The US administration is poised to impose high tariffs on imported cars. The US Commerce Department concluded in a report to President Donald Trump that imported cars, such as those from South Korea, pose a threat to national security, according to Agence France-Presse on Thursday.
After receiving the report Sunday, Trump has 90 days to decide whether to slap duties of up to 25 percent on imported autos and auto parts or restrict their quantity.
The report is the result of an investigation started by the department in May 2018 at Trump’s request under Section 232 of the Trade Expansion Act. The purpose of a Section 232 probe is to determine the effects of imports on national security.
The report is significant in that it provides grounds upon which Trump could decide to impose tariffs on imported vehicles and vehicle parts.
If subjected to restrictions in any form, including tariffs, the car industries of Korea, Japan and the European Union, as well as those of other countries and regions, will suffer severe damage because the US is a major car market.
No one knows what Trump will decide, but given his erstwhile positions on trade issues his decision is likely to come as bad news to the United States’ trading partners.
His decision on Korea could go either way -- reflecting either the US-Korea alliance and the revised free trade agreement or pressure from US automakers.
When the free trade deal with the US underwent revision, Korea made concessions in the automobile sector, but it has not yet received a definitive answer as to whether it will be exempted from separate auto tariffs under the Trade Expansion Act.
Korean Trade Minister Kim Hyun-chong told reporters that the reaction of the US officials and lawmakers he had met when asked about the likelihood of Korea being exempted was “not bad.”
His words are reassuring, but Washington may put pressure on other industries, depending on the situation.
It is not the time to be complacent. The administration must prepare for a worst-case scenario, considering the profound effects that the auto industry has on many other sectors.
Korea produced 4.02 million cars last year and exported 810,000 to the US. The Korea Economic Research Institute predicts that if the US imposes a 25 percent tariff, Korea’s auto trade balance with America could shrink by a maximum of $9.8 billion from the current level. Tariffs will also have negative impact on regional economies in Busan, Ulsan, Incheon and Changwon, where the nation’s car and car parts plants are concentrated. The Hana Institute of Finance forecasts that as many as 130,000 jobs could vanish in a worst-case scenario.
The Korean auto industry is showing signs of crisis, with the Chinese market slowing. Few things would be worse than tariffs for Korean carmakers already beset by sluggish sales at home and abroad, the ever-present high risk of labor disputes and unfavorable court rulings on ordinary wages that will certainly increase labor costs.
Hyundai Motor’s earnings and profits plunged 47 percent and 64 percent, respectively, last year. The utilization ratio of its Chinese plants dropped to 44 percent.
If the company has to take a further hit as a result of US tariffs or trade restrictions, it will inevitably suffer irreparable damage.
The Korean trade authorities seem to believe that Washington is targeting the EU or Japan, not Korea -- but considering Trump’s unpredictable style, it may be that the sparks from other countries’ automotive trade wars will fly right into Korea’s face.
The authorities need to be fully prepared for the possibility of US trade action. After all, despite Korea’s persistent efforts to persuade Washington not to introduce an import quota on Korean steel products, it went ahead with the quota anyway.
Trump has 90 days to decide whether to impose tariffs, and if so, how and when. Also, unforeseen events could easily change his mind before the deadline. In this situation, the government in Seoul would do well not to fall victim to wishful thinking, but to try harder to advance the good arguments showing why Korean cars should be exempted from tariffs and all other trade restrictions. It also needs to strengthen cooperation with the EU and Japan on this issue.
Its ability to demonstrate trade diplomacy has been put to the test.