US tariffs to hit Korean carmakers hard
In another trade bomb, the Donald Trump administration is moving to impose a hefty 25 percent tariff on car imports, which will likely weigh heavily on domestic carmakers and Korea’s export to the United States.
According to the White House, Trump instructed the U.S. Department of Commerce to investigate whether automotive parts imports threaten the country’s “national security.” This is a step prior to imposing a hefty duty on car imports to the U.S., which the Wall Street Journal reported could be as high as 25 percent.
The announcement appears to be leverage for the U.S. negotiations with Canada and Mexico over the North American Free Trade Agreement (NAFTA), but it could also pose a huge risk to Korea if the country fails to get an exemption.
“This (the car tariff) means the U.S. wants carmakers to have facilities on its soil and make cars there,” said Kim Phil-soo, a professor at Daelim University’s Automotive Engineering Department.
“A tariff higher than 20 percent is virtually a ban for an exporter. Currently, Korea manufactures 4.2 million cars, but it may not surpass the 3 million mark, if the duty takes effect,” he said.
“Given that the car industry is based on supply chains of large carmakers and small- and medium-sized enterprises, the impact of the tariff will be massive.”
For Korea, the U.S. is a very important market and cars are a critical export.
Currently, 44 percent of the cars sold in the U.S. are imported. In 2017, the country imported cars worth $191.73 billion, and $15.7 billion of cars, or 8.1 percent, were from Korea, which is the fifth-largest exporter to the U.S., following Mexi- co, Canada, Japan and Germany.
According to the Korea Automobile Manufacturers Association (KAMA), Korea exported 2.53 million vehicles, of which 845,000, or 33 percent, headed to the U.S., meaning the country is the single largest export market for Korean carmakers.
Also, cars accounted for 21.4 percent of Korea’s exports last year, while auto parts were 8.3 percent, according to the Korea International Trade Association (KITA).
The U.S. currently imposes a 2.5 percent tariff on imported cars but exempts those from Korea due to the Korea-U.S. Free Trade Agreement (KORUS FTA).
Should the Trump administration include Korea in the list of countries for the duty, Korean carmakers, whose cars are recognized in the U.S. for cost-efficiency rather than premium quality, will likely lose their market competitiveness, experts say.
Currently, Hyundai Motor, Kia Motors, GM Korea and Renault Samsung export their cars to the U.S. with SsangYong Motor being the only exception. In terms of Hyundai Motor, 600,000 of 1.3 million vehicles it sold in the U.S. last year were produced in Korea.
If the tariff comes into effect, it has to raise the number of cars manufactured in the U.S. from last year’s 700,000 to avoid the hefty duty, as the company is doing in the Chinese market.
“It is expected to take six months to one year before the actual implementation, and Korea has to prepare itself during the period, as well as calling for the prompt implementation of the KORUS FTA,” Kim said.
“Though it may not be satisfactory, Korea can opt to face a quota in exports instead of a hefty tariff, as it did for the steel industry earlier this year.”
In Trump’s previous move to impose duties on steel imports, Korea earned an exemption in return for placing an exporting quota of 70 percent of its average export volume between 2015 and 2017.
— The Trump administration on Wednesday launched an investigation into whether tariffs are needed on the imports of automobiles into the United States, moving swiftly as talks over the North American Free Trade Agreement have stalled. President Donald Trump predicted earlier that U.S. automakers and auto workers would be “very happy” with the outcome of the NAFTA talks.
The White House said in a statement that the president had asked Commerce Secretary Wilbur Ross to consider whether the imports of automobiles, including trucks, and automotive parts threaten U.S. national security. The president said in the statement that “core industries such as automobiles and automotive parts are critical to our strength as a Nation.”
The U.S. remains far apart on the talks over rewriting the trade pact with Canada and Mexico, with the discussions at an impasse over rules for car production. The initiation of the trade investigation could be seen as an attempt to gain leverage in the talks with the two U.S. neighbors. Treasury Secretary Steven Mnuchin has said that efforts to renegotiate the trade agreement could spill into next year.
Nearly half of the vehicles sold in the U.S. are imported, with many coming from assembly plants in Mexico and Canada. During a meeting with auto executives earlier this month, Trump said he would push for an increase in the production of vehicles built at U.S. plants. He has also criticized European Union auto imports and tariffs and earlier this year threatened a “tax” on European imports.
A person familiar with the discussions said the president has suggested seeking new tariffs of 20 to 25 percent on automobile imports. The person spoke on condition of anonymity and was not authorized to speak about private deliberations.
Trump brought a little-used weapon to his fight to protect auto workers: Section 232 of the Trade Expansion Act of 1962. The provision authorizes the president to restrict imports and impose unlimited tariffs on national security grounds.
The Trump administration used that authority in March to slap tariffs of 25 percent on imported steel and 10 percent on aluminum imports. Until then, the United States had pursued only two such investigations since joining the World Trade Organization in 1995. Both times — in a 1999 case involving oil imports and a 2001 case involving iron ore and steel imports — the Commerce Department refused to recommend sanctions.
Critics fear that other countries will retaliate or use national security as a pretext to impose trade sanctions of their own.
Daniel Ujczo, a trade lawyer with Dickinson Wright PLLC, said the tariff threat is likely meant to pressure Mexico into accepting U.S. demands for NAFTA changes that would shift more auto production to the U.S. from Mexico. But he questioned whether it would work.
“I do not believe that it will have the desired effect,” Ujczo said. “Everyone knows that (the investigation) will take too long and has no chance of surviving any legal challenge.”
Trump offered a hint about the move earlier in the day on the South Lawn, telling reporters that “you’ll be seeing very soon what I’m talking about.” He noted that both Mexico and Canada have been “very difficult to deal with” during the negotiations.
“I am not happy with their requests. But I will tell you in the end we win, we will win and will win big,” Trump said before departing for New York. He said America’s neighbors have been “very spoiled because nobody’s done this but I will tell you that what they ask for is not fair. Our auto workers are going to be extremely happy.”