By on December 4, 2010

It looks like North Korea’s artillery barrage on a small South Korean island had one of those famous unintended consequences: South Korea, faced by a belligerent enemy, decided to let bygones be bygones. A shell-shocked South Korea and a proud America “completed a free-trade agreement that will eliminate most tariffs on exports and solidify one of the nation’s most significant alliances in Asia,” as the New York Times praises the deal. South Korea stared down the barrels of North Korean guns, and America won the war that never was.

Don’t run down to your Hyundai dealer just yet and expect dramatic price reductions. The deal has major hurdles to pass. And at closer inspection, it looks like an oinking pig in a poke.

First, the hurdles: The deal isn’t done yet. There are still beef issues, and the devil is in the details. Once done, the deal must be approved by the legislatures of the two countries. Easier said than done. There already had been a free trade pact, hammered out in 2007. It was never ratified.

Now, for the pig in the poke. The U.S. auto industry, led by Ford, had protested loudly against the deal. The UAW agreed with the bosses. The argument was that the bad Koreans keep good American cars out of their market. Bunk. Even if South Korea would drop its import duty to zero (as the Japanese did,) there won’t be mass importation of U.S. cars to South Korea. U.S. cars are as popular in Korea as they are in Japan and Europe. As in not. The export story is a red herring to distract from the urge to stem the flood of Korean cars coming into the U.S. – and that goes especially for Korean trucks. The 2007 agreement would have required the United States to start reducing the 25 percent chicken tax on Korean trucks immediately and phase it out completely after ten years. Horrors!

The infamous chicken tax protects a huge segment of  the U.S. market – light trucks – from nasty importers. Truck-heavy Ford lobbied heavily against the agreement. They should know. Ford is an expert when it comes to the chicken tax.

Ford currently imports all of its Transit Connect models from Turkey as passenger vehicles with the requisite items, such as rear windows, rear seats and rear seatbelts. Once off the boat, rear windows are smashed and replaced with metal panels. Rear seats and seatbelts are removed. The removed parts are not even shipped back to Turkey. Too expensive. They are tossed. The process costs Ford hundreds of dollars per van, but saves thousands in taxes. Taxes that protect Ford’s domestic business.

That will remain as is for quite some time. According to a fact sheet put out by the Whitehouse, not much will change fast if the pact will ever be approved.

  • Car tariffs: The 2007 agreement would have immediately eliminated U.S. tariffs on an estimated 90 percent of Korea’s auto exports, with remaining tariffs phased out by the third year of implementation. The new deal keeps the 2.5 percent tariff on Korean cars in place until the fifth year. At the same time, Korea will immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent), and will also ditch it in year five. U.S. 1 –  Korea nil.
  • Chicken tax: The 2007 agreement would have required the United States to start reducing the 25 percent tariff on Korean trucks immediately and to get rid of it by year ten. The new deal keeps the chicken tax in place for another eight years, then it will be phased out by the tenth year. In return, South Korea must eliminate its 10 percent tariff on U.S. trucks immediately. U.S. 3 –  Korea nil.
  • EVs: According to the 2007 agreement, the United States and Korea would have eliminated tariffs on electric cars and plug-in hybrids by the tenth year. The new deal requires Korea to immediately reduce its electric car tariffs from 8 percent to 4 percent. Both countries will then phase out their tariffs by the fifth year. U.S. nil –  Korea nil.
  • Safety standards: According to the Whitehouse paper, „safety standards have effectively operated as a non-tariff barrier to U.S. auto exports.” Under the new deal, 25,000 cars per U.S. automaker can be imported per year to Korea, “provided they meet U.S. federal safety standards, which are among the most stringent in the world.” Apparently, U.S. safety is not as stringent as in South Korea. Safety conscious Korean customers will have to wait until late in the year and hope that the unsafe quota is exhausted. No need to worry: The United States exported a total of 7,663 cars and light trucks to South Korea in 2009, while it imported 476,857 from automakers there, according to U.S. Commerce Department figures. With 25,000 units per manufacturer coming in unmolested, that quota is a non-issue. Try pulling the same stunt when importing cars to the U.S.: “It’s up to Korean regs. That should be good enough for you.” If you want to do car business in the U.S., you need to comply with U.S. rules. Making cars compliant, and the adjunct testing and certification is expensive. The new agreement simply saves U.S. automakers certification costs. If they would truly expect to export a lot, these costs could be spread over many units. Now, the entry ticket is free. U.S. 1 –  Korea nil.
  • The environment: The Whitehouse fact sheet mumbles that all U.S. autos will be considered compliant with new Korean environmental standards on fuel economy and greenhouse gas emissions, “if they achieve 119 percent of the targets in these regulations.” Huh? The DetN provides the required translation: “Obama and congressional staffers highlighted the fact that the agreement would allow all U.S. autos to be considered in compliance with new South Korean environmental standards.” The pig in the poke allows U.S. greenhouse oinkers to be sold in countries with much tougher rules. U.S. 1 –  Korea nil.
  • Special Motor Vehicle Safeguard: Under the 2010 supplemental agreement, Korea has committed to add a special safeguard for motor vehicles that protects the American auto industry “from any harmful surges in Korean auto imports due to this trade agreement.”  The special auto safeguard will remain in place for 10 years beyond the full elimination of tariffs for each Korean auto product. Even more ominously, “fewer procedural steps are required to speed up the application of the safeguard when workers need faster relief.” This clause, generally overlooked by the main stream media, allows the U.S. to roll back major parts of the agreement when anyone complains.  Refer to the infamous tire vs. chickenfeet spat between the U.S. and China to see how these safeguards work. By the way, not a single additional tire was produced in the U.S. after safeguard was applied and the cheap tire business simply moved to Thailand. From there, the tires could be imported duty free until the U.S. government said “ooops” and dropped the duty free status on July 1. Thai tires are now subject to the 4 percent harmonized tariff allowed by the WTO. The same tariff the U.S.A. had charged on Chinese tires before the additional 35 percent were slapped on. Dumb and dumber. U.S. 5 –  Korea nil.
  • Bad boys: The 2007 agreement  had a rule that allowed the U.S. to “snap-back” tariffs to pre-agreement levels ”if  U.S. auto business in Korea is materially affected by Korean violations of the agreement.” That was not enough. “The 2010 supplemental agreement substantially increases Korea’s obligations in a number of areas subject to this strong enforcement mechanism.” So if the slant-eyed Koreans just look askew at the U.S. auto business: Snap! U.S. 1 –  Korea nil.

