproduction tariff is layered on top of that, the effective rate could end up at “15%+α.” USTR Representative Jamieson Greer has told the EU that “a deal is a deal,” signaling respect for existing agreements, but the administration has simultaneously opened a separate Section 301 investigation into Germany over cheap pharmaceutical imports — suggesting the actual application remains fluid. Think tank Atlantic Council estimated that if the 15% cap holds, the US would collect roughly $4.3 billion annually in tariff revenue from Korean imports, but warned that a broken cap could trigger a cycle of retaliation.
The tariff shock is already visible in the hard data. According to CNN, Korea’s first-quarter GDP fell 0.1% quarter-over-quarter, marking its first negative reading in four years. Still, CNN noted that Korea’s economic pain would have been far worse had the originally threatened 25% tariff been imposed instead. Korea’s economy is extraordinarily trade-dependent — exports accounted for 44% of GDP as of 2023 — meaning even a few percentage points of tariff difference can meaningfully affect the real economy. Fortunately, the US doesn’t account for a large share of Korea’s semiconductor exports, so the impact there is expected to be limited, and the shipbuilding sector’s substantial order backlog should also cushion any major blow.
3. The US-Iran War: A Pattern of Failed Ceasefires and Hormuz Risk
Since erupting earlier this year, the US-Iran war has seen several attempted ceasefire negotiations, each of which has collapsed in turn. On July 8, President Trump declared that a provisional agreement aimed at ending the war with Iran was no longer valid, sending global oil prices up more than 6% in a single day. In mid-July, reports of renewed strikes on Gulf energy and water facilities further destabilized the fragile truce, and oil prices climbed 10-14% over the past week alone amid fears of escalating hostilities. The US resumed a naval blockade targeting Iranian ports near the Strait of Hormuz, and Iran has retaliated by striking US targets in Bahrain, Jordan, Kuwait, Oman, Qatar, and Syria.
The blockade of the Strait of Hormuz, the Middle East’s critical oil export route, has pushed global oil prices higher, benefiting regions that produce oil outside the conflict zone, such as Texas and Norway. Asian countries heavily dependent on Middle Eastern crude, by contrast, have taken a significant hit. Dubai crude — the physical-delivery benchmark for the region — is reportedly trading at a 15-20% premium over Brent as a result of the blockade. Experts warn that if the blockade drags on for roughly a month, as President Trump has suggested it could, the result could be an oil shock; alternative ports are already at capacity, meaning even a lifted blockade could take considerable time to translate into normalized logistics.
4. Where the Two Risks Converge: Inflation and the Fed’s Dilemma
Tariff policy and Middle East risk may seem unrelated, but they actually converge at a single point: inflation. Tariffs push up import prices, while rising oil prices exert broad-based upward pressure on prices as well. According to Deloitte’s analysis, the nomination of Kevin Warsh as the incoming Fed chair, inflation reignited by tariffs and the Middle East conflict, and a cooling pace of job growth have all converged at once, leaving US monetary policy more uncertain than at almost any point in recent memory. If both risks push up prices simultaneously, it becomes even harder for the Fed to pin down the timing of rate cuts — a dynamic that could ultimately weigh on emerging-market financial conditions broadly, Korea included.
5. What Experts Are Saying About the US Economy
- The Fed’s most recent decision: As of July 4, markets were pricing in a 75.6% probability that the Fed holds rates steady at its July 29 FOMC meeting, all but ruling out a cut. The prior meeting’s vote to hold was unanimous (12-0), with officials citing solid economic activity and employment even as inflation continues to run above the 2% target.
- September is the key meeting: June’s nonfarm payrolls report showed only 57,000 jobs added, roughly half the 114,000 the market had expected — a reading that eased some concerns about a rate hike. Still, some observers note that renewed deterioration in Middle East energy conditions could revive the case for a hike in December.
- Major banks’ views: Most investment banks still expect the Fed to resume rate cuts in September, but with conditional caveats — the timing could slip further depending on how the Strait of Hormuz situation evolves, or move up sooner if the conflict ends.
- Ira Kalish, Deloitte Global chief economist: Noted that with tariffs and the Middle East conflict both stoking inflation at once, a Fed under Kevin Warsh is likely to lean more heavily on incoming data than on forward guidance when setting policy.
6. What Experts Are Saying About the US-Iran War
- An S&P Global source: Warned that even if the Strait of Hormuz blockade is lifted, a simultaneous rush of vessels to already-saturated alternative ports could take considerable time to resolve into normalized logistics.
- Some analysts: Have cautioned that if the blockade drags on for roughly a month, as President Trump has suggested it might, the result could resemble the oil shocks of the 1970s.
- Regional risk assessment: Israel is reportedly excluded from the US-Iran negotiating table and is said to oppose the talks altogether, leading some analysts to conclude that Israel-Iran hostilities could continue independent of any formal US-Iran agreement.
Putting It All Together
In short, Korea’s economy is currently navigating a policy risk in the form of tariffs and a geopolitical risk in the form of the Middle East war, simultaneously. Each is burdensome enough on its own, but the bigger concern is that both can amplify each other through their shared channel: inflation. The Korean government maintains that the 15% cap will broadly hold, but until the specific application of Section 301 tariffs and the trajectory of the Middle East conflict are both resolved, a cautious approach seems warranted. In particular, it’s worth watching the July 24 tariff-regime transition, the September FOMC meeting, and the direction of military tensions around the Strait of Hormuz — all together.