South Korea has proposed a shipbuilding investment package to the United States, named “Make American Shipbuilding Great Again” (MASGA). This comes ahead of the August 1 tariff negotiation deadline, with the aim of reducing or eliminating a 25% reciprocal tariff imposed on South Korean goods.
The package consists of large-scale investments by South Korean private shipbuilders in the U.S. It includes financial support such as loans and guarantees, backed by the Export-Import Bank of Korea.
Meeting Highlights
South Korean Industry Minister Kim Jung-kwan has discussed the proposal with U.S. Commerce Secretary Howard Lutnick in New York. Lutnick reportedly showed a positive response to the offer.
South Korea’s Finance Minister Koo Yun-cheol is scheduled to visit Washington and meet U.S. Treasury Secretary Scott Bessent. These discussions aim to finalise a trade agreement before the upcoming deadline.
Failure to reach a deal by August 1 will result in the resumption of the tariffs and other specific duties. The tariffs were initially implemented on April 9 but have been temporarily suspended for 90 days.
Potential Market Impact
The approaching August 1 deadline creates a clear catalyst, and we view the talks between the two countries as a high-probability path to a deal. The positive response from Lutnick to the proposal suggests a de-escalation is the most likely outcome. Derivative traders should therefore position for risk-on sentiment in the affected sectors.
We believe the most direct play is to be bullish on South Korean shipbuilders, which secured a world-leading 45% of global orders in the first quarter of 2024. Avoiding the 25% tariff would remove a major overhang, making call options on the largest players attractive. The investment package itself also signals government backing, reinforcing this positive outlook.
The potential agreement is also a significant event for the currency market. With the South Korean won recently hitting a 17-month low against the U.S. dollar, a finalized deal would remove major economic uncertainty and likely trigger a relief rally. We are looking at strategies that would profit from a drop in the USD/KRW exchange rate leading into and following the deadline.
On the American side, the “Make American Shipbuilding Great Again” proposal implies a significant capital injection into U.S. industrial capacity. This news could provide a tailwind for domestic shipbuilding stocks and their supply chains. We see this as a longer-term bullish factor for the sector, which has seen limited private investment for decades.
Historically, resolutions to trade disputes, such as the KORUS agreement renegotiations in 2018, have led to a sharp decrease in implied volatility. We anticipate that as discussions between Koo and Bessent progress favorably this week, volatility in related assets will compress. Selling options premium on related indexes or equities could therefore be a profitable strategy.
