South Korea’s carmakers stand to benefit most from the country’s free trade agreement (FTA) with the US, allowing them to boost sales in North America.
The FTA will mean the removal of the 2.5% tariff on cars within four years of the pact coming into effect. Meanwhile, industry analysts predict that about 5,000 small and mid-sized Korean auto parts manufacturers will be able to expand their presence in the US once the existing 4% tariff on vehicle components is abolished.
Go deeper with GlobalData
Discover B2B Marketing That Performs
Combine business intelligence and editorial excellence to reach engaged professionals across 36 leading media platforms.
Tariffs on Korean-made auto parts will be lifted immediately when the trade pact takes effect on 1 January.
The Korea Automobile Manufacturers Association (KAMA) said the pact would be helpful not only for boosting exports to North America but also sales in other major markets by increasing global recognition of Korean vehicle brands.
Hyundai Motor has sold 7.1m units in the US in 25 years and Kia 3.6m in 17 years. However, their brand image is still weak compared with Toyota, Honda, Nissan and the major European players there.
In return, tariffs on American cars exported to Korea will be lowered from the current 8% to 4% from January and removed completely in four years.
While General Motors, through its Korean subsidiary GM Korea, has been successful in capturing nearly 10% of the local market, Ford and Chrysler are keen to boost their presence under the FTA.
Korea’s compromises on auto clauses in the FTA renegotiation last year are unlikely to have a significant impact on domestic carmakers, according to analysts, who say that the pact will bring more freedom and promote facilities investment.
According to KAMA, Hyundai’s plant in Alabama produced about 230,000 vehicles during the first nine months of the year while Kia’s Georgia factory assembled 96,000 during the same period.
With the majority of Hyundai and Kia US-produced vehicles sold in the country, their production figures are about 56% and 36%, respectively, of their sales there.
With both plants capable of producing 300,000 units per year each, there is room to increase the proportion of US sales accounted for by vehicles produced locally.
The Korean side conceded to putting a cap on customs refunds on automobile parts that are imported and used in exported vehicles at 5%, unlike the country’s trade deal with the EU where such a clause was not included.
Seoul’s backtracking on environmental regulations could also benefit US carmakers. The Korean government is reviewing the exemption of up to 10,000 vehicles each year from the new fuel economy and greenhouse gas emission standards that will go into effect in 2015.
It had originally intended to exempt brands with an annual sales figure of less than 1,000 units from the new rules.
From 2015, vehicles able to seat 10 or fewer people will be required to either meet the 17km per litre fuel economy standard or emit less than 140 grams of CO2 per kilometre.
