Korea’s Economy at a Crossroad: Internal and External Challenges

- With a Focus on Tariffs, the “Yellow Envelope Act,” and Amendments to the Commercial Act -

Jung-gun Oh

President, Institute of Freedom and Market

 Chairman, Korea Finance & ICT Convergence Association

1. The fierce surge of external threats

2. The fierce surge of internal worries (1): The Yellow Envelope Act

3. The fierce surge of internal worries (2): A tougher Commercial Act

1. The fierce surge of external threats

The Korean economy is staggering amid a triple wave of internal and external crises. Externally, the United States’ tariff pressure and China’s push-export strategy are both intensifying. Under unilateral U.S. pressure, Korea agreed to accept a 15% tariff, a sharp reversal from the zero-tariff status previously in effect thanks to the KORUS FTA. The Korea Institute for Industrial Economics & Trade has projected that, due to this tariff increase, Korea’s total exports this year will decline by 1.9% compared with last year.

In return for being subjected to a 15% tariff, Korea pledged USD 150 billion toward the revival of U.S. shipbuilding, USD 200 billion in investments in other industries, and USD 100 billion in energy imports. The most critical question is whether the planned USD 350 billion in U.S. investments can in fact succeed. The average annual wage for U.S. workers in 2024 is USD 83,000. Over the past two decades, as wages rose, labor-intensive U.S. manufacturing relocated to Japan, Korea, China, and elsewhere, with U.S. manufacturing employment falling from about 18 million in 2000 to the 12-million range after 2010.

In 2024, the average annual wage for Korean workers is USD 34,800. Korean firms themselves are moving to China, Vietnam, India, and other countries to ease labor-cost burdens. Under these circumstances, the key issue is whether Korean companies can truly succeed in the United States, where wage levels are 2.4 times higher than in Korea. Both Korea and the United States appear to be pushing ahead while ignoring the most basic economic logic. If the initiative fails, not only will President Trump’s hard-driven policy to revive U.S. manufacturing prove unworkable, but Korea will also sustain enormous damage, and the risk of a currency crisis will rise.

From President Trump’s perspective, the West and East Coasts have traditionally been bastions of the left-leaning Democratic Party, whereas the Midwest is a right-leaning Republican stronghold. The Midwest was once a manufacturing heartland, but with deindustrialization it has become the “Rust Belt.” As manufacturing collapsed, many lower-educated white workers in particular lost their jobs and have been left adrift. For Trump, the Rust Belt’s revival is a matter of political survival. Yet, given today’s elevated wage levels, there are numerous uncertainties as to whether a policy of manufacturing revival can truly succeed.

If Korea’s U.S. investment projects do not succeed, the USD 350 billion in guarantees or loans will crystallize as external debt. The guarantees will likely be provided by the Export?Import Bank of Korea or the Korea Trade Insurance Corporation, and if repayment fails, the burden will fall squarely on Korea’s external liabilities. At the Korea?U.S. summit held at dawn on August 26 (Korea time), the United States reportedly pressed for investment while Korea argued for guarantees or loans. However, from the standpoint of increasing external debt, there is little difference between the two. It is astonishing that senior government officials, seemingly unaware of this mechanism, acted as if Korea had taken a prudent step back by proposing guarantees or loans.

Korea’s external debt stood at USD 683.4 billion at the end of the first quarter of 2025, while its foreign exchange reserves amounted to only USD 410.2 billion at the end of June. In this context, if the USD 350 billion in guarantees or loans becomes external debt due to policy failure, Korea will face a heightened risk of a currency crisis. Moreover, reports indicate that Korean business leaders who accompanied the summit pledged USD 150 billion in investments. It must be clarified whether this amount is an additional commitment or included within the previously promised USD 350 billion.

President Trump is not a simple figure; he is a battle-hardened veteran who has weathered every sort of business trial. A careless remark can have serious consequences. With external debt already at USD 683.4 billion, a USD 350 billion investment pledge, and a further USD 150 billion in additional investment, the Korean economy could be pushed to the brink. Foreign exchange reserves total only USD 410.2 billion. The likelihood of a currency crisis will increase, and if foreign capital flees, a crisis will unfold.

Given these foreign-exchange conditions, extraordinary measures by both companies and the government are required for USD 350 billion in investments to succeed in a country where wage levels are 2.4 times higher than Korea’s. The government must present multifaceted support measures?financial, tax, and otherwise?for Korean firms entering the U.S. market. Without such measures, the Korean economy, which relies on manufacturing technology, could collapse under the strain of overreach. Excessive investment in the United States could also hollow out Korea and create severe employment problems. It goes without saying that details must be carefully coordinated regarding statements attributed to President Trump that Korea will merely provide funds while the United States will select, own, and control the investments, and remarks by the U.S. Secretary of Commerce that 90% of profits will accrue to the United States?claims that are difficult to reconcile with a capitalist market economy.

