US tariffs to hit Korean carmakers hard

/ Yonhap

By Nam Hyun-woo

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.” It is a step prior to imposing a hefty duty, which the Wall Street Journal reported could be as high as 25 percent, on car imports to the U.S.

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 Mexico, 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.

“We are paying very sharp attention to the Trump administration's move,” an industry official said. “Though it is still uncertain whether the 25 percent tariff will happen, attention is required to the progress of the issue, given President Trump's negotiating style.”

The investigation would provide the legal basis for the president to impose tariffs for national security. The Trump administration used the rule for the steel industry by starting an investigation in April last year. Trump then signed a 25 percent duty on steel imports and 10 percent on aluminum.