Quick Summary
- South Korea’s manufacturing sector experienced a contraction in October, with the PMI falling to 49.4.
- U.S. tariffs and a sluggish domestic economy were cited as key factors impacting demand and production.
- Rising raw material costs, exacerbated by tariffs and a weaker currency, drove up input expenses for manufacturers.
- A trade agreement between South Korean President Lee Jae Myung and U.S. President Donald Trump aimed to cap U.S. tariffs on Korean automobiles and parts at 15%.
- The agreement also included significant South Korean investments in the U.S. and Chinese trade concessions.
South Korea’s Manufacturing Sector Contracted in October
South Korea’s factory activity contracted in October, with the S&P Global South Korea Manufacturing Purchasing Managers’ Index (PMI) declining from 50.7 in September to 49.4 in October. This indicates further economic stress as the year approached its close. The report, released on November 3, highlighted that companies experienced reduced output and fewer new orders. Employment levels also saw a fractional decrease for the first time in three months. Manufacturers commonly attributed these challenges to the impact of U.S. tariffs and the subdued domestic economy, which affected both demand and production decisions. Consequently, purchasing patterns and inventory management were also influenced by these pressures.
U.S. Tariffs and Economic Weakness Impact Manufacturers
Rising Input Costs and Price Pressures
Input costs for South Korean manufacturers saw a significant increase in October, primarily driven by rising raw material prices. Tariffs coupled with a weak currency rate contributed to higher price pressures on imported materials. While the rate of input price inflation eased slightly to a four-month low, it remained above the historical average. To cope with these escalating costs, companies continued to raise output charges for the eleventh consecutive month, although at the slowest pace in three months.
Usamah Bhatti, Economist at S&P Global Market Intelligence, noted that the improvements seen at the end of the third quarter had largely diminished in October. He pointed to a faltering domestic demand and a renewed decline in new export orders, particularly from the United States.
“Manufacturers noted that tariffs further impacted the sector, as new export orders fell into decline again, particularly emphasizing the decrease in U.S. export demand.”
– Usamah Bhatti, Economist at S&P Global Market Intelligence.
Bhatti further explained that persistent inflationary pressures were observed, with unfavorable exchange rate fluctuations frequently increasing the cost of foreign raw materials. The economic outlook for the upcoming months was described as mixed.
Trade Agreements and Their Impact on U.S.-Korea Relations
The Trump-Lee Trade Pact
The economic downturn in South Korea’s manufacturing sector occurred shortly after an agreement was reached on October 29 between South Korean President Lee Jae Myung and U.S. President Donald Trump. This agreement aimed to establish a 15% ceiling on U.S. tariffs imposed on Korean automobiles and auto parts. This followed an initial trade deal in July, where South Korea committed to investing $350 billion in the U.S. and purchasing approximately $100 billion in liquefied natural gas. In return, the U.S. agreed to reduce its initial 25% tariff on South Korean goods to 15%.
Kim Yong-beom, Lee’s chief of staff for policy, detailed that $200 billion of the $350 billion investment would be disbursed in cash installments, capped at $20 billion annually. An additional $150 billion was designated for investments in shipbuilding. This phased payment structure was intended to ensure currency stability for South Korea while maintaining its long-term commitment to the overall investment. The annual cap was implemented to protect local economies as industrial cooperation progressed.
Collaborative efforts in production and technology were planned within the shipbuilding sector, with Korean shipyards expected to maintain their lead. Profit sharing from this segment was set at a 50/50 basis until the initial investment was recouped.
Broader Trade Deal Implications
A fact sheet released by the White House provided further details on a separate trade agreement negotiated between President Trump and Chinese President Xi Jinping in South Korea. Under this agreement, China committed to halting investigations into U.S. semiconductor manufacturers and refraining from imposing export bans on rare earth metals. Consequently, the U.S. decided to postpone planned import taxes on Chinese goods, originally set to take effect that month, and extend the delay on certain reciprocal tariffs on China for an additional year.
Final Thoughts
South Korea’s manufacturing PMI reflects significant challenges due to external factors like U.S. tariffs and internal economic weaknesses. While recent trade agreements between the U.S. and South Korea, as well as the U.S. and China, aim to mitigate some of these pressures and reshape economic relationships, the immediate impact on manufacturing output and costs remains a key concern for the region.
