[Insight & Opinion] Government Pushing Companies Toward 'Investment Hollowing Out'

Investment Restructuring Inevitable Due to Tariff Negotiations
Policy Direction Needs Rethinking Amid Uncertainty

The South Korean economy, now mired in a prolonged slump, is entering a period of deep uncertainty over global economic restructuring, triggered by the tariff policies of the Trump administration. Nevertheless, the government continues to pressure businesses through measures such as the Yellow Envelope Act, amendments to the Commercial Act, and corporate tax hikes.

From an industrial perspective, the current state of the South Korean economy can be summed up as one of polarization and long-term stagnation. The service sector is experiencing severe polarization between the financial industry and self-employed businesses, while the manufacturing sector is divided between semiconductors and other manufacturing industries. Compared to June 2019, prior to the COVID-19 pandemic, the financial and insurance industry’s production index rose by 58% as of June this year, but during the same period, the retail industry’s (excluding automobiles) production index fell by 3%. In particular, general retail, which is closely tied to people’s livelihoods, declined by 11%, food and beverage retail by 35%, daily necessities by 28%, and restaurants by 5%.

The manufacturing sector is also suffering from a severe “semiconductor illusion.” Over the first seven months of this year, total exports increased by 0.8% year-on-year, but excluding semiconductors, exports actually fell by 2.5%. Meanwhile, the manufacturing producer shipment index in June 2025 was 5.3% higher than in June 2015, but if semiconductors and parts are excluded, the index dropped by 5.5%. As a result, manufacturing employment has been declining for 21 consecutive months.

The tariff negotiations with the Trump administration, which ended with a mutual tariff rate of 15%, were a relatively fortunate outcome, but the bigger challenges lie ahead. The shock of U.S. tariffs is making a restructuring of global manufacturing supply chains inevitable, and foreign direct investment?which determines global supply chains based on at least a ten-year business outlook?is now facing severe uncertainty.

South Korean companies are truly facing both internal and external crises. Externally, they are confronted with global economic uncertainty and supply chain restructuring due to Trump’s tariff policies. Internally, they are under pressure from the National Assembly’s Yellow Envelope Act and the government’s corporate tax hikes. In this situation, how will companies respond, and what direction will the South Korean economy take as a result?

Hyundai Motor Group has already moved to minimize the impact of tariffs by expanding its annual production capacity in the United States from 700,000 to 1.2 million units, and is reportedly shifting the sourcing of around 200 key components to local suppliers. The lesson for the South Korean economy from the Hyundai Motor Group case is the “hollowing out of domestic investment.” In 2024, total capital investment in South Korean manufacturing was 145 trillion won (106 billion dollars), whereas the agreed investment amount in the U.S. tariff negotiations?350 billion dollars?is three times the annual domestic capital investment in manufacturing and 17 times the outward investment of 20.4 billion dollars in 2023. Although the investment deadline is not known, it appears inevitable that companies, facing capital constraints, will have no choice but to reduce domestic investment in favor of U.S. investment.

What is concerning is that recent moves by the National Assembly and the government?such as the Yellow Envelope Act, amendments to the Commercial Act, and corporate tax hikes?could accelerate this hollowing out of domestic investment by companies. The expansion of U.S. investment and reduction of domestic investment will clearly further weaken the growth momentum of the South Korean economy, whose potential growth rate is already in decline. In the immediate term, Hyundai Motor’s plan to expand local sourcing of parts will deliver a serious blow to the 15,000 domestic auto parts suppliers.

The Yellow Envelope Act, amendments to the Commercial Act, and corporate tax hikes each have their own justifications. However, as the wave of global economic uncertainty caused by Trump’s tariffs approaches amid a trend of declining growth, one cannot help but question whether policies that drive companies into both internal and external crises are truly in the interest of ordinary people.

Kim Dongwon, former visiting professor at Korea University