There were further signs of revival for the free trade agreement between the US and South Korea at the recent G20 meeting in Toronto, though labour opposition and fears that the removal of tariffs could damage light truck production in the US and lead to an unbalanced influx of more Korean models continue to hamper progress. And according to some in the industry, the prospects for logistics operators not linked to one of South Korea’s protected chaebols do not look much better.
Building on an announcement made during US president Barak Obama’s visit to South Korea last November, during which South Korean president Lee Myung-bak said the republic was willing to reopen discussions on automotive trade under the KORUS free trade agreement, last week the two presidents announced plans to rework the deal by November this year when the G20 reconvenes in Seoul.
The agreement, which has lain inert since April 2007, could be the US’s largest trade pact since the North America Free Trade Agreement (NAFTA) in 1994 and is lauded as being a support for Obama’s pledge in March this year to double American exports in five years.
"It will strengthen our commercial ties and create enormous potential economic benefits, and create jobs here in the United States, which is my number one priority," Obama said in Toronto.
But the United Auto Workers union sees the move as a potential threat to jobs at a time when 15m people are out of work in the US, with the influx of Korean models endangering jobs in the automotive industry.
Neither is the assurance sitting well with disgruntled carmakers who fear the agreement would guarantee access by South Korean automotive companies to the US market without reciprocal assurances that US carmakers could improve their sales there.
South Korea only imported around 6,100 vehicles in total from the US last year, while last month Kia alone sold nearly 38,000 vehicles in the US.
More generally, the US imported $8.4 billion worth of vehicles and parts from Korea last year and Bloomberg cites the US International Trade Commission in speculating that this could increase by as much as $1.7 billion a year as a result of the deal. By comparison the US exported just $140m to South Korea in the first 11 months of last year.
The imbalance led Representative Sander Levin, chairman of the House Ways and Means trade subcommittee, to state earlier this year that, “in no sector is the lack of reciprocal market access more apparent than in Japan's and South Korea's auto sector, where market access barriers to US auto imports have led to grave auto trade deficits."
South Korea has the lowest level of import penetration of any developed country.
Ford and the UAW want Washington to keep a 25% US tariff on pickup truck imports but the agreement would require the US to phase out that tariff over the next decade. The proposal would similarly remove an 8% South Korean tariff on US passenger cars and a 10% truck tariff according to the country’s ambassador in the US, Han Duck-soo.
But for some in the industry the US-Korea trade initiative (like the one proposed with the EU) remains highly controversial even without these tariffs. At the behest of Hyundai, the Korean government has negotiated for a number of other customs and regulatory standards that carmakers in the US and the EU say discriminate against foreign competition and are perceived as highly restrictive and unfair.
One example is that South Korea does not fully acknowledge international test cycles and standards and applies its own unique rules. For instance, regarding carbon dioxide emissions, an approved and tested car from the US or EU cannot be sold in South Korea without costly modifications being made.
South Korea’s progressive tax which imposes heavier levies on large cars and its complicated engine displacement tax are two other issues and, when combined, the perceived imbalance has led one insider to tell Automotive Logistics News this week that, “no one can import cars to South Korea, whilst Hyundai goes mad dumping cars on everybody else.”
Concerns over the possibility that Hyundai-Kia can import vehicles or parts from China and re-export them to Europe and the US are another concern. South Korea benefits from a duty drawback clause that allows its manufacturers to reclaim import duties on vehicle parts from neighbouring countries.
And as Hyundai-Kia only uses logistics service providers with close links, such as member company Glovis, the opportunities for other logistics operators could remain limited. “The situation is good for Glovis as Hyundai will be able to continue their onslaught on the world market subsidised by South Korea's protected market,” said an industry source.
Hyundai Motor said it would not comment on any questions relating to Korea-US FTA issues, “as the talks are not yet finalised”, but rejected the notion that South Korea may be operating discriminating regulatory standards, stating that it currently does not have any trade barriers to vehicle imports.
The question over sufficient reciprocity with respect to vehicles remain “legitimate issues for negotiation” to use Obama’s studied language but a lot of work remains to be done before November to clear the barriers preventing free trade.