| Statement of Stephen J. Collins, President, Automotive Trade Policy Council Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means March 20, 2007 I. Introduction
Mr. Chairman/Members of the Committee:
Thank you for the time to discuss the importance of
automotive trade issues in the ongoing U.S.-Korea FTA negotiations. I am
testifying today on behalf of General Motors Corporation, Ford Motor Company
and DaimlerChrysler Corporation – who are the members companies of the
Automotive Trade Policy Council and whose views I am presenting today.
I want to begin with several comments relating to the
current situation:
1. The US auto companies have supported US trade liberalization initiatives by Republican and Democratic Administrations for
decades. This includes all the bilateral FTAs presented to the Congress
since 2000. We have also offered extensive support to USTR in this Korean
initiative from the beginning of this negotiation. These three companies have
spent many years trying to open the Korean auto market. ATPC’s hope is to see
the U.S. reach a strong, solid and credible agreement with Korea that will
eliminate all tariff and non-tariff barriers and allow U.S. auto companies to
fully participate in that market.
2. Auto trade is a large portion of US-Korea trade and
has now become a big problem in this negotiation. But the Korean government
created this problem and the Korean Government is the party that has to resolve
it. The auto industry has earned a seat at this table. The US now has an $11 billion deficit in auto trade with Korea, which is 82% of the total deficit
between our two counties. In simple numbers, US-Korean auto trade is so
lopsided that it cannot be seriously justified by any credible economic or
market- based rationales.
Last year, Korea exported about 700,000 cars, vans and SUVs
to the United States. Our market is open and Korean competitors have been
welcomed and given a fair shot a success here. On the other side, US auto exports to Korea totaled just over 4,000 last year. Amazingly, auto imports from the entire
world represented just 3.6% of the Korean market. This is not a picture of a
healthy, mature, and mutually beneficial trading relationship
3. A Free Trade Agreement is primarily about trade. There
have been changes in investment patterns in the auto business, both here and in
Korea. Recently, Korea has opened up to foreign investment in its auto
sector. In 2002, General Motors invested in Korea, acquiring certain assets of
the bankrupt Daewoo Motors and creating a new company which produces cars there.
On the US side, Hyundai/Kia has also made investments here,
with one assembly plant operating and another under construction. But auto
investment is not the topic of this FTA. It’s all about trade and market
access.
4. Korea’s auto market is not just closed to
the US auto industry. European and Japanese automakers are doing no
better in Korea and share the same view – that Korea unacceptably and
unjustifiably restricts sales of foreign automobiles.
5. The US auto companies have worked together with
USTR for over a decade to deal with this serious and glaring blot on our
countries’ trade relationship and have not succeeded in opening the Korean auto
market. However, all past efforts, including two bilateral auto trade
(MOU) agreements negotiated in good faith by USTR in l995 and l998 using the
strongest US trade policy tools, have failed to open the Koran auto market.
That is not the fault of past UTSR efforts, or the efforts of US, European or
Japanese companies to get access to that market. The reason is the refusal of
the Korean government to remedy and reverse these blatantly unfair and
self-serving policies.
II. The Position of ATPC on the US Korea FTA
We understand that there has been some mischaracterization
in Seoul and in Washington about what we seek in this negotiation as a remedy
to the closed Korean auto market. Let me be very clear: We are not seeking
‘managed trade’ or ‘guaranteed sales in Korea’, as some have suggested. These
are incorrect, yet quick and simple labels that have been used to gloss over
the serious efforts by many trade practitioners to an innovative approach to
deal with a unique and intractable problem.
We believe that the standard trade approach, reminiscent of
the old US-Korea MOUs of the l990s, which is apparently being used by our US
negotiators, will result in a one- sided agreement that benefits only Korea.
We believe that the US-Korea FTA is the absolutely last chance for USTR, in
close consultation with the Congress, to get this right. Otherwise one of the
largest and most active auto markets in the world will remain closed to access
by the U.S.
ATPC has consistently recommended opening the Korean auto
market will require the their willingness to take new approaches. Given Korea’s
dismal past record, we have recommended that preferential access to the US auto
market be provided when the Administration and the Congress can be reasonably
satisfied that all trade barriers to imported autos have been removed and the
Korean market is seen to be fully open to the sale of US and other imported
cars.
III. Why is the Korean Auto Market Closed?
Let me summarize the major facts about this case, and
explain how Korea‘s system of tariffs, taxes, and particularly nontariff
barriers that keep foreigners restricted in the market.
Chart #1 shows the sales by all foreign automakers in Korea
last year. In a country that produced 3.8 million cars, and had domestic sales
of 1 million last year, Korea imported a total of 40,000 cars and trucks from
the rest of the world. I would draw your attention in Chart #1 to the fact that
this is a grand total of a 3.6 % market share for all imported cars. In
comparison, of the 30 OECD industrialized countries where the average level of
imports for autos is over 40%, Korea ranks 30th out of 30.
Chart #2 shows the breakdown of the sale of imports in Korea
by automaker. As you can see, no one is selling any respectable volume in
Korea. The vast majority of those imported car sales are in the highest-end
luxury segment. While our companies’ sales in Korea were small, you will
notice that high volume European automakers sales were also minimal while the
Toyota, and Nissan brand, which are the number one and two automakers in Japan,
did not sell a single car in Korea. This is not a picture of a normal,
healthy, competitive automotive market.
