Donald Trump’s renewed trade offensive has come at a steep cost for Japan and South Korea. With little room to manoeuvre, both countries have been pressured by Washington to commit to investing hundreds of billions of dollars in the US in exchange for lower tariffs. The demands follow years of Japan and South Korea ranking among the top economies with the largest trade surpluses with the US.
The commitments helped seal trade deals for both Asian nations back in July, but the complexity of the investment pledges has led to months of wrangling over the size, scope and structure of the funds. Japan has now largely finalised its investment arrangement with the US, shifting the focus to specific investment projects under consideration. South Korea, meanwhile, continues to push back against US demands, citing the scale of the proposed investment and the potential impact on its currency market.
What has Japan agreed to?
Japan has agreed to invest up to $550bn in the US through government-linked funding. Under the memorandum of understanding signed between the two countries in early September, the US has the right to consider raising tariffs again if Tokyo doesn’t provide funding for investment projects approved by Trump within 45 days.
According to the MoU, Trump will choose projects based on recommendations from an investment committee led by US Commerce Secretary Howard Lutnick. The investment committee will incorporate input from Japan via a separate panel, with investments to be made by January 19, 2029 — the end of Trump’s presidential term.
The US says it does not intend to raise tariffs provided Japan faithfully implements the deal and doesn’t fail to provide funding. The US president would be able to raise tariffs again if Japan fails to fund a project.
Initial terms stipulate that profits from investments will eventually be shared 90:10 in Washington’s favour.
What has South Korea agreed to?
South Korea has pledged to invest $350bn, though how the plan will be carried out has yet to be finalised. President Lee Jae Myung said before Trump’s arrival in South Korea that the two sides were stuck on key points such as the size and timeframe of investments and the sharing of the profits.
The Japan deal and the conditions that were stipulated made policymakers in Seoul blanch. South Korea’s Prime Minister Kim Min-seok said that fulfilling the pledge would also deal a severe blow to the Korean economy unless the US provided dollars through a currency swap.
The arrest and shackling of hundreds of Korean workers in a US immigration raid on a Hyundai Motor Co and LG Energy Solution Ltd battery plant in Georgia in September also shocked South Korea, raising questions about its existing investments in the US.
What else is unclear about the deals?
While Trump characterised the deals as requiring the two countries to put up cash upfront, policymakers in Tokyo and Seoul said the pledges would take the form of loans and loan guarantees, with only a small amount of direct equity purchases.
Why did Japan and South Korea agree to invest so much?
The investment commitments helped both countries secure framework trade deals in July that brought across-the-board tariffs down from a threatened 25% to 15%. But a separate 25% duty specifically on cars and auto parts stayed in place, pending an executive order from Trump. The US used that extra pain on the auto sector to leverage more detailed investment commitments from both Japan and South Korea.
Japan moved faster on negotiations as then-Prime Minister Shigeru Ishiba sought to secure lower auto tariffs while his political standing at home started to slip. Japan’s car sector accounts for almost 10% of the country’s GDP and employs about 8% of the nation’s workforce, according to industry estimates.
How big are these commitments relative to GDP?
For Japan, the investment commitment amounts to about 14% of gross domestic product as of the end of 2024. The dollars required would represent just under half of the country’s foreign currency reserves.
For South Korea, the relative burden is much heavier. Its pledge is equivalent to around 20% of GDP as of 2024 and roughly 80% of its foreign-exchange reserves.
Japan’s trade surplus with the US was the seventh-largest last year, at $68.5bn. That means Tokyo’s pledge would be about twice the size of the US trade deficit with Japan during Trump’s second term, assuming the gap holds steady. The US shortfall with South Korea was only slightly smaller, at $66bn.
What specific projects is Japan considering?
To demonstrate that the fund was moving ahead, Japan’s trade ministry cited more than 20 projects under consideration during Trump’s October visit. The companies included SoftBank Group, Westinghouse and Toshiba Corp According to the trade ministry, these companies are exploring ventures in energy, artificial intelligence and critical minerals.
The size of the proposed projects ranges from $350mn to as much as $100bn, and together they could total about $400bn, according to Japan’s Trade Minister Ryosei Akazawa, who led the tariff talks with the US.
What’s the potential impact on economies and financial markets?
Market participants have speculated that such a surge in Japanese investments into the US would weigh on the yen. Akazawa, however, says the investments will be funded through a foreign-exchange special account, primarily using existing dollar holdings, thereby minimising any impact on currency markets.
Japan is already the biggest investor in the US and expanding that footprint through the new fund has also raised concerns that domestic manufacturing could suffer if companies increasingly opt to produce goods in the US rather than export from Japan. The government is considering measures to address those worries.
South Korea faces similar concerns, though the potential impact to its currency is viewed as even larger. The Bank of Korea has said the country can only provide up to $20bn a year in funding without affecting the foreign exchange market. Local media have reported that Seoul is pushing for annual investment flows below that amount, while Washington continues to press for more.