South Korea’s Regulatory Tightrope: Tech Giants, Trade Winds, and Domestic Reforms

Executive Summary

South Korea’s economy faces a trifecta of challenges: taming domestic platform monopolies without provoking U.S. trade retaliation, managing structural vulnerabilities in its export-dependent model, and addressing governance gaps in its financial sector. Recent moves to regulate Big Tech collide with Washington’s protectionist agenda, while falling export surpluses and recurring financial scandals reveal deeper systemic risks. These developments underscore the delicate balance Seoul must strike between asserting regulatory sovereignty and navigating an increasingly volatile global economic order.

Tech Regulation Amid Global Trade Tensions

Platform Act: Ambition Meets Geopolitical Reality

South Korea’s proposed Platform Fair Competition Promotion Act—aimed at curbing anti-competitive practices by IT giants like Kakao and Naver—reflects growing global scrutiny of Big Tech. Modeled loosely on the EU’s Digital Markets Act (DMA), the law seeks to ban self-preferencing, tying, and restrictive multi-homing practices, with penalties up to 8% of sales. However, U.S. opposition, framed through Trade Representative warnings against “discriminatory regulations,” has forced Seoul to dilute its approach, opting for amendments to existing fair trade laws instead of standalone legislation.

The dilemma is stark: domestic platforms (Kakao Mobility, Coupang) face fines for anti-competitive behavior, while U.S. firms like Google and Apple remain shielded by Washington’s threat of retaliatory tariffs. With the Trump administration investigating DMA’s impact on U.S. companies, Seoul’s regulatory space is constrained. This mirrors broader tensions, as seen in the U.S.-EU tech feud, but with added urgency for Korea—a trade-reliant economy where 12.4% of 2023 exports went to the U.S.

Export Reliance and Structural Economic Risks

Semiconductors Giveth, Non-IT Sectors Taketh Away

January’s current account surplus of $2.94 billion—the 21st consecutive month in the black—masks troubling fissures. While semiconductor exports rose 7.2%, declines in petroleum products (-29.2%), automobiles (-19.2%), and chemicals (-13.2%) dragged overall exports down 9.1% YoY. Regional exposure compounds risks: shipments to China (-14%), the EU (-11.6%), and the U.S. (-9.4%) all contracted. The economy’s overreliance on chips—which account for 18.9% of total exports—leaves it vulnerable to cyclical downturns and U.S.-China decoupling.

Real Estate and the Semiconductor Domino Effect

Pyeongtaek’s designation as an “unsold housing management area”—with inventories surging 18-fold to 6,438 units in a year—highlights how industrial megaprojects distort local markets. Delays at Samsung’s semiconductor campus triggered a collapse in housing demand, leaving 42.5% of Gyeonggi Province’s unsold units concentrated in one city. With the government excluding Seoul metro areas from bailouts, regional imbalances risk deepening—a microcosm of Korea’s “too big to diversify” economic structure.

Financial Sector Governance and Risks

Embezzlement Scandals Expose Control Failures

Shinhan Bank’s 1.7 billion won embezzlement case—undetected for over three years—spotlights systemic governance lapses. Despite record profits (18.8 trillion won net income for top banks in 2023), lenders face criticism for prioritizing “interest margin harvesting” over risk management. Similar scandals at KB Kookmin (14.7 billion won fraud) and Woori Bank (10 billion won embezzlement) suggest industry-wide complacency, exacerbated by “rubber-stamp” boards where outside directors issued zero dissenting votes in 2023.

Internet Banks: Inclusion vs. Stability

Kakao Bank and Toss Bank’s 0.25–0.3 percentage point deposit rate cuts reflect squeezed margins amid regulatory mandates to serve mid-to-low-credit borrowers (30% of loans). While critical for financial inclusion, their simplified product structures—focused on deposits and consumer loans—leave them exposed to rate fluctuations and default risks. With corporate lending restricted to SMEs, profitability hinges on volatile retail segments—a precarious model as household debt hits 1,087 trillion won.

Policy Reforms and Demographic Challenges

Inheritance Tax Overhaul: A Bid to Unlock Capital

The Korea Federation of Medium Business’s call to slash inheritance tax rates from 50% to 30% targets a structural drag on family-owned firms, which dominate Korea’s economy. With the effective top rate reaching 60% due to “largest shareholder premiums,” succession often forces asset liquidations. While the proposal aligns with OECD norms, critics argue it risks entrenching wealth inequality—a fraught trade-off as aging demographics (median age 44.5) pressure growth.

Agricultural Inflation and Supply-Side Fixes

Government stockpile releases—2,600 tons of cabbage, 500 tons of radish—aim to curb food inflation, with prices up 42–63% YoY for key staples. Climate disruptions (heavy snow, marine warming) and import dependencies exacerbate volatility, underscoring the need for resilient supply chains beyond short-term fixes.

Conclusion: Navigating the Trilemma

South Korea’s economic trajectory hinges on balancing three imperatives: (1) regulating platform monopolies without triggering U.S. trade retaliation, (2) diversifying export engines beyond semiconductors while managing real estate spillovers, and (3) restoring financial sector credibility through governance overhauls. Success requires nuanced diplomacy with Washington, targeted industrial policies to nurture non-IT sectors, and stricter enforcement of boardroom accountability. With global trade fragmenting and domestic risks mounting, Seoul’s ability to walk this tightrope will define its post-pandemic economic identity.