Korea, US strike 15% auto tariff deal

Kim Yong-beom, presidential chief of staff for policy, holds a briefing at the presidential office in Seoul, Thursday, after Korea and the United States clinched a last-minute trade deal. Yonhap

Korea has defended itself “relatively well” in the last-minute auto tariff negotiation with the United States, as local carmakers will face a smaller financial burden following their latest agreement to set the tariff rate at 15 percent, experts and industry officials said Thursday.

The stance of the Korean government was to reduce the earlier 25 percent auto tariff to 12.5 percent, but the country failed to narrow its gap with the U.S. agreeing to a 15 percent auto tariff on Wednesday (local time).

Experts said the latest outcome is still a relief for tariff-hit Korean carmakers — particularly Hyundai Motor and Kia — as it is expected to boost their profitability in the second half of the year.

The carmakers were hit hard in the second quarter, reporting double-digit declines in their operating profits due to the 25 percent tariff burden from the world’s largest economy. The U.S. began imposing the tariff on Korean automakers on April 3.

“It leaves much to be desired that Korea has de facto lost its competitive edge from the Korea-U.S. Free Trade Agreement (KORUS FTA), after clinching the 15 percent auto tariff agreement with the United States,” said Kim Pil-soo, a professor of automotive technology at Daelim University College.

Earlier, Japan and the European Union signed 15 percent auto tariff deals with the U.S., but this is not the same increase as Korea, according to the professor.

“Japan and the EU are not FTA partners with the U.S. and had already been subject to a 2.5 percent auto tariff. This means their additional tariff burden increased by 12.5 percentage points under the new deals,” Kim said.

In contrast, Kim explained that Korean vehicles had entered the U.S. market tariff-free under the KORUS FTA, but under the new agreement, they are now subject to the full 15 percent tariff — in effect, a heavier effective burden than that faced by Japan and the EU.

Automobiles are parked for exports at a port in Pyeongtaek, Gyeonggi Province, Thursday. Yonhap

“Reflecting on this, the latest outcome looks not that satisfactory, but one good side is that local carmakers evaded the worst-case scenario and cleared tariff-related uncertainties to some extent,” the professor added.

Shares of Hyundai Motor and Kia rallied on Thursday morning on news of the reduced tariff risk from the U.S., but later took a downward trajectory because Korea’s tariff outcome was seen as less favorable to the those of Japan and the EU.

The stock price of Hyundai Motor closed down 4.48 percent on the benchmark KOSPI, Thursday, from a day earlier. Kia saw an even steeper decline of 7.34 percent over the same period.

The U.S. also agreed to impose 15 percent tariff on imports of Korean auto parts, such as motors, tires and batteries for electric vehicles.

Officials from the local auto industry said they will push for multilateral measures to minimize the impacts from the tariff.

“We will also continue focusing on improving product quality and enhancing our brand competitiveness by launching diverse action plans,” an official from Hyundai Motor said. The company declined to comment details on the specific countermeasures, such as auto price hikes.

An official from the auto industry said Hyundai Motor Group will reduce its marketing and other operational costs to ensure its profitable growth in the U.S.

“Even if the latest agreement bodes well for the carmaker due to the reduced tariff burden, this is still burdensome,” the official said. “The carmaker will have to keep increasing its production in the U.S., and diversify its export channels into more countries for more balanced revenue structure.”

The U.S., however, kept its current tariff rate on imports of Korean steel and aluminum unchanged at 50 percent. This sparked growing concerns that local players will retain their price competitiveness in the United States, with Korean companies suffering worsening profitability there unless the rate is adjusted downwards.