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The Peninsula

Korea Deserves Clarity from the U.S. Regarding a Tariff Exemption on Autos

Published September 28, 2018
Category: South Korea

By Phil Eskeland

During Wednesday’s bilateral meeting between President Donald Trump and Japanese Prime Minster Shinzo Abe, both agreed to begin talks on a bilateral free trade agreement.  While Japan was part of the now defunct Trans Pacific Partnership (TPP) trade agreement, this bilateral approach makes sense for the Trump Administration not only because Japan is America’s fourth largest trading partner and could provide a new lucrative markets for U.S. exports, particularly in the agricultural sector, but the country is also fourth largest contributor to the U.S. trade deficit.  In 2017, the U.S. goods and services trade deficit with Japan reached $56.6 billion.  For the first six months of this year, the bilateral trade imbalance grew by 8.3 percent to reach $30.1 billion.

However, as part of the announcement, the U.S. and Japan also agreed to “refrain from taking measures against the spirit of this joint statement during the process of these consultations.”  This is widely interpreted to mean that the U.S. would refrain from imposing higher tariffs on imported Japanese autos and parts while the trade negotiations are on-going.

This joint statement joins a similar announcement that the U.S. reached with the European Union (EU) that both sides “will hold off further tariffs.”  A related understanding has also been reportedly reached with Mexico in an undisclosed side agreement as part of the new U.S.-Mexico trade deal to allow higher tariffs, but only if Mexico exports more than $90 billion in autos to the U.S., which translates into approximately 2.4 million units.  As a point of reference, Mexico only exported about 1.8 million cars and trucks to the U.S. in 2017, so this possible restriction may be immaterial.

Because there are only five major sources of automobile production that comprise almost all imports into the United States (EU, Mexico, Japan, Korea, and Canada), there is concern that with agreements reached with the EU, Mexico, and now Japan, South Korea and Canada still remain possible targets of higher U.S. tariffs on imported motor vehicles and parts for dubious national security reasons.  While the U.S. is still trying to entice Canada to join the revised North American Free Trade Agreement (NAFTA) with threats to impose higher tariffs on autos made in that country, the U.S. and South Korea recently signed revisions to the Korea-U.S. Free Trade Agreement  (KORUS FTA).  These new changes included a series of modifications to the auto provisions that the Office of the U.S. Trade Representative said will “strengthen our national security relationship.”  However, there are no public reports either during or after the signing ceremony that a similar assurance was given to South Korea that the U.S. would exempt Korea from higher tariffs in imported autos and parts even though Korea has consented to a series of U.S. demands on trade policy, from revisions to KORUS to import quotas on Korean-made steel.  Particularly at this challenging time in dealing with North Korea and recognizing the national security value of the revisions to KORUS, the U.S. should extend the same courtesy as it provided to other friends and allies of the U.S. – the EU, Mexico, and Japan – to publicly commit to refrain from imposing higher tariffs on all imported autos and parts from the Republic of Korea.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from Bernard Spagg. NZ’s photostream on flickr creative Commons.

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