KORUS-FTA, Time for Renegotiation – “Hit the AUTO button”

Posted on April 3, 2018

By Bob Brewer, BLG VP-Marketing

I can’t resist the play on words, so here we go: (Sorry) It’s not necessarily a KORUS of voices regarding unfair trade with S. Korea. On the contrary, it’s just one voice, but the one that matters the most. The U.S. and the Republic of Korea signed the United States-Korea Free Trade Agreement (KORUS FTA) on June 30, 2007, but it didn’t enter into force until March 15, 2012 due to some political obstacles with the Bush administration. It was actually the Obama administration who brought KORUS back to life around 2010, and managed to get it pushed through and entered into force in March of 2012. Now under the Trump administration, it’s of course, time to renegotiate.

Trump has long decried KORUS as a terrible agreement for the U.S. and blamed former secretary of State Hillary Clinton because the deal was officially ratified on her watch. “It’s a horrible deal. It was a Hillary Clinton disaster, a deal that should’ve never been made,” Trump said during an Oval Office interview with the Washington Post last year. “It’s a one-way street.” “She should be arrested!” Oh wait, that was associated with something else.

So, where are we now in this disaster of a relationship? Over the past few years South Korea has become the United States’ sixth largest two-way trading partner representing about 3.1% in total annual trade with the U.S., while the U.S. is South Korea’s 2nd largest trading partner behind China. As of the end of 2017, China traded at U.S. $142.1 billion (24.8% of total Korean exports), and the U.S. was $68.9 (12% of Korean exports). To date, South Korea’s trade surplus narrowed to USD 3.3 billion in January of 2018 from USD 7.0 billion in the same month of the preceding year. It was the smallest trade surplus since January of 2017.

What was the priority that needed to change? The U.S. will be now able to sell more vehicles and auto parts in South Korea under a deal the Trump administration hailed as the first significant victory from its “America First” policy of imposing stiff tariffs on steel imports. South Korea will double, to 50,000, the number of U.S. vehicles entering the country annually that don’t have to meet Korean safety standards, as long as they have met U.S. standards. In addition to allowing more cars, the deal imposes a limit of about 2.68 million tons of steel Korea can export to the U.S. That amount is equal to about 70% of the annual average of Korean steel exports to the U.S. between 2015 and 2017.

When taking a closer look at the automotive industry, a good barometer of trade, and the most contentious of issues in South Korea’s trade dealings with the U.S., where are we in the disproportion of sales by country. How does the landscape look when drilling down to the specific market share of the top companies?

In 2017 vehicles manufactured by Hyundai Motor Company accounted for 45.7 percent of the automobile market in South Korea, Kia is around 35%, and GM Korea is just 7%, and the rest, meh, doesn’t merit a mention. Of note, GM plans on closing (4) of its manufacturing plants in S. Korea by the end of May 2018, as they are deemed to be unprofitable, and not worth saving. In contrast on our soil, Hyundai produces its best-selling U.S. models, the Elantra and Sonata, in its Montgomery, AL factory, and the Santa Fe in sister brand Kia’s West Point, GA factory, while its other models for the U.S. market are imported from its factories in South Korea. In the U.S. in 2017 it sold 663,943 Hyundai for a 3.86% market share. All Kia’s sold in the U.S. in 2017 totaled 589,688 representing 3.42% market penetration. GM for example, since 2000, has dropped in U.S. market share from 28% to 16.6%. The “Asia Invasion”, of course, has a lot do with this drop, but that’s another article. Also worth noting, under the renegotiated KORUS, South Korea will allow the U.S. to extend its 25% tariff on imports of Korean pickup trucks by an additional 20 years to 2041.

It’s worth mentioning that the Mexican subsidiary of Korean car maker Kia Motors said last week that it would be well-positioned to export its compact vehicles even if the upcoming renegotiation of the North American Free Trade Agreement does not yield positive results. Horacio Chavez, managing director of Kia Motors Mexico, said he is not concerned at all over the possibility that Mexico, the United States and Canada could impose the maximum tariffs allowed by the World Trade Organization. Negotiations between the three countries is of course ongoing. After just two years in Mexico and one year of manufacturing, Kia had a market penetration of 5.6 percent at the end of July in Mexico in 2017, besting its goal of 5 percent market share by 2020. Kudos to S. Korea, as the Kia Rio was already in the top 10 in auto sales in Mexico at the end of 2017. (Nissan still holds the top spot)

It will be interesting to see how the renegotiation develops, as there are many ties between the U.S. and S. Korea beyond simply trade, and the politics have an impact. For instance, Kim Jong Un plans his first visit on April 27th, and we all know there have been numerous discussions with S. Korea about how that should go according to the Trump administration’s agenda. Kim already went to China to get his marching orders before heading to S. Korea. If all goes well, and after the meetings, the sun shines brighter, birds are chirping louder, then just imagine, a denuclearization of N. Korea, and subsequent lifting of the sanctions. The possibility of N. Korea opening its doors to worldwide trade, including the U.S. in 2019, or 2020? Whoda thunk it? There aren’t many cars, at all, on the roads in N. Korea, but if they follow in the footsteps of S. Korea, who knows, with some outside help, and subsequently a vastly improved economy, there could be a surge in traffic on the N. Korean streets, (street actually) via Hyundai’s and Kia’s. I sincerely doubt GM, or Ford would care to attempt making much of an impact.

One final note, and just an interesting honorable mention. Lockheed Martin is building (40) F-35’s for S. Korea. Yes, it’s not a car, but those puppies aren’t cheap, but they are however getting more affordable. According to Lockheed Martin’s CEO jets bought in 2019 will be cheaper by a factor of nearly one half. Was Walmart involved? CEO Marilyn Hewson told CNBC recently that with the first aircraft delivered, the defense giant is “on a path to be down to a price of $85 million per jet by 2019.” Just $85 million! That’s the equivalent of around 3,400 Kia’s!!!! Let’s all do a collective chant, U.S.A., U.S.A., U.S.A.!!!