Don't expect big shift in U.S. exports with Korea trade deal

Kia vehicles bound for export at the port of Pyeongtaek in Pyeongtaek, South Korea, in January. Photo credit: BLOOMBERG

WASHINGTON -- President Donald Trump scored his first tangible victory on trade with the late-March agreement to amend the U.S.-Korea free trade agreement.

Raising U.S. light-vehicle exports was at the heart of the deal and fulfilled the president's "America First" agenda, but Detroit manufacturers have not taken any victory laps.

Under the revised trade pact, which still must be sent to Congress for a 60-day review and be approved by Korea's National Assembly, Korea will double the annual quota for U.S. imports to 50,000 units per company, recognize U.S. safety standards and reduce red tape associated with emissions compliance.

The American Automotive Policy Council, which represents the Detroit 3 on trade matters, didn't issue a statement after the deal was announced. Neither did Ford Motor Co.

General Motors said it was pleased by the progress, pending the release of specific details, adding, "We continue to have high expectations for KORUS and would like to see its positive trends continue."

But officials at all three organizations have avoided interview requests.

The muted response is a sign that GM and Ford don't see Korea's concessions as a big deal.

If that's the case, why did they seek government help to resolve complaints about ongoing Korean roadblocks to market access, despite the lowering of barriers six years ago?

Perhaps it's because boosting exports to Korea might be the least important of their priorities.

Remember, Korea is an extremely difficult market to penetrate for foreign companies, and no reduction in trade barriers is going to change that. Most Koreans are loyal to domestic brands -- Hyundai and Kia. They perceive U.S. vehicles as too large or unattractive for their tastes.

The Korean government was willing to bend on protective rules because it knows consumer preferences will keep sales of U.S. imports to a minimum. And they didn't want to upset a mercurial U.S. president at a time of delicate security negotiations with North Korea.

U.S. Trade Representative Robert Lighthizer acknowledged that Detroit automakers won't see exports jump to 50,000 vehicles any time soon, but said they could push beyond the current ceiling of 25,000 over time.

GM and Ford each shipped fewer than 10,000 vehicles to Korea last year, although that's a big increase compared to pre-KORUS days. GM also produces cars at four plants in Korea, but most of them are exported. A decline in exports in recent years, partly due to yanking the Chevy brand from Europe, has GM executives weighing how to downsize operations there.

Korean officials say it's now up to American ingenuity to sell vehicles in Korea.

"We have free access that's given to European and Japanese cars, and they are doing very well. And we've given opportunities to the U.S. automakers," Young Ju Kim, CEO of the Korea International Trade Association, told reporters through an interpreter during a visit here to urge swift conclusion of the KORUS negotiations. "What remains to be done is to make U.S. cars more attractive for the consumers in Korea. This is something the marketers have to do. Once that's done, I have no doubt U.S. cars will be successful in the Korean market."

The higher import caps and recognition of U.S. standards have value because they give U.S. automakers some incentive to make an effort. As small-volume exporters, it doesn't make economic sense to spend lots of resources to follow different testing or safety standards for Korea. As one trade expert confided, it gives Ford and GM the space to figure out which models will be most appealing to Korean consumers and then concentrate on exporting them.

But the real prize for Ford and GM is protecting the lucrative U.S. market for pickups, crossovers and SUVs. And the new KORUS delivered on that in a big way, extending another 20 years the 25 percent import tariff on light-duty trucks that was set to expire in 2021 for Korean automakers under the original free trade pact. Justifying protectionism at home is a lot easier when the companies can point to Korea's tilted playing field. So, the fight for market access in Korea had the dual benefit of serving as a negotiating lever to maintain tariffs, which means Kia and Hyundai have to invest in the U.S. if they want to sell trucks in this market.

Another apparent motivation for seeking Korea's recognition of U.S. standards, plus a side agreement against currency manipulation, is that Detroit automakers are looking for new trade deals to serve as templates for future ones. Trade deals tend to build on, and borrow from, each other, so precedent is important. That's why U.S. automakers are pressing for language on currency manipulation in talks to retool NAFTA, even though there's no problem with Canada and Mexico, and harmonized standards.

And to be clear, in the case of Korea, it doesn't appear that both sides have fully harmonized safety and emissions standards. Korea has decided to recognize U.S. rules, but how that will be executed is not entirely clear because public information so far is vague. We probably won't have any details until after the congressional review.

The bottom line for KORUS: There's less than meets the eye.

You can reach Eric Kulisch at ekulisch@crain.com

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