How AI Cooperation Can Save the U.S.-ROK Trade Talks

The ROK is currently being hit with multiple tariffs: a 10 percent baseline tariff under the International Emergency Economic Powers Act, as well as tariffs on automobiles and auto parts, steel, and aluminum under Section 232. Faced with the prospects of even higher tariffs, South Korean Trade Minister Yeo Han-koo has spent several weeks pursuing full-scale negotiations with the Trump administration to stabilize the U.S.-ROK relationship. As reported by the South Korean press, Yeo proposed a "manufacturing renaissance partnership" centered on cooperation on nuclear energy, shipbuilding, semiconductors, batteries, and AI, and is contemplating investments in Alaskan liquified natural gas (LNG). The intent was clear: rebalance trade and promote investment in ways that enhance U.S. productive capacities.

Despite South Korea's zero-tariff treatment of U.S. goods, the reduction of its nontariff barriers (NTBs), particularly in the digital sector, was not part of Yeo's package. Seoul's legislative efforts over the past five years to promulgate platform competition promotion legislation, modeled after the European Union's Digital Markets Act, would grant preemptive authority to South Korean regulators to impose strict restrictions on designated "dominant online platform operators" based on market share, user base, and revenues. ROK officials argue that the bill protects national security and consumer data privacy while ensuring market opportunities for domestic small- and medium-sized enterprises. Critics, however, note that the proposed legislation would de facto negatively impact leading U.S. cloud and AI service providers relative to emerging People's Republic of China (PRC) tech firms.

Add to that Seoul's cautious approach to agricultural liberalization-especially regarding U.S. beef-and it's no surprise that the July 9 negotiating window closed without a deal. Meanwhile, the Trump administration's new tariff announcement-set to hit several countries, including the ROK on August 1-seeks to ratchet up pressure to "manufacture and build in America." Yet South Korea has already emerged as one of the largest sources of foreign direct investment in the United States, having placed big, long-term bets on the U.S. techno-industrial base with deals exceeding $1 billion at an all-time high (Figure 2). Against this backdrop, the administration's ever-changing benchmarks for what constitutes an "acceptable deal" only further complicate the path forward.

Beyond Tariff Concession: Prospects for a U.S.-ROK Economic Security Partnership

In the midst of Groundhog Day-like tariff standoffs, it is worth remembering: Not all trading partners are the same, nor are all trade deals. The U.S.-ROK alliance carries unique geostrategic weight. And evaluating it solely through the lens of goods trade deficits or defense contributions is backward-looking. A forward-leaning economic reset should address shared vulnerabilities-from China's techno-mercantilism and coercive tactics to stalled productivity growth in both economies.

South Korea stands out not only as a treaty ally for the past three generations but also as a natural economic security ally in the emerging economic order. It is one of the few countries-besides China-with full-stack techno-industrial capabilities across shipbuilding, chipmaking, and nuclear power, including manufacturing know-how and burgeoning AI research talent. It also has a track record of integrating with U.S. supply chains and helping build components of the U.S. techno-industrial base (Figure 3). And yet, given its productivity slowdown, South Korea stands to gain from closer integration with the more dynamic elements of the U.S. innovation ecosystem. Additionally, as a market-oriented democracy on the frontlines of frequent cyber and economic coercion threats from North Korea and China, South Korea-like the United States and other partners such as Japan and Australia-has a strong interest in strengthening its economic security arsenal.

The potential of a modern economic security partnership between these two treaty allies is not lost on Beijing. That is why it has signaled its concerns about countries striking bilateral U.S. deals reached at the "expense of China's interests." In this instance, PRC interests include deeper integration of ROK firms into PRC supply chains and the PRC AI stack. The challenge for South Korean President Lee Jae-myung is to chart a path to sustained economic growth even as he is squeezed between Trump tariffs and the need to de-risk from China. His only option, a centerpiece of his presidential campaign, may be export diversification. The risk for the United States is that the overuse of tariffs prompts the new South Korean government to actively hedge away, by diversifying its partnerships, including with China and Russia. For instance, both have extended high-level overtures, including China's invitation to Lee to attend its 80th anniversary of Victory Day in September and Russia's opening of Track 1.5 dialogues.

It is time for both the U.S. and ROK negotiators to consider an alternative path in the coming weeks-a modern U.S.-ROK Economic Security Partnership that goes beyond trade remedies and tariff concessions. Such an approach would encompass trade, science, and technology collaboration, and third-country cooperation. The U.S.-UK Economic Prosperity Deal and ongoing U.S.-UK discussions on a technology partnership offer useful reference points. More generally, the U.S.-ROK deal and other such deals with allied market economies must meet four tests, as I've discussed elsewhere:

• Trade Rebalancing: While the issue of tackling chronic trade imbalance is new, it is an overarching priority for the current U.S. administration-and its salience could endure. That said, there is good reason to expect that the U.S. import substitution strategy-tariffs, deregulation, and tax incentives for foreign investment in the United States-will be unlikely to achieve trade rebalancing goals. With respect to the U.S. bilateral trade deficit with South Korea, the most viable path is to grow the U.S. services trade surplus-something the past two U.S. administrations have underappreciated. A focus on growing the services surplus would need decisive action by South Korea to lower NTBs in areas like cloud and digital services.
• Techno-Industrial Hedging: Both nations must deepen two-way investment in climate tech, chips, and advanced manufacturing. South Korea's investments in U.S. fabs and clean energy can be matched by U.S. investment in ROK AI, cybersecurity, and digital creative industries to strengthen integrated industrial bases and resilient supply chains. This will require investment facilitation efforts on both sides, in particular on the ROK side.
• Accelerated Innovation: The defining geoeconomic challenge of this decade is the technology race between allied market economies and China. Any deal should enhance the capacities of both the United States and South Korea to accelerate the pace of innovation across advanced technologies and their lab-to-market transitions with intellectual property and national security guardrails.
• Geoeconomic Reach: Joint U.S. and ROK efforts to deepen commercial, trade, and investment ties with third countries, such as Australia, Indonesia, Vietnam, India, and other emerging markets, provide optionality. Extended geoeconomic reach in strategic sectors such as critical minerals, clean energy technologies, and other technologies is a more sustainable way of reducing chokepoint vulnerabilities, minimizing coercion risks, and opening up export markets for AI and AI-enabled services.

Given the current state of negotiations, an economic security pact that meets this high bar may seem elusive. One way to focus on the ongoing negotiations between the two countries is to launch a track on AI full-stack cooperation. The AI stack is a composite of the core elements of economic competitiveness and economic security for both countries. It covers frontier models and applications with spillover effects across sectors (including the augmentation of traditional defense capabilities), data centers with leading-edge chips, ample energy sources to power these data centers, digital platforms on which AI models run, and importantly, the critical minerals required to manufacture chips and generate energy. It necessarily combines trade and export controls, technology policy, and other elements of economic cooperation.