The Biggest Beneficiary of KORUS FTA
Japanese automakers have been receiving tax-free treatment of the free trade agreement (FTA) between South Korea and the United States as nine out of 10 Honda and Nissan cars sold in South Korea are manufactured in U.S. plants.
The top three Japanese car brands in South Korea enjoy up to 30 billion won (US$25.23 million) worth of benefits a year each from the Korea-U.S. FTA, according to the Financial Supervisory Service (FSS) and Korea Automobile Importers & Distributors Association (KAIDA) on Aug. 1. Honda Korea benefits most, followed by Nissan Korea and Toyota Motor Korea.
Tariff benefits of the three Japanese companies can be estimated from the transactions between their operations in Korea and the United States. Nissan Korea made an inventory purchase deal worth 115 billion won (US$96.72 million) with Nissan USA last year. The Altima mid-size sedan is the flagship model of Nissan Korea. The firm imports the Altima produced in the Smyrna plant in Tennessee, U.S., to South Korea and sells the model in the domestic market. If Nissan Korea manufactures the Altima in Japan and sells it in South Korea, it has to pay 8 percent tariffs according to the Customs Law and obtain certifications separately.
However, Nissan Korea received tax favors amounting to 9.20 billion won (US$7.74 million), or 8 percent of its sales, in 2016 thanks to the elimination of tariffs on cars under the FTA between South Korea and the United States. The total amount of tax benefits the company received for three years since 2016 is estimated to surpass 32 billion won (US$26.91 million), including 11 billion (US$9.25 million) in 2017 and 12.20 billion won (US$10.26 million) in 2016.
Market experts believe that Honda Korea has received even bigger tariff benefits. Honda Korea imports all the models from the United States, except for the HR-V, a mid-sized compact sports utility vehicle (SUV) produced in its Mexican plant. The firm sold 7,965 cars in South Korea last year, higher than Nissan Korea’s 5,053 units.
Honda Korea purchases cars from the global headquarters of Honda, unlike Nissan Korea which makes transaction with the U.S. subsidiary. This is why Honda Korea’s audit report shows no transactions with the U.S. subsidiary. However, the HR-V is the only model imported to South Korea from countries other than the United States. Honda Korea imported 160 units of the HR-V last year, accounting for a mere 2 percent of the total. Honda Korea's deals with its headquarters are mostly about importing cars from the United States. The amount of transactions between Honda Korea and the headquarters stood at 363.60 billion won (US$305.80 million) last year. The value of tariff benefits from the Korea-U.S. FTA is estimated at 28.50 billion won (US$23.97 million). Honda Korea had transactions of 201.10 billion won (US$169.13 million) in 2016 and 310.20 billion won (US$260.89 million) in 2017. In the process, the firm saved approximately 20 billion won (US$16.82 million) of tariffs a year.
Toyota produces most of its models, including high-end brand Lexus, in Japan and imports them to South Korea, paying 8 percent of import duties. However, the Avalon full-size sedan is exempt from import duties since it is manufactured in the plants in the United States. Toyota received about 3.30 billion won (US$2.76 million) of tariff favors last year after making a deal worth 41.20 billion won (US$34.65 million) with Toyota Motor Sales USA. To be sure, Toyota also enjoyed tariff benefits from 2011 to 2017 by producing the Camry mid-size sedan in the United States. The three Japanese car makers benefited more from the Korea-U.S. FTA than U.S. firm Ford, which imported 11,586 units in 2018.
In addition, an FTA is a multinational agreement with a goal of reducing or eliminating trade barriers, accepting damage on less competitive industries. For Korea, the agriculture industry was hit the most by the Korea-U.S. FTA and the automotive industry gained the most benefits. The South Korean government spent 20.40 trillion won (US$17.16 billion) of taxpayers’ money for 10 years since 2007 to support the agriculture industry. In short, Japanese companies have become the biggest beneficiary of the Korea-U.S. FTA which costed 20 trillion won (US$16.82 billion).
A bigger problem is that Japanese firms are obsessed with sending profits gained from the Korea-U.S. FTA to its own country instead of contributing to South Korea. Nissan Korea has donated only 410 million won (US$344,830) in South Korea since it started business in the country in 2005. Honda Korea has also donated only 510 million won (US$428,930) for 13 years since 2005. Honda Korea even has to pay additional corporate taxes this year as it failed to meet the requirements of investment and wage cost increase on the special provisions on taxation for investment and coexistent cooperation promotion. Toyota sent all the profits made after 2009 to the headquarters in Japan, except for 50.90 billion won (US$42.81 million) last year. It shows a stark contrast with Mercedes-Benz which keeps most of its retained earnings in South Korea and donates 2 billion won (US$1.68 million) every year, and BMW which has established a driving center in South Korea by investing tens of billions of won.