So what is the problem?
IV. What Specifically Causes the Problem of Selling
Imported Cars in Korea?
Chart #3 summarizes the story and the continuing problem.
For a long time, Korea has very effectively used a whole arsenal of trade
tools, starting with outright imports bans, high tariffs, discriminatory taxes
and a stifling maze of overlapping and never ending regulatory nontariff
barriers to keep placing hurdles for imported cars.
Bans on Imported Autos
Prior to l995, as this chart shows, the Korean government
was quite clear about its policy:
- All imported cars were legally banned in Korea until 1989, while the
country was furiously building its own auto industry
- Japanese cars remained banned
until l999
- Very high tariffs (50%) were
applied
Tax Audits on Purchasers of Imported Cars
After those outright bans were dropped, Korea switched to
other NTBs that were very effective. Korea employed one of the most effective
tools when it directed that all purchasers of imported cars would automatically
have their taxes audited. After the U.S. repeatedly complained, these automatic
tax audits stopped, but the perception and a lingering fear remains
Just last year in a highly publicized move, Korean tax
authorities ordered all of the country’s import car dealers to report to their
federal tax agency the names, addresses and relevant personal information of
the purchasers of all foreign cars. Now I ask, if you were thinking about
buying a new car, wouldn’t you find that intimidating?
High, Discriminatory Taxes on Imported Autos
Korea has also freely used its tax structure to make it far
more expensive to purchase an imported car. Korea has nine different layers of
tariffs and taxes on autos. With an overall tax burden of over 70% for imports
versus 56% for domestic autos, the effects of cascading taxes on top of the
tariff puts imports at a 14% percentage point price disadvantage vis-à-vis
domestic vehicles.
To make matters worse, many of the taxes are applied at a
rate much higher for imported cars, based on engine size, configuration or
other artificial means. The end result is that much higher taxes are added to
imported cars, on top of the 8% import tariff.
The Web of Regulatory NTBs
When compared to other partners with whom the U.S. has
engaged in Free Trade Agreements, Korea is unique in the both the scope and
intensity of its use of Non Tariff Barriers to restrict imports. This pervasive
use of NTBs in restricting trade calls for different kinds of solutions than US
trade negotiators have faced before.
This is the
most complex and most difficult issue to summarize for those outside of the
business. But all foreign automakers are in consensus that Korea pursues a
rolling series of regulatory NTBs that, de facto, severely restrict the ability
to market imported cars into Korea. These include regulations that are often
trivial, imposed without warning and developed with no input from foreign
automakers. They have the effect of knocking out or severely limiting the
ability of foreign automakers to get cars to the market in Korea.
Every year, the issue is different – tinted windshields,
frequencies for remote keyless entry systems, bumper configurations, power window
requirements, and license plate sizes. Just last week, we were notified of a
change in the auto insurance policies that arbitrarily placed imported vehicles
are in the highest risk classification. The result is owners of imported
vehicles will pay the highest premium possible for their auto insurance, (both
Ford and DaimlerChrysler were placed in Class #1, the most expensive), as well
as a totally unacceptable process foreign companies must use to certify
compliance with these regulations.
The NTBs vary from one wave to another, but the result is
the same: a revolving set of costly hurdles placed in front of any foreign
automaker trying to sell in Korea.
I want to share with you the conclusion of the European
Auto Manufacturers Association (ACEA) in their statement to European
Governments and the EU Commission describing the situation:
“Korea has a number of nontariff
barriers in place which prevent market access of European vehicles to the
Korean market. In general, the import situation is characterized by a lack of
transparency, little or no lead-time and adoption of unique standards and
inadequate action of EU or US standards in the fields of safety and
environment… As a result no foreign automakers – E.U., U.S. or Japan – has been
able to achieve a significant market share”.
Over the past nine years, following the l998 US-Korea
bilateral auto MOU agreement, Korea has introduced more than 15 new auto
technical regulations that have served as barrier to auto imports.
Here are three quick examples of a few of the past and
current NTBs:
1. License Plate Size -- The
Korean government proposed a new regulation that would change the size and
shape of a car’s license plates, with little notice or opportunity to comment.
License plates in Korea have traditionally been the same size as found in the
United States.
At first blush, this may appear to be a minor
nuisance with little impact on U.S. automakers. However, given the fact that
the front and back bumpers of cars are designed around the size and shape of a
license plate, this type of requirement would lead to almost a million dollars
per model being spent to meet the new requirement. Domestic automakers that
are selling hundreds of thousands per vehicle model can afford the cost spread
over a large number of sales, but importers that are lucky to sell a few
hundred of a particular model would not be able to justify the cost and would
have necessitated pulling most U.S. models out of the Korean auto market, or
taking a heavy loss on every vehicle sold.
The Korean authorities were forging forward with
this regulation, despite the devastating impact it would have on imports, and
that it would not have any societal benefit. Fortunately efforts were made,
including the intervention by USTR Zoellick, to get the Korean government to
drop the proposed regulation. Although successful, the fact that a U.S. cabinet
official had