[Car Talk Forest] Cars as a Bridge Between Korea and the US via FTA... Can They Overcome the IRA Wave?

Automobiles, Korea-US Largest Trade Item for 10 Years
FTA and Improved Quality of Korean Cars Boost Exports to US
IRA Encourages EV Production in US
Harder to Bring to Negotiation Table Like Before

President Joe Biden of the United States

[Asia Economy Reporter Choi Dae-yeol] The most traded goods between South Korea and the United States are automobiles. Although semiconductors overwhelmingly dominate South Korea's exports, and resource-rich America has recently increased its exports of crude oil and gas, neither surpasses automobiles. The trade volume between the two countries reached about $112.3 billion through July this year, with automobiles and parts alone accounting for $18.6 billion. Just before the COVID-19 outbreak in 2019, automobiles and parts made up more than 20% of the total bilateral trade volume.

This is the result of multiple factors working together. Broadly speaking, it can be attributed to the lowering of trade barriers due to the Free Trade Agreement (FTA) and the rise of star players like Hyundai Motor, Kia, and Tesla, which have established bases in each country. Until the mid to late 2000s, when South Korean and U.S. officials negotiated ahead of the FTA's implementation, the top traded items were semiconductors or mobile phones.

During the FTA negotiations over a decade ago, both countries fiercely debated how to handle tariffs and non-tariff barriers in the automobile sector to favor their domestic companies, anticipating a significant increase in automobile trade after the FTA took effect. At that time, U.S. policymakers and the automotive industry likely believed that since General Motors (GM) was holding the world’s number one position, penetrating the relatively small but lucrative Korean market would not be difficult.

From South Korea’s perspective, it was necessary to actively penetrate the U.S., one of the world’s three largest automobile markets. In other words, even if there were differences in details, both sides’ needs aligned well to conclude the FTA deal.

Automobile export volume at Pyeongtaek Port. Photo by Hyunmin Kim kimhyun81@

By gradually eliminating tariffs ranging from 2.5% to 25% and lowering hurdles related to emission and safety standards, automobile trade has become increasingly vibrant year by year. Additionally, Hyundai and Kia, once perceived as makers of cheap cars, expanded their scale by building factories worldwide while improving quality and durability, achieving qualitative growth.

The impression that Korean cars are worth more than their price has taken root, enhancing brand value. In the past three to four years, imports of Tesla’s U.S.-made electric vehicles into Korea have increased significantly. This explains why automobiles have been the top traded item between South Korea and the U.S. for over ten years since 2012.

Although automobile trade between the two countries has increased, the reality is that South Korea’s exports to the U.S. have grown substantially, which understandably causes some discomfort for the U.S. Americans buy more Korean cars, while Koreans have been reluctant to purchase American-made vehicles.

In response, policies have been implemented. The U.S. does not seem to mind being mocked for its "America First" stance. Former President Trump’s slogan "Make America Great Again" was an unhidden rhetoric prioritizing the interests of American companies and citizens. Although President Biden’s "America is Back" slogan appears to oppose Trump’s approach, it is actually considered to have gone a step further. The U.S. no longer positions itself as a willing protector of free trade, ready to accept losses as in the past.

Electric vehicle Ioniq 5 produced at Hyundai Motor's Ulsan plant. Currently, all units are manufactured in Korea. There are concerns that price competitiveness will decline as the $7,500 tax credit under the US Inflation Reduction Act does not apply.

Although the legislative and executive decision-making process for the Inflation Reduction Act (IRA) was unusually swift, signals regarding the automobile sector had already been sufficiently detected. The act also reflects an intention to wrest control of electric vehicle technology and supply chains?the future core of eco-friendly mobility?from China.

It is unsettling that the hegemony of internal combustion engine vehicles, held for most of the 20th century, has shifted to Europe and Asia in recent decades. It is likely even harder for the U.S. to accept being sidelined from the 21st-century electric vehicle dominance competition from the start.

Kim Sung-han, Director of the National Security Office, is taking a commemorative photo with Jake Sullivan, U.S. National Security Advisor, at the U.S. Indo-Pacific Command in Honolulu, Hawaii, on the 1st (local time). When Advisor Sullivan expressed concerns about the U.S. Inflation Reduction Act, he reportedly said, "Let's go home and thoroughly read the IRA bill."

Even if the U.S. has unilaterally imposed new rules, it is true that the South Korean government has limited means to respond. There are rumors within and outside government circles that Korea might plead that the FTA or WTO rules have been violated or seek to be excluded during the establishment of detailed standards. What is clear is that Korea must come to the negotiating table prepared with cards that will make the other side nod in agreement.

Trade negotiations are transactions based strictly on mutual interests. Can we get what we want? Since both sides’ interests are completely divergent, achieving a satisfactory outcome does not seem easy.

This content was produced with the assistance of AI translation services.