U.S. Trade Representative Says Ratification of KORUS FTA "Top Priority" this Year

U.S. trade representative Ron Kirk has signalled his hope that the free-trade agreement (FTA) signed with South Korea in 2007 can be ratified following many years of negotiations. Kirk told media that, "As [U.S. president Barack Obama] said last week, we are working to resolve the outstanding issues so that we can move forward on trade agreement with South Korea…Approval of this FTA is a priority." He went on to add that, "With South Korea, we are determined how best to address outstanding issues, particularly related to automobiles…If the outstanding issues can be successfully resolved, we will work with Congress on a timeframe to submit them for Congressional consideration." The president had earlier emphasised that the presidential committee "would press for passage this year of [the] free-trade agreement with South Korea" to help create automotive jobs through export growth, although he cautioned that "different glitches" must first be resolved before ratification could take place.

However, despite the very vocal and numerous protests from the U.S. auto industry, several key provisions in the FTA have not been addressed.

Background

The automotive industry is an important producer and employer in both South Korea and the United States. The two countries signed the Korea-United States (KORUS) FTA during June 2007. The FTA is the first between the United States and a major Asian economy and the former's largest trade deal since the North American Free Trade Agreement (NAFTA) in 1993. For South Korea this is by far its largest FTA, dwarfing those signed in recent years with Chile, Singapore, the European Free Trade Association (EFTA), and the Association of Southeast Asian Nations (ASEAN). For South Korea it is of utmost importance, while the deal will also have a significant impact on the U.S. vehicle market.

Why KORUS FTA for U.S.?

The benefits available to U.S. automakers from the opening up of South Korea's automotive market include:

• Tariffs Eliminated: South Korea will immediately eliminate its 8% import tariff on nearly all U.S. vehicles and will immediately eliminate virtually all tariffs on auto parts. With respect to trucks, the country will also eliminate its 10% tariff immediately. In return, the United States will eliminate its 2.5% tariff on small cars immediately and on large cars (engines of 3000cc and greater) over three years.
• Solutions for Standards: South Korea will address emissions and automotive safety standards to ensure that they do not block access to the market for U.S. automakers.
• South Korea will exempt low-volume importers from its ultra-low-emission vehicle (ULEV) standard; apply a special small-volume importer standard used in California for importers of 10,000 or fewer vehicles annually; apply standards no more stringent than California's to other importers; and use California's methodologies for determining whether a manufacturer meets the standard.
• The FTA also provides an automatic two-year grace period before U.S. vehicle manufacturers must meet any new South Korean regulations related to self-certification for safety standards. After the grace period expires, South Korea will apply the self-certification regulations only to vehicles subject to a government-mandated recall and will deem U.S. vehicles produced by automakers that sell 6,500 or fewer units annually to be in compliance with the South Korean regulations if they meet U.S. safety standards.
• Enforcement: The automotive dispute settlement procedure includes a provision allowing the United States to suspend its tariff concessions (i.e., "snap-back" to pre-FTA levels) on South Korean passenger cars if South Korea is found to be causing nullification of its FTA obligations, in a way that materially affects the sale and purchase of U.S. vehicles. This "snap-back" provision could result in the reimposition of more than US$200 million in annual U.S. tariffs on South Korean passenger car imports.

Furthermore, the U.S. International Trade Commission (USITC) estimates that the reduction of South Korean tariffs and tariff-rate quotas on vehicles alone would add between US$10 billion and US$12 billion to annual U.S. GDP and around US$10 billion to annual vehicle exports to South Korea. Kirk explained: "The [positive] elements will stimulate export-driven growth and help the U.S. meet the president's goal to double U.S. exports in five years—an increase that could support 2 million additional American jobs."

How Might the U.S. Lose Out?

Despite these benefits, there remain some major obstacles for the United States:

• Auto Trade Imbalance: South Korea has long been regarded as having the lowest level of import penetration among developed markets, partly because of the dominance of domestic automakers, but also because of other non-trade barriers (NTBs). The U.S. president has earlier commented that the KORUS FTA is "badly flawed", given the imbalance in auto trade. This can be well understood when looking at last year's South Korean vehicle sales data. According to IHS Global Insight, the United States remained the largest export market for South Korean automakers, which achieved sales there of around 583,000 units during 2009. This contrasts with U.S. automakers, which sold around just 5,400 units in South Korea during the same year.
• Taxes: The U.S. Congress continues to demand that South Korea eliminate the discriminatory aspects of its engine displacement-based consumption and vehicle taxes and reduce existing tax rates. Furthermore, South Korea is also being asked to reconsider its decision to impose new engine displacement-based taxes and to apply its existing taxes in a non-discriminatory manner.
• Acceptance of Standards: South Korea does not fully acknowledge international test cycles and standards and applies its own unique rules. For example, regarding carbon dioxide (CO2) emissions, an approved and tested U.S. car cannot be sold in South Korea; costly modifications are required.
• Alleged Currency Manipulation: In recent years, South Korea has been criticised for intervening in the foreign currency markets by purchasing U.S. dollar assets to artificially lower the value of the South Korean won against the U.S. dollar in order to boost exports. The won appreciated between 2005 and 2007 and in response the South Korean authorities have intervened episodically to slow the won's rise, although the scale of this intervention has been much smaller than in Japan and China. The United States made currency intervention a major issue at the Senate Committee meeting. Major U.S. automakers such as Ford have claimed that the won has been "kept intentionally low" and that this has placed the South Korean auto giants Hyundai and Kia in an advantageous position in their export markets.

Nevertheless, South Korea is keen to ratify the deal before the end of this year and the country's president, Lee Myung-bak, has hinted that he is willing to make further concessions on vehicle trade with the United States to help move the legislation along. He stated, "If automobiles are a problem, we are ready to talk about it again. I want U.S. businesses to understand that the Korea-U.S. FTA is not something that is advantageous for [South] Korea and disadvantageous for the United States."

Outlook and Implications

The FTA in its current form would boost (competitively priced) South Korean imports significantly in the U.S. car market over the coming years, predominantly Hyundai and Kia models, and would help these automakers expand their market shares in the United States. In view of higher expected demand, South Korean vehicle manufacturers' output levels are set to increase. However, the agreement in its current form would be unlikely to have a major impact on U.S. vehicle imports into South Korea in the near and medium term. Imports will remain a tiny fraction of total sales in the South Korean market. All in all, the agreement gives South Korean vehicle manufacturers full access to the U.S. market without a tangible improvement in export conditions to South Korea. Thus, in the eyes of many U.S. manufacturers, the current agreement is rather lopsided, handing an unfair competitive advantage to South Korean manufacturers. Moreover, such an agreement would set a precedent for U.S. FTAs with other countries, leading to further uneven competition.