From Caterpillar to The Miami Herald, all hail the trade agreement as the biggest deal since NAFTA, and as something that could bring “up to $11 billion in overall American exports and 70,000 jobs.”

Some are not as cheerful. A letter to the Wall Street Journal, dispatched by blogger Don Boudreaux, puts it best:

“Reporting on the U.S.-Korea free-trade pact, you write that “South Korea agreed to give the U.S. five years to phase out a 2.5% tariff it levies on Korean-built cars, rather than cutting the tariff immediately” (“U.S., Korea Agree on Free-Trade Pact,” Dec. 3).

In other words, South Korea agreed to allow Uncle Sam to continue to impose additional financial burdens on Americans who buy automobiles made in South Korea, for no reason other than to make life easier for Detroit.

So much for the Obama administration’s courageous refusal to allow special-interest groups (in this case, U.S. automakers and the UAW) to dictate policy – so much for our leader’s eagerness to get the policy right even if doing so means getting the politics wrong – and so much for all the ballyhoo, out of Detroit and Washington, about U.S. automakers again being world-class producers who can compete successfully with foreign automakers.“

PS: Where’s the beef? It suddenly sounds like that was also a trumped-up issue. Says Reuters:

”U.S. beef exporters have already recovered much of their lost market share in South Korea under a voluntary industry agreement to address lingering concerns about several cases of mad cow disease found in the U.S. cattle herd.

Much of the beef industry is eager to have the pact approved because it phases out a 40 percent South Korean tariff on U.S. beef and because a major competitor, Australia, is negotiating its own free trade pact with South Korea.”

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20 Comments on “Trade Peace Watch: US-Korean Trade Pact: Korea (And U.S. Customers) In Deep Kimchi...”

  • avatar

    I am sure the conversation went something like this: “you want us to protect you, let’s wrap this up.”

    The whole thing seems like a sop to the US auto industry that realy doesn’t accomplish much. 25k per automaker exports to Korea while we import 400k ++ per year. Our automakers don’t have to comply with Korean standards – why? what’s so hard about it? Eliminating the truck tariff on US make trucks. Big deal, do we expect F250s to suddenly clog the streets of Seoul?

  • avatar
    John Horner

    Does anyone care to put a monetary value of the US’ military protection of South Korea? How long would South Korea (or Taiwan, Japan, et. al.) remain independent countries if the US where to say “you are on your own”?
    Meanwhile, South Korea runs about a $1 Billion/month imbalance of trade with the US (in Korea’s favor, of course).
    Yeah, the US sure is putting one over on South Korea. Not.

    • 0 avatar

      And you honestly think the U.S. is there only out of the goodness of their hearts, to provide a bulwark for democracy and freedom?

      – The U.S. is maintaining a tripwire strength force of 28,000 on South Korea.

      – Who complains loudly when Japan asks the US to lower their troop strength there?

