1. Korea Unveils 2026 Budget with 8.1% Increase, AI Investment at Core The Korean government announced its 2026 national budget, projecting a sharp 8.1% increase compared to the previous year, totaling 728 trillion won. Central to this expansion is a significant allocation for artificial intelligence development, with 35.3 trillion won earmarked for AI research and applications, marking a 19.3% rise year-on-year. Industrial policies will receive 32.3 trillion won, reflecting a 14.7% increase, while defense spending is set to rise by 8.2% to 66.3 trillion won. The government also pledged expanded welfare measures to tackle demographic decline, increasing birthrate-related spending by 8.2%. However, this ambitious fiscal agenda is not without challenges. The fiscal deficit is forecast to widen to 4.0% of GDP, while public debt is projected to climb to 51.6%. To finance the gap, the government plans to issue bonds worth 232 trillion won. Analysts caution that while the heavy investment in AI signals Korea’s determination to position itself as a top-three global AI leader, ballooning debt and persistent structural challenges, such as aging demographics and sluggish domestic demand, could pose risks to long-term fiscal stability. Nevertheless, policymakers argue that bold, forward-looking investments are essential to escape low-growth traps and ensure Korea’s competitiveness in the next industrial wave.
2. Bank of Korea Warns of “Significant” Economic Shock Despite Trade Agreement with U.S. Even after concluding a trade agreement with the United States, the Bank of Korea (BOK) has warned that Korea’s economy will continue to face “significant shocks.” The U.S. deal leaves an average tariff of around 15% on Korean exports in place, and the central bank estimates this could shave 0.45 percentage points off growth in 2025 and 0.60 points in 2026. Growth forecasts stand at 0.9% this year and 1.6% next year, both well below historical averages. The BOK’s assessment reflects the sobering reality that Korean exporters remain highly vulnerable to global trade frictions and protectionist policies. Although the trade deal avoided the worst-case scenario of sweeping tariffs, industries such as automobiles, electronics, and steel remain under pressure from U.S. barriers. Policymakers are particularly concerned about Korea’s reliance on a limited set of export markets, noting that any further U.S.-China tensions could amplify risks. The BOK emphasized the need for proactive monetary and fiscal measures to cushion the impact, as well as structural reforms to diversify export destinations. For now, the bank maintains its projection of gradual recovery, but with strong caveats that Korea’s open economy remains exposed to unpredictable geopolitical and trade headwinds.
3. China Extends Anti-Dumping Duties on Phenol Imports from Korea and Others China’s Ministry of Commerce has decided to extend anti-dumping tariffs on phenol imports from Korea, the U.S., the EU, Japan, and Thailand for another five years. Phenol, a crucial raw material for plastics, pharmaceuticals, and adhesives, plays a central role in global supply chains. The decision is expected to increase production costs for Korean exporters and downstream industries reliant on chemical inputs. For Korea, which counts China as its largest trading partner, this move compounds existing pressures from slowing Chinese demand and intensifying competition from local suppliers. Industry experts warn that Korea’s petrochemical companies could face eroding margins, forcing them to seek alternative markets or pivot toward higher-value chemical derivatives. The extended tariffs reflect a broader trend of economic nationalism, as major economies deploy trade protectionism to shield domestic industries amid global slowdowns. For Korean policymakers, the decision underscores the urgency of diversifying export structures and accelerating innovation, as over-reliance on China exposes the economy to recurrent risks. While the immediate financial impact may be moderate, the long-term challenge lies in reshaping Korea’s industrial competitiveness in a more protectionist world economy.
4. Korea-U.S. Summit to Focus on Troop Costs, China Strategy, and Security Cooperation As President Lee Jae-myung prepares to meet former U.S. President Donald Trump, now back in office, the upcoming Korea-U.S. summit is expected to center on contentious issues such as defense cost-sharing, modernization of the military alliance, China containment strategies, and trilateral coordination with Japan. Washington is likely to press Seoul for higher contributions to U.S. troop deployments in Korea, while Seoul seeks to balance alliance obligations with fiscal prudence. Analysts note that Trump’s transactional approach to alliances could once again reshape the dynamics of burden-sharing, potentially straining public sentiment in Korea. The summit will also address growing regional security concerns, particularly North Korea’s accelerating nuclear program and the broader strategic rivalry with China. Seoul faces the dual challenge of strengthening deterrence with the U.S. and Japan while preserving economic relations with Beijing, a critical trading partner. Observers say the outcome of the summit will signal Korea’s future orientation in balancing its security commitments and economic diplomacy, making it a pivotal moment in the country’s foreign policy.
5. AI as a Growth Engine: Policy Priority Amid Economic Slowdown The government has doubled down on artificial intelligence as the centerpiece of Korea’s growth strategy, unveiling 30 flagship AI projects slated to begin this year. These projects span healthcare, manufacturing automation, defense systems, and digital infrastructure, supported by regulatory reforms and tax incentives. Officials set a bold goal of positioning Korea as one of the world’s top three AI powers, competing with the U.S. and China. The urgency is underscored by Korea’s slowing growth, with GDP expansion projected at just 0.9% this year. Policymakers argue that AI adoption could boost productivity and compensate for demographic challenges, particularly an aging workforce and low fertility rates. However, critics caution that without parallel reforms in education, labor markets, and startup ecosystems, investment alone may not translate into tangible gains. Moreover, Korea must ensure that AI expansion aligns with ethical and social considerations, including data privacy and equitable access. The policy reflects Korea’s recognition that in a rapidly digitalizing global economy, technological leadership is not optional but a necessity for survival and relevance.
Editor’s Note Today’s issues collectively illustrate Korea’s attempt to break from structural stagnation through bold investment in artificial intelligence and expanded fiscal policy, while simultaneously grappling with external shocks in trade and security. The government’s 2026 budget signals a strong commitment to future-oriented industries, but rising debt levels cast long-term doubts. The Bank of Korea’s warning that even after securing a trade deal with the U.S. Korea will face significant shocks underscores the vulnerability of an export-dependent economy. China’s extension of anti-dumping duties reveals the risks of heavy reliance on a single partner. Meanwhile, the upcoming Korea-U.S. summit places Seoul at the crossroads of alliance management, economic security, and regional diplomacy. Finally, the AI policy push embodies both ambition and risk: Korea must ensure that investment translates into productivity gains rather than unsustainable hype. Taken together, these developments suggest that Korea is navigating a delicate balance between bold innovation and structural fragility. How do you think Korea should reconcile these competing priorities in the years ahead?
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