By John Burton
Cars have been at the center of trade disputes between Korea and the U.S. for more than 30 years. When Korean cars began making inroads into the U.S. in the late 1980s and early 1990s, U.S. auto manufacturers complained that both tariff and non-tariff barriers were keeping their products out of Korea. Although Seoul would make some concessions, the number of U.S. cars sold in Korea remained extremely low.
The car trade imbalance was addressed again in the mid-2000s when negotiations began on a Korea-U.S. Free Trade Agreement (KORUS FTA). Although a deal was reached in 2007, it was blocked in the U.S. Congress when Democrats complained about the bilateral trade deficit in autos. At the time, only around 5,000 American-made cars were being sold in Korea, while sales of Korean-made cars in the U.S. were more than half a million.
Talks on the KORUS FTA were resumed in 2010 with much of the focus on how to increase U.S. car sales in Korea. Seoul agreed to reduce car taxes based on engine displacement, which was said to disadvantage U.S.-made cars because they tended to be larger than Korean cars. In addition, Seoul agreed to a delay in tariff reduction on Korean car imports to the U.S. for five years. The agreement went into effect in March 2012.
However, the KORUS FTA did not settle matters when it came to autos. President Donald Trump forced Korea to renegotiate part of the agreement in 2018. This included an increase in annual U.S. auto exports from 25,000 vehicles to 50,000, which would only require meeting U.S. safety regulations instead of Korean ones.
This history shows that it is perhaps not surprising that the issue of cars once again threatens to disrupt Korean-American trade relations. The point of conflict this time concerns the new generation of electric vehicles or EVs.
Seoul is unhappy about the terms in President Joe Biden's omnibus Inflation Reduction Act (IRA) that could potentially place restrictions on U.S. sales of EVs from Korea as well as Europe. Although the act is meant to combat inflation and promote a green economy among other goals, the provisions concerning EVs could prove to be counterproductive by making them more expensive in a less competitive environment. Under the law, buyers of Hyundai and Kia EVs would no longer be eligible to receive U.S. tax credits of up to $7,500 unless most of their cars and parts were manufactured in the U.S., Canada or Mexico.
What makes it difficult for Korean EV automakers to achieve this goal are added stipulations concerning the lithium-ion cell batteries that power the EVs. At least half of the battery components must be assembled in North America. In addition, 40 percent of the minerals used to make the batteries must be sourced from within North America or countries that have a free trade agreement with the U.S., such as Chile which has vast reserves of lithium. Minerals from China or Russia would be barred by 2025.
The battery requirements could prove to be an almost insurmountable problem for Korean EV carmakers since China is the world's leading lithium-ion battery producer and is a major source of the cobalt, graphite and lithium used in battery production.
The purpose of the IRA's EV standards appears to be pretty clear. One is to protect traditional U.S. carmakers, such as Ford and General Motors, which have lagged behind in the development of EVs. Although Tesla dominates the American EV market with a 70 percent share, Hyundai/Kia rank second with a 9 percent share.
The other goal is to encourage carmakers with EV expertise to relocate their manufacturing to the U.S. as part of an American strategy to reduce dependence on Chinese supply chains.
Korea has already proved amenable under U.S. pressure to relocate advanced manufacturing plants. Hyundai Motor announced earlier this year that it would build a $5.5 billion EV car factory in Georgia by 2025. Korean battery makers, including LG Energy Solution, Samsung SDI and SK On, have already set up plants in the U.S. or are planning to do so. They can receive U.S. subsidies under the IRA in doing so.
The new tough standards nonetheless represent a slap in the face, particularly after Washington and Seoul recently agreed to enhance economic security cooperation. Moreover, they might be in violation of the KORUS FTA and World Trade Organization rules.
The U.S. may be able to limit the damage to trade ties with Korea if it adjusts the legislature when it is implemented by granting exemptions for some of its provisions. In addition, continued Korean efforts to boost manufacturing in the U.S. would help resolve the issue in the long term. But the IRA's lingering cost could be an erosion of trust between the two countries.