      – There hasn’t been a single U.S. soldier on Taiwan since 1979
      As for the trade imbalance, there is a simple cure: Complain less, export more.

    • 0 avatar

      I’m always surprised by this one-dimensional thinking.
      The U.S. Military in S. Korea and Japan allows the US to project power across Asia.  It allows the US to be immediate striking distance to China and Russia.  This is incredible leverage and relevancy, and it allows the US to dictate terms of foreign policy.
      The value of US military presence in Asia benefits the US first.  Not to mention the fact that Koreans and Japanese pay billions of dollars to host US troops. Because if the US isn’t willing to project power in Asia, China will.
      Keep in mind, over the last year the Japanese have been fighting tooth-and-nail to stop US military expansion in Okinawa.  The DPJ, a previously pro-China Japanese government, has only now reluctantly accepted American terms after the territorial disputes with China.
      And this US-Korea FTA is incredibly unpopular in S. Korea.  They aren’t concerned about American-made cars, nobody outside the US buys them anyway, they are concerned about American agriculture which is subsidized to the tune of hundreds of billions of dollars each year by the US government.  A lot of this talk is obscured by mad-cow food safety talk, but Korean agriculture will be crushed by this FTA.  This means that Korea will loose more control on domestic food supply, which is a national security concern.

    • 0 avatar

      Actually, there have been people in Japan, high ranking executives, who privately pointed toward an odd coincidence: Toyota’s troubles with a hyperactive U.S.  government coincided with the Okinawa ruckus. And it did quiet down once the Japanese had caved in on the basing demands. As in “nice car industry you’ve got here …”
      The same execs didn’t blame the Americans. Thuggish behavior was expected. They blamed their DPJ government for being clumsy and insensitive to matters of international diplomacy.
      (The Okinawa issue was settled at around May 2010, and it did cost Prime Minister’s Hatoyama’s job. The anti-Toyota rhetoric was promptly ratcheted down and two months later, the NHTSA said it was driver error. All purely coincidental.
      The coast guard/fishing boat incident came much later and was unrelated. Military threats were never made. The captain was released, and so were some Japanese tourists who supposedly had taken pictures of highly sensitive Chinese military installations. Chinese tourists were back happily shopping at Takashimaya. Rare earth shipments that were never officially stopped quietly resumed. Then SecDef Gates had nothing better to do than state the obvious, namely that the rocks in the water of course fall under U.S. protection. All hell broke loose again.)

    • 0 avatar

      While its true that a lot of Futenma base dispute has been off the headlines with the stepping down of Hatoyama, the issue isn’t actually settled yet.
      Okinawan governor Nakima, who just won re-election, is still calling for the bases removal, and Kan is not responding as of yet.  While the DPJ and the US made a joint statement on the base, its is not set in stone yet, and far from it as far is Nakima is concerned.  What the Sino-Japanese island dispute has done is bring Japanese public opinion against China and for the US.  This is crucial in that Futenma support has skyrocketed amongst the Japanese public due to that incident.
      The fact that Clinton reiterated that the bases belonged to Japan, and the US is sworn to protect it went very far.  US’ hard-lined reaction after the N. Korean bombings went far as well, especially as the US was being bashed by S. Korean media over beef.  Discussion of US mad-cow tainted beef has subsided as the US draws closer during S. Korea over these latest incidents.
      What the US is doing is consolidating influence in Asia; in India, ASEAN regions, S. Korea, and Japan.  Its largely aided by Chinese territorial disputes and N. Korean aggression.  Nothing brings countries together like a bigger, badder, rival (China) and an excuse (N. Korea).

    • 0 avatar

      And South Korean not only pays for 60% of the cost of stationing US troops on Korean soil, they also buy billions in US arms (much to the chagrin of the French who give them better deals but still lose out) and they have fought alongside the US in its various wars (SK sent over 300K troops during the Vietnam War, by far the most out of any other country, sufferin gover 15K in casualties).

      As for the US beef brouhaha, the protests were over Seoul surreptitiously lifting the 30 month age restriction (beef from  cattle over that age were banned) which many other countries also have (Japan’s restrictions are even tougher, only allowing US beef imports from cattle under 20 months of age).

      It’s funny to see the US beef industry trying to use the Korean market as the starting point in which to do away w/ the 30 month age requirement, when they have been in a protracted battle trying to keep out live Canadian cattle over 30 months in age.

  • avatar

    I wonder if we’ll be seeing Korean Mahindras here in the States?

  • avatar

    Perhaps just get rid of all the political psychopaths that the retarded Democracy Parasites vote for and are so fond of and make the tarriffs what they should be…Zero. Free trade is actually a human right regardless of what little public school sheeple/nationalists are told to think. Interfering with trade is actually slavery and theft…Concept easily understood by those with free and rational adult minds.

