White House

Trump tough on South Korea: Threatens to terminate free trade deal, wants payment for THAAD missile defense system

How Trump is changing US trade policy

President Donald Trump said that he will either renegotiate or terminate a "horrible" trade deal with South Korea, Reuters reported late Thursday.

The president also said he wants South Korea to pay for the $1 billion THAAD missile defense system, Reuters said.

Responses to Trump's comments soon arose, with an official from South Korea's automakers association telling Reuters that the group is now concerned about "the uncertainty" of the free trade agreement.

Shares in Hyundai Motor fell as much as 2.4 percent following Trump's comments. South Korea's won turned weaker on the comments.

Khoon Goh, head of Asia research at ANZ, told CNBC such a reaction is expected given " massive amounts of foreign inflows" into Asia, particularly Korea and Taiwan, over the last month "as trade tensions between the U.S. and China have eased off."

"So investors are thinking that perhaps the worst on trade tensions with Asia is not going to happen," he said. "And all of a sudden, this has come from a bit of a left field, so I think what we're going to see now is markets perhaps need to start pricing a little bit more potential of trade tensions between the U.S. and Korea."

Still, he added that Trump's comments were likely "just a negotiating tactic."

An official from South Korea's Finance Ministry said that the U.S. administration had not yet requested anything on the free trade agreement.

And on the issue of THAAD payment, a foreign policy advisor to South Korea's presidential front-runner, Moon Jae-in, said that Seoul shelling out for the missile defense system is an "impossible option," according to Reuters.

A Terminal High Altitude Area Defense (THAAD) interceptor is launched during a successful intercept test, in this undated handout photo provided by the U.S. Department of Defense, Missile Defense Agency.
U.S. Department of Defense | Missile Defense Agency | Reuters

The South Korean Defense Ministry said that there was no change to its position that the U.S. would bear the cost of THAAD deployment, Yonhap news agency reported. Earlier this week, Yonhap said the U.S. military had begun transferring parts of THAAD into a planned deployment site in South Korea.

The system, the Terminal High Altitude Area Defense, is designed to protect South Korea and Japan from missile attack, and it could be operational as soon as summer 2017. North Korea and its unpredictable leader Kim Jong Un possess nuclear weapons and make a habit of regularly threatening neighbors.

THAAD uses radar to track when a ballistic missile is launched and then intercepts and destroys the missile before it descends onto its target.

Now, Trump's hard stance comes as tensions are on the rise in the Korean Peninsula as U.S. rhetoric takes a sharper tone against the North.

In fact, Trump also told Reuters on Thursday that "there is a chance that we could end up having a major, major conflict with North Korea. Absolutely." Still, the president had emphasized to the news outlet that he would prefer a peaceful resolution to the situation in the region.

Some have theorized that THAAD may be an effective way to pressure China to help deescalate tensions with North Korea.

"We planted this high-end air defense system in South Korea that has obvious implications for the Chinese because the radar fans go all the way through Manchuria," former CIA Director Michael Hayden said this month, explaining that such a move will force Beijing to address the "bad toothache" of Pyongyang, according to Yonhap.

This is a breaking news story. Check back for updates.

—Reuters and CNBC's Seema Mody contributed to this report.

Correction: This article has been updated to reflect that THAAD stands for Terminal High Altitude Area Defense.