John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is a Washington, D.C.-based journalist and consultant.
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The car trade imbalance was addressed again in the mid-2000s when negotiations began on a Korea-U.S. Free Trade Agreement (KORUS FTA). Although a deal was reached in 2007, it was blocked in the U.S. Congress when Democrats complained about the bilateral trade deficit in autos. At the time, only around 5,000 American-made cars were being sold in Korea, while sales of Korean-made cars in the U.S. were more than half a million.
Talks on the KORUS FTA were resumed in 2010 with much of the focus on how to increase U.S. car sales in Korea. Seoul agreed to reduce car taxes based on engine displacement, which was said to disadvantage U.S.-made cars because they tended to be larger than Korean cars. In addition, Seoul agreed to a delay in tariff reduction on Korean car imports to the U.S. for five years. The agreement went into effect in March 2012.
However, the KORUS FTA did not settle matters when it came to autos. President Donald Trump forced Korea to renegotiate part of the agreement in 2018. This included an increase in annual U.S. auto exports from 25,000 vehicles to 50,000, which would only require meeting U.S. safety regulations instead of Korean ones.
This history shows that it is perhaps not surprising that the issue of cars once again threatens to disrupt Korean-American trade relations. The point of conflict this time concerns the new generation of electric vehicles or EVs.
Seoul is unhappy about the terms in President Joe Biden's omnibus Inflation Reduction Act (IRA) that could potentially place restrictions on U.S. sales of EVs from Korea as well as Europe. Although the act is meant to combat inflation and promote a green economy among other goals, the provisions concerning EVs could prove to be counterproductive by making them more expensive in a less competitive environment. Under the law, buyers of Hyundai and Kia EVs would no longer be eligible to receive U.S. tax credits of up to $7,500 unless most of their cars and parts were manufactured in the U.S., Canada or Mexico.
What makes it difficult for Korean EV automakers to achieve this goal are added stipulations concerning the lithium-ion cell batteries that power the EVs. At least half of the battery components must be assembled in North America. In addition, 40 percent of the minerals used to make the batteries must be sourced from within North America or countries that have a free trade agreement with the U.S., such as Chile which has vast reserves of lithium. Minerals from China or Russia would be barred by 2025.
The battery requirements could prove to be an almost insurmountable problem for Korean EV carmakers since China is the world's leading lithium-ion battery producer and is a major source of the cobalt, graphite and lithium used in battery production.
The purpose of the IRA's EV standards appears to be pretty clear. One is to protect traditional U.S. carmakers, such as Ford and General Motors, which have lagged behind in the development of EVs. Although Tesla dominates the American EV market with a 70 percent share, Hyundai/Kia rank second with a 9 percent share.
The other goal is to encourage carmakers with EV expertise to relocate their manufacturing to the U.S. as part of an American strategy to reduce dependence on Chinese supply chains.
Korea has already proved amenable under U.S. pressure to relocate advanced manufacturing plants. Hyundai Motor announced earlier this year that it would build a $5.5 billion EV car factory in Georgia by 2025. Korean battery makers, including LG Energy Solution, Samsung SDI and SK On, have already set up plants in the U.S. or are planning to do so. They can receive U.S. subsidies under the IRA in doing so.
The new tough standards nonetheless represent a slap in the face, particularly after Washington and Seoul recently agreed to enhance economic security cooperation. Moreover, they might be in violation of the KORUS FTA and World Trade Organization rules.
The U.S. may be able to limit the damage to trade ties with Korea if it adjusts the legislature when it is implemented by granting exemptions for some of its provisions. In addition, continued Korean efforts to boost manufacturing in the U.S. would help resolve the issue in the long term. But the IRA's lingering cost could be an erosion of trust between the two countries.
John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is a Washington, D.C.-based journalist and consultant.
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