    • 0 avatar

      If you want free flow of goods and capital it’s only fair to allow free flow of labor along with it.

    • 0 avatar

      You’re kidding, right?  

      Actually, the USA has been a democracy for over 200 years, and for most of its history – up until the early 1900s, tariffs actually were a big component of the national government’s budgets (income tax wasn’t imposed until the early 1900s).   Having a tariff or not has little to do with human rights or democracy….two separate things totally. 

  • avatar

    Bertel – you seem pretty dismissive of America companies selling outside of the US – quote “U.S. cars are as popular in Korea as they are in Japan and Europe. As in not.” Umm I seem to remember seeing stats that show Ford and GM (Chevy/Opel/Vauxhall) with about 10% each of the market. Whereas those all conquering juggernauts of the industry Honda and Toyota have a COMBINED share of 6%! Yeah sure Ford Fusions wont sell in Europe. But the Focus and Fiesta (also in the US) sell well. Chevy Cruze doing good too.
    Why do you say the US isn`t in Korea just for the good of the South Koreans. Do you think now they really care if South Korea was occupied by North Korea – no domino effect (which was the worry with Vietnam, Korea etc in the ’50s and 60’s). Of course the US has some vested interest but they also want a strong democratic country – how about the South Koreans reimburse us for their protection?
    You also seem to think US auto makers wanting special protection is something unique. I am pretty sure VW and Toyota get their Governments to help them out.

    • 0 avatar

      We are talking exports.
      Ford and Opel are not exported to Europe. They are made in Europe, regarded as European, and made for European tastes. Both Ford and Opel have been in Germany longer than Volkswagen. Nobody there thinks “America!” when they look at  a Fiesta or an Ascona.
      Exports of US cars to Europe, Korea, Japan are negligible. Not because of trade barriers. Because nobody wants them. Chevrolet has a market share of exactly 1.4% in all of Europe. In Germany, the market share of Chevrolet is 0.9, that of Chrysler is 0.2 .

      I can’t speak for Toyota, but I spoke for Volkswagen for more than 30 years, and I can say with certainty that the company doesn’t expect nor receive special protection from the German government. The EU market is open to all who pass EU certification. Europe signed a real – not phony – free trade agreement with Korea that does a way with all tariffs on cars. The only government that balked was that of Italy. What many forget: The opening and closing of markets is no longer done on a national level in Europe. It is done on a pan-European level in Brussels. There are much more non-car producing EU members than car producing members. Brussels is swift to intervene if a national government favors one of their own.

      As for troop basing policies: I happened to have been married into a high level Washington military family for a quarter of a century. My former father in law’s birthday parties were worthy of being covered by the History Channel. I have certain insights which are not on the standard UAW talking point sheet. Let’s leave it at that.
      (Out of spite – and true love – I then married a Japanese.)

  • avatar

    Well, that didn’t take long- founder Jane Hamsher is already declaring that the UAW betrayed liberals.

  • avatar
    Robert Schwartz

    “There already was a free trade pact, hammered out in 2007. It was never ratified.”
    Harry Reid, at the behest of the unions, wouldn’t let it out of committee.

  • avatar

    China’s lost interest in North Korea. Chinese leadership more focused on keeping things calm at home. Uncle Kim’s North is a broke, starving gangster regime, huffing & puffing for another payoff. Half the North Korean fleet has no oil in the tank and Kim’s sailors and soldiers bellies ache with hunger. Uncle Kim has all of 6 nukes about which one might launch. But then one’s enough.. Kim’s regime is part of the region’s murky equlibrium. The South and and around there don’t really want him taken out cause they’d get flooded with the starving hordes. Much in the same way as Florida and Castro’s Cuba.

    But this is supposed to be about U.S. cars and tarrifs. Well U.S. cars are popular in China.

  • avatar

    “So if the slant-eyed Koreans just look askew at the U.S. auto business: Snap! U.S. 1 – Korea nil.”

    Hey there Mr. Kraut, I think you should make some effort to hide your biases.

  • avatar

    Yes, I suppose your niece makes the content somehow ok?

    Making derogatory comments towards Koreans is not best defended by making a claim of some support of Japan.

    But since you are so proud of your “trickery” I suppose the point is still missed.

  • avatar

    Bertel – thanks for the slightly odd reply (especially the last paragraph or two).
    Regarding imports/exports. I note no Toyota’s other than the RAV4 and Prius are sold in both Europe and the US so Toyota doesn`t do very well with global product. Unlike Ford which has the excellent selling Focus and Fiesta (top two cars in the UK). GM is also in on the act with the Cruze and Insignia/Regal.

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