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Korean, Malaysian auto barriers pose trade negotiation challenge

Washington File | 02 May 2006

Korean, Malaysian Auto Barriers Pose Trade Negotiation Challenge

Free trade agreements must achieve more open markets, experts say

By Bruce Odessey
Washington File Staff Writer

Washington — Opening up trade in autos poses a major challenge in free-trade agreement (FTA) negotiations with South Korea and Malaysia, experts in the United States say.

Both the Korean and Malaysian auto markets are described as among the most closed to foreign competition, but the two countries’ practices are different.

The United States has been pressing Korea for at least 10 years to open its auto market to competition. The two sides approved memoranda of understanding (MOU) in 1995 and 1998 on opening that market, but import penetration remains less than 3 percent share of the total South Korean auto market.

The first round of U.S.-Korea FTA negotiations is scheduled the week of June 5. According to Stephen Collins, president of the Automotive Trade Policy Council, the two governments have set up a separate negotiating group specifically to handle automotive industry issues. The council represents the three big U.S. auto manufacturers.

Collins said he does not expect quick resolution of the U.S.-Korea auto issues.

"Auto negotiations tend to be moved toward the back because they are among the more sensitive issues," he said. "We’re skeptical based on our 10 years or more of really dismal experiences with Korea, but we’re giving them the benefit of the doubt."

Jeffrey Schott, a senior fellow at the Institute for International Economics in Washington, said Korea must open its market more to foreign competition if it wants an FTA.

"If there isn’t coverage of the auto trade in these agreements, then there won’t be an agreement," Schott said. "It’s pretty hard to carve out that large a portion of total bilateral trade."

Korean manufacturers produced about 3.7 million autos in 2005, exporting about 2.6 million. Total South Korean imports of foreign autos amounted to about 31,000 vehicles in 2005, about 12 percent of those from the United States.

The negotiators face many tariff and nontariff issues, but they know what to expect from a year engaged in pre-negotiations, he said.

Korea imposes an 8 percent tariff on auto imports, more than three times the U.S. tariff. According to the Office of the U.S. Trade Representative (USTR), multiple auto taxes raise the effective tariff rate to 12 percent. Sales taxes based on engine size end up hurting bigger autos, most of them imports, more than the smaller cars made in Korea.

USTR said it has pressed the Korean government to replace the engine-displacement taxes with a system based on total cost, reduce the number of taxes imposed on autos and develop a transparent and comprehensive tax plan.

"To date, it has not produced a transparent plan to meet the long-term MOU goals," USTR said.

Nontariff barriers pose a different kind of challenge. According to Collins, more than a decade ago, the Korean government carried on "egregious and overt anti-import activities" basically threatening consumers — subjecting them to tax audits, for example — if they purchased foreign autos.

Under the 1995 MOU, Korea’s government halted those practices, he said, but the fear lingers.

"In 1995, U.S. companies exported 4,200 cars to Korea," Collins said. "In 2005, 10 years and two agreements later, Korea is now selling 800,000 cars in the U.S.; we sold last year 3,900 cars" in Korea.

Schott suggested that U.S. manufacturers might not be exporting the kind of autos that sell in Korea although the demand for bigger vehicles is starting to expand. On that point, Collins cited sales of more than 800,000 U.S. autos to Korea’s neighbor China. "That argument doesn’t fly," Collins said.


USTR announced the proposed FTA with Korea in February, the one with Malaysia in March.

According to Collins, Malaysia is the biggest market in Southeast Asia for automobiles, more than half a million sales a year.

Malaysia’s government long has protected its auto industry from foreign competition using high tariffs and nontariff barriers. "National autos," those manufactured by Malaysian producers Proton and Perodua, get preferential treatment over "nonnational" autos, even those manufactured in Malaysia by foreign-owned companies, USTR says.

Those policies already have begun to change, however, partly because of Malaysian participation in the World Trade Organization (WTO) and in an FTA with its neighbor countries in the Association of Southeast Asian Nations (ASEAN), according to USTR.

The Malaysian government has eliminated some local-content requirements and has cut its tariffs for autos having at least 40 percent ASEAN content. However, it has imposed excise taxes on autos to compensate for the lost tariff revenue.

"The high tax rates continue to overburden automakers and discriminate against foreign-owned manufacturers" by giving Proton and Perodua a 50 percent rebate on the excise taxes, USTR said.

Another Malaysian barrier is the system of approved permits for importing and distributing imported autos, USTR said. Besides restricting the number of auto imports, capped at about 10 percent of the domestic market, the system also allows sale of the permits for profit, with the higher costs passed on to prospective imported auto buyers.

Nevertheless, Collins said, the FTA negotiations offer a good opportunity to open Malaysia’s market to more imports, citing significant reforms to the country’s national auto policy announced just weeks ago.

Besides, he said, the government probably has decided protection for Proton and Perodua can provide no further benefits. The future for Malaysia’s industry "lies in integrating itself with the regional and global auto and auto parts market," he said.