When the U.S. Republican Party introduces a border adjustment tax, a price hike on products of Hyundai Motor and its smaller affiliate Kia Motors is expected to be 10 times higher than that of Ford. Accordingly, Korean products will rapidly lose the competitiveness in exports.
Accordingly U.S.-based market research firm Baum & Associates LLC on Feb. 15, the price of Hyundai-Kia Motors cars will be increased by US$2,704 (3.09 million won) per unit, which is 2.5 to 9.6 times higher than US$995 (1.14 million won) of GM and US$282 (321,762 won) of Ford, when the border adjustment tax is introduced. Automakers that import their full lineups would be most affected, including US$17,000 (19.4 million won) per vehicle for Tata Motors' Jaguar and Land Rover brands, US$2,651 (3.02 million won) for Toyota Motor and US$2,298 (2.62 million won) for Nissan Motor.
Baum & Associates also said that the average price of cars will be increasd by about 8 percent and car sales in the U.S. will be decreased by 2 million units a year. This will also lead to lower demand for Korean vehicles and auto components.
In its report titled “Trends of U.S.’ Border Adjustment Tax Introduction and Effects on Korean Economy and Industry,” KOTRA said, “When the border adjustment tax is put in place, the price of imported consumer goods at large retailers and department stores in the U.S., including Walmart, will be raised. This will directly adversely affect Korea’s leading exports to the U.S. such as cell phones, home appliances and consumer goods.”
The U.S. Republican Party proposed the tax reform that reduces the corporate tax rate from current 35 percent to 20 percent and imposes no taxes on exports leaving the U.S. and overseas profits, while imposing a 20 percent border adjustment tax on imports. Since the new system taxes only companies’ US earnings, it exempts exports from tax but levies a tax on imports caused by manufacturing processes, including components.
U.S. President Donald Trump pledged to impose a 20% tax on Mexican imports as a border tax, but he also supports the border adjustment tax.
This is why Korean companies have become more worried. An official from Hyundai Motor said, “We are strethening local production, including the Alabama plant, and most of our parts suppliers have their production plants in the U.S. However, it is impossible to be supplied with every component within the U.S.” An official from Samsung Electronics also said, “There will be no problem with IT products, such as smartphones and semiconductors due to the non-tariff measures on the products. For home appliances, however, we need to consider profitability whether we should bear the burden of the border adjustment tax by maintaining the complete knock down (CKD) method or bring our parts suppliers to the U.S.”
KOTRA also expressed concerns over indirect effects from a sharp drop of China’s exports to the U.S. Peterson Institute for International Economics (PIIE) said that China’s exports to the U.S. this year will drop by more than US$46 billion (52.49 trillion won), which is a 10 percent of the toal exports, and the Bank of Korea reported that Korea’s total exports decline by 0.36 perent when China’s exports to the U.S decrease by 10 percent.
Yoon won-suk, head of KOTRA's Information and Commerce Support Division, said, “The likelihood of introducing the border adjustment tax is not very high yet, but I am concerned about direct and indirect adverse effects on Korean economy and inusdtry when the tax comes into effect.”