Carmakers and trade deals: One-way street
Europe’s carmakers fear the results of a free-trade agreement with South Korea
Jul 8th 2010
In the next few months European Union governments will have to decide whether to ratify a free-trade agreement (FTA) with South Korea that is described by the EU’s external-trade directorate as “one of the most ambitious and complete deals” it has ever signed. The agreement would eliminate import duties on nearly all products and prepare the way for rapid liberalisation of trade in services. However, the FTA, which took many rounds of tough negotiations, is also deeply controversial.
Although the estimates of the deal’s overall economic benefit to the EU are tiny (up to 0.08% of extra GDP, according to the European Commission) and are not that large even for the Koreans (0.84%), the deal is regarded by both sides as a template for others they would like to do as an alternative to progress at the stalled Doha round of world trade talks. A similar FTA between South Korea and America was signed by the Bush administration three years ago but Congress has failed to ratify it and shows few signs of doing so.
As in America, the most strident opposition to the EU’s deal with Korea has come from the car industry, and for much the same reasons. Europe’s carmakers, like their American counterparts, say they support free trade but do not believe that the agreement in its present form delivers it. They have a point. Korean vehicle exports to the EU reached a peak of around 700,000 a year a few years ago—20% of all EU car imports—before the downturn and before Hyundai-Kia, the country’s biggest manufacturer, opened factories in Slovakia and the Czech Republic. In contrast, the Europeans’ annual sales to the Koreans have averaged just 32,500 in the past four years, mostly of German premium brands that can absorb the high costs of meeting Korean regulations and do not compete directly with local products.
The concern of European carmakers, whose campaign against the agreement is being waged by their trade body, ACEA, is that whereas the gains for the Koreans are real and tangible, allowing them in a few years’ time to sell a €10,000 car for up to €1,450 less than today, the Korean market will remain as it is today, the most impenetrable of any developed country.
Under the FTA, import tariffs, currently 10% in Europe and 8% in Korea, will be gone in three to five years. But the Koreans have secured two concessions. The first is that even when their cars are tariff-free, they will still be able reclaim duty on imported vehicle parts from low-cost nearby countries, above all China. Normally, such “duty drawback” arrangements end when the tariff on the finished vehicle is abolished. Even the European Commission’s tax and customs directorate has expressed surprise that this is not happening. Second, the FTA will weaken the “rule of origin” from 60% local content to 55%. If the Koreans were to take full advantage of these dispensations, they could undercut European rivals that do have to pay duty on foreign parts by up to 4.5%.
In exchange, the Koreans have undertaken to sweep away the so-called non-tariff barriers that have been used to protect their car industry. But there are two problems. The first is that South Korea has a reputation for signing agreements that would end its practice of using safety and emissions standards to keep imports at bay, but then reneging on them.
In 1995 and 1998 Korea signed memoranda of understanding with America to improve vehicle-market access. But since 1998, American negotiators claim, 15 new regulations—from a unique “anti-pinch” requirement for electric windows (2001) to a similarly unique emissions standard (2005)—have been unilaterally introduced. A confidential document prepared for Ford in 2007 noted: “Alone, most of these regulations could be overcome, but collectively they represent a huge cost and burden, especially for small-volume import sellers.” ACEA believes that there are not enough safeguards in the FTA to prevent the same insidious process starting again after the agreement is ratified.
The second problem is that even if the Koreans were to give up playing the non-tariff-barriers game, there remains a deeply ingrained anti-import bias within their government and news media. A report in 1999 by J.D. Power, a market-research firm, on South Korean consumer attitudes towards imported cars found that almost 50% of potential owners feared tax audits if they bought a foreign car; 42% were worried that their car would be vandalised; 30% feared they would be assaulted; and 13% believed that driving a foreign car would make them a target for traffic police.
The fear factor
Such fears are not just paranoia. In May 2006 the national tax service demanded that car importers submit their sales records for the past three years as well as personal information on their customers, pending a large-scale tax investigation. After an American complaint, the South Korean government said it had been a “mistake”, but leaks to the media ensured that the chilling effect on prospective purchasers had been achieved. Two months ago the European Commission, in an economic-impact statement on the FTA, estimated that EU car firms would be able to raise their exports to South Korea by 400%, albeit from a very low base. The industry’s response was a hollow laugh. Ivan Hodac, the chief executive of ACEA, says: “It must have been a typo.”
There are still several hurdles the FTA must overcome before it is ratified. In the next few months the European Parliament will have the chance to reject it and member states are expected to vote on it by the end of the year. The commission says that it has dealt with EU carmakers’ concerns by introducing both a safeguard clause restricting duty drawback if South Korean manufacturers substantially increase the imported content of their vehicles, and a mechanism for settling disputes if there are new non-tariff barriers.
The carmakers think this is still not enough. They also see trouble ahead in the shape of proposed FTAs with places such as India and ASEAN, the South-East Asian trade block, which may demand concessions similar to those won by the Koreans. Unfortunately for the car firms, the chances of more than minor tweaks before the FTA is passed are slim, as is the likelihood that South Korea will become more welcoming for foreign vehicles.