[Bloomberg Column] Electric Vehicles Are the 'Hidden Hero' of the Korea-US Alliance

Team Culpan Bloomberg Opinion Columnist

As the global economy slows down, South Korea's exports suffered a significant blow in 2023. However, it was the long-overlooked automotive industry in the United States that helped mitigate this shock and enabled trade with the US to swiftly surpass trade with China. With the continuous rise in demand for electric vehicles, the longstanding alliance between the two countries is expected to deepen further.

Semiconductors have long been a pillar of the South Korean economy. However, a substantial portion of semiconductors were shipped to China or Southeast Asia, assembled into electronic devices such as smartphones and computers, and then transported to other countries before reaching end consumers worldwide. Last year, this flow of components was disrupted, resulting in a 24% decrease in semiconductor exports abroad. Fortunately, automobiles and machinery have been filling this gap.

In fact, although South Korea’s exports to its largest importer, China, fell by 20%, overseas automobile sales increased by 31%, offsetting the decline. Notably, exports to the US rose by 5.4%, driven by demand for electric vehicles and high-performance sport utility vehicles (SUVs). Consequently, the US is rapidly catching up to China as South Korea’s major export market. Last year, the export share to the US lagged behind China by only about 1.4 percentage points.

Looking deeper, more is happening beyond the numbers. Including a rebound in the memory semiconductor sector, the global economic recovery expected this year signals that South Korea’s exports to China will return to an upward trajectory. Although a weakness in electric vehicles could impact trade with the US, this is considered only a short-term issue. In the long term, demand for new energy vehicles in the US is an unstoppable trend. It will only slow temporarily due to factors such as rising interest rates and adjustments in government subsidies.

Additionally, machinery supports the export recovery of Asian countries. Last year, South Korea’s sales of manufacturing equipment to the US increased by 25%. This growth is expected to continue as the US government implements policies such as tariff hikes and expanded incentives to boost domestic production of American-made products in sectors like steel, renewable energy plants, and automobile manufacturing.

Realistically, it will be difficult for American automakers to dominate the rapidly growing electric vehicle market entirely. Similarly, Chinese electric vehicle manufacturers like BYD will face challenges securing a foothold in the US market due to geopolitical tensions. Chinese manufacturers are already subject to tariffs of about 25%. The US government’s new tax credit regulations for electric vehicles further weaken the competitiveness of not only Chinese finished vehicle manufacturers but also automakers sourcing batteries and other components from China.

As a result, South Korea, Europe, and Japan will fill this gap. In traditional internal combustion engine vehicles, Japan is clearly the leader. Toyota and Honda, along with US domestic companies Ford and General Motors (GM), dominate the market. However, these companies do not hold strong positions in electric vehicles; all are chasing Tesla.

Hyundai Motor Company and Kia are seizing this opportunity. According to data from South Korea’s Ministry of Trade, Industry and Energy, Korean electric vehicle sales in the US market increased by 60% last year, a fivefold jump compared to 2021. Furthermore, as the US pursues new policies to increase domestic production of new energy vehicles, dependence on Hyundai and Kia for batteries, machinery, and automotive parts is expected to grow.

For more than 70 years, South Korea and the US have been close military and political allies. Within the next decade, trade will begin to play a role as important as military and political ties in the relationship between the two countries.

Tim Culpan, Bloomberg Opinion Columnist

This article is a translation by Asia Economy of Bloomberg’s column titled 'A Hidden Hero Will Drive Korean Trade Closer to the US.'