To make matters worse, China’s push-export strategy has left the Korean economy in what is no exaggeration to call a state of devastation. Chinese overcapacity and the global downturn have triggered a wave of dismantlement among major domestic petrochemical companies. Since last year, large inflows of cheap Chinese steel have also eroded the profitability of Korea’s steel industry, as evidenced by POSCO’s Pohang Works posting a deficit for the first time last year. Even the secondary-battery industry, once regarded as a future growth engine, has seen profitability deteriorate rapidly under the double pressure of Chinese battery competition and weakening EV demand. A Korea Chamber of Commerce and Industry survey last year found that, among 2,228 manufacturing firms nationwide, 28% had already suffered hits to sales and orders due to low-priced Chinese competition, and 42% feared future damage.

Korea’s exports to China peaked at USD 162.9 billion in 2021 and then began to decline, with the balance turning to deficit beginning in 2023. Excluding semiconductors, exports to China had already peaked at USD 123.8 billion in 2013, and the non-semiconductor trade balance has been in deficit since 2018. This stems from the Korea?China FTA, which took effect in 2015 and included a large number of general-technology products among its concessions, allowing low-priced Chinese goods to penetrate the Korean market across the board. Korea is now hard-pressed to fend off U.S. pressure and China’s relentless offensive at the same time.

2. The fierce surge of internal worries (1): The Yellow Envelope Act

The waves of external threats are extremely strong. In such a situation, Korea should at least be doing everything domestically to keep companies afloat and thereby overcome the external shocks. However, the ruling party has pushed through the Yellow Envelope Act, which will create a heaven for strikes, as well as a tougher set of amendments to the Commercial Act that shakes the position of controlling shareholders, alongside a corporate-tax increase and enforcement of the Serious Accident Punishment Act. In particular, strict enforcement of the Serious Accident Punishment Act is aggravating the crisis in the construction sector. On the 24th, the ruling party led the National Assembly’s plenary passage of the Yellow Envelope Act (amendments to Articles 2 and 3 of the Trade Union and Labor Relations Adjustment Act), which, among other things, limits excessive damage claims by companies against workers or unions. With the opposition absent, the Assembly approved the Act with 183 votes in favor and 3 against out of 186 members present at the morning plenary session that day. The Yellow Envelope Act expands the scope of “employer” and the subjects of “labor disputes,” and restricts companies’ damage claims against striking workers. This bill is one of those previously scrapped by the Yoon Suk Yeol administration’s exercise of the presidential veto. The prospect is that the gates to a strike heaven will be thrown open.

Because the Yellow Envelope Act passed the plenary session of the National Assembly on the 24th, it is expected to cause a major shock at worksites after the six-month grace period ends, including immunity for certain unlawful acts by unions. The amendments to Articles 2 and 3, which passed that day, are divided broadly into Article 2, which defines the concepts of “employer” and “labor dispute,” and Article 3, which addresses damage claims and liability arising from union activities. Article 2 adds that “even a person who is not a party to the employment contract shall be deemed an employer to the extent that the person is in a position to exercise substantial and specific control or decision-making over a worker’s working conditions.” This is intended to guarantee labor rights by allowing indirectly employed workers such as those of subcontractors to engage in collective bargaining with principal employers. However, unlike ordinary cases where employer status is recognized, bargaining is not permitted on all matters; it is limited to certain issues such as safety where substantial control is exercised.

The definition of “labor union” is also amended by deleting the clause that excluded “organizations that allow non-workers to join” from being treated as unions. This is intended to ensure the freedom of association for special-type workers and platform workers, while maintaining the premise that the principal subject of a union must be workers. The definition of “labor dispute” is revised from “determination of working conditions” to “determination of working conditions and management decisions that affect working conditions,” and the phrase “a clear violation of a collective agreement by the employer” is added. The prior year’s draft had replaced the term with “working conditions,” which some viewed as too expansive, and the present bill narrows the scope. It is also a major change that restructuring, layoffs, and business consolidation are included among the subjects of labor disputes.

Article 3 adds to the conditions under which no damages may be claimed even if the employer suffers loss, by including “other legitimate labor-union activities under the Act,” such as publicity campaigns and picketing outside collective bargaining and industrial action. It further provides that “no liability for damages shall arise where, in response to an employer’s unlawful act, harm is unavoidably caused in order to protect the interests of the union or workers,” and that “an employer may exempt a union or workers from liability for damages arising from collective bargaining, industrial action, or other union activities.” Additional provisions state that even when a court recognizes a worker’s liability for damages, a surety shall not be held liable, and they specify detailed conditions for apportioning damage liability to workers.

The Democratic Party welcomed the outcome, calling it a historic advance on long-standing labor demands, while the People Power Party criticized it as “toxic legislation” that would shake Korea’s economy and society to their core. The Yellow Envelope Act, which prompted the previous president to exercise the veto twice amid controversy and concern, has now become a reality, and the “moment of truth” at which its economic impact will become apparent is not far off. Few doubt that there will be substantial aftereffects. Academic estimates suggest that the law could reduce annual GDP by roughly KRW 10 trillion and foreign investors’ investment in Korea by about 1.5% (approximately KRW 400 billion) per year.

