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US Moves to Impose Tariffs Up to 25% on Imported Vehicles.
Red Flag for Korean Automakers
US Moves to Impose Tariffs Up to 25% on Imported Vehicles.
  • By Jung Min-hee
  • May 25, 2018, 10:06
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The US government is moving to impose a tariff of up to 25% on imported vehicles.
The U.S. government is moving to impose a tariff of up to 25% on imported vehicles.

The United States’ move to impose a tariff of up to 25% on imported vehicles caused a backlash from South Korean automakers. This is because South Korea made a concession in revising the KORUS FTA in March this year by agreeing to postpone Washington’s abolishment of a 25% tariff on imported pickup trucks until 2041. Despite Korea’s concession, the US is moving to introduce the new tariff on imported vehicles, to which a zero tariff has been applied since 2016 under the FTA.

On the face of it, the new tariff targets every country. However, the real targets are Japanese, South Korean and European automakers, which have high market shares in the United States. President Donald Trump is urging them to increase their production in the United States, wielding Section 232 of the Trade Expansion Act of 1962.

According to local industry sources, South Korean automakers cannot export their vehicles to the U.S. market in the presence of the 25% tariff. At present, they are barely maintaining their price competitiveness in the market, which is dominated by Japanese automakers who provide a lot of incentives to dealers. If the new tariff comes into play, South Korean carmakers will have to absorb the additional burden by raising their product prices.

It is Hyundai Motor and Kia Motors that are likely to be affected most. They exported 307,000 and 287,000 cars to the U.S. market last year, respectively. Hyundai Genesis vehicles, which are all produced in South Korea, may completely lose their competitive edge.

GM Korea will take a direct hit, too. Last year, export to the U.S. accounted for 30% of the company’s total exports. Likewise, Renault Samsung Motors exported more than 30,000 Nissan Rogues to the U.S. last year. The new tariff is estimated to affect 30% of South Korea’s total automobile exports (2.53 million units in 2017) and 72% of South Korea’s trade surplus with the U.S. in the industry (US$17.9 billion). At present, the ratio of local production to sales in the U.S. market stands at 53% for Hyundai and 48% for Kia, lower than the local market average of 63%, which means the two may face more pressure than the others.

South Korean carmakers have two options to choose from. One is to sell their vehicles at higher prices and the other is to produce cars in the U.S. According to industry insiders, they are likely to choose the second option in the end. Then, their production in South Korea cannot but fall.

The new tariff is predicted to result in massive repercussions given the proportion of the automotive industry in the South Korean economy. As is well known, approximately 25,000 parts are used in a single vehicle. Last year, South Korea’s car exports totaled US$41.7 billion and exports to the U.S. market accounted for more than one-third of the total. Production losses will exceed 40 trillion won, leading to a lost added value of 11 trillion won, on the assumption that exports to the U.S. drop from about 800,000 units to zero. Then, no less than 350,000 jobs will disappear in the South Korean automotive industry.

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