The bill was advanced on the basis of incorrect factual premises. The Democratic Party claimed it was necessary to reach the standards of advanced economies, but the reality differs from those claims. There is no international precedent for allowing subcontractor unions to bargain with principal employers (Article 2), and, as for limiting damage liability (Article 3), it is unnecessary abroad because workplace occupation during strikes is generally prohibited in the first place. If the Yellow Envelope Actwere truly a global standard, it is hard to see why AMCHAM and the EU Chamber in Korea would have publicly opposed it in unison. The Democratic Party, having forced the bill through, must now accept responsibility for the consequences of its choice. It would be fortunate if side effects are minimized, but even during the grace period it should not forget the criticism that the law “serves only aristocratic unions while making life harder for the vast majority of non-regular workers and small self-employed,” and it must prepare countermeasures. After the Yellow Envelope Act, the labor movement is already pressing for a higher minimum wage, “equal pay for equal work,” and conversion to open-ended contracts after two years for part-time workers. Far from assisting companies that are staggering under external shocks, these measures are tightening the noose to the point of leaving one speechless.

Britain’s trade unions are the strongest in the world. When I studied in the United Kingdom in the early 1980s, it was said that no politician, whether Conservative or Labour, could operate without watching the eyes of the union leaders. Arthur Scargill, the miners’ union leader of that era, was a figure both parties shunned and the most powerful man in Britain. The famous miners’ strike of 1983 lasted for a year. Yet even in Britain, unions themselves observed bans on workplace occupation, and the principle of “no work, no pay” was respected. I vividly remember Prime Minister Margaret Thatcher, the “Iron Lady,” engaging in exchanges with union members at the pitheads. Union members sustained the bare minimum of living expenses from funds deposited in union accounts, but when mine owners applied to seize those deposits to cover damages and the courts granted the request, the year-long strike came to an end. Everything proceeded under the rule of law. Against this backdrop, the claim that the passage of the Yellow Envelope Act will advance Korea’s labor?management relations in the mold of advanced countries is nothing but tendentious sophistry. It is beyond frustrating to hear the presidential policy chief say that problems can simply be corrected later if they arise.

3. The fierce surge of internal worries (2): A tougher Commercial Act

Following the Yellow Envelope Act, another contentious bill is the “tougher Commercial Act,” or the second set of amendments to the Act. The amendments mandate cumulative voting for companies with assets of KRW 2 trillion or more and expand the separate election of audit committee members. On the 25th, business organizations issued a joint statement expressing regret that a second amendment?coming barely a month after the first amendment on July 1?had passed the National Assembly to broaden separate election of audit committee members and mandate cumulative voting. They warned that the changes would significantly increase the risk of management disputes and litigation, and they urged the National Assembly to pursue balanced legislation that minimizes adverse effects.

They also argued that it is urgent to establish defense mechanisms at the level of global standards to protect free corporate activity from threats to control by speculative capital, and they called for codifying the business judgment rule and rationally improving criminal breach-of-trust doctrines. They added that Korea should overhaul economic criminal penalties and adopt scaled regulations and incentives by corporate size so that firms can focus on innovation and growth.

The United States is simultaneously half-pressuring and half-enticing Korean firms to relocate there, while within Korea, a paradise for strikes is being created and the threat to corporate control from speculative capital is being amplified. In this situation, Korean companies, like someone who wants to cry and then gets slapped, will have no choice but to move abroad, particularly to the United States. If that happens, who will create quality jobs in Korea?

Through the first and second supplementary budgets, the government has injected roughly KRW 35 trillion in additional fiscal resources in an effort to stimulate domestic demand. Nevertheless, with exports sluggish and construction in decline, the Korea Development Institute recently projected that Korea’s economic growth rate will remain at 0.8% this year. Studies now abound showing potential growth slipping toward zero. Each year, 300,000 to 400,000 university graduates pour into the labor market, which means the number of jobs must rise by 300,000 to 400,000 year-on-year. However, as of July, the number of people in normal employment increased by only about 170,000, marking the second consecutive month in the 100,000 range.

To overcome the current internal and external economic environment, Korea must actively expand into the Global South and, in response to changes in the external environment, aggressively pursue new trade policies such as accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). However, these topics were not discussed at the recent Korea?Japan summit. Observing this, one cannot help but worry that the presidential office and the government may have a weak grasp of the countermeasures required by a shifting trade environment. This is not the time to press ahead with pro-labor and anti-business policies. Rather, Korea should prioritize forward-looking, pro-enterprise policies that create quality jobs. Only then can we offer hope to future generations.

This article may differ from the views of the Hansun Foundation.

(※ It's a translation based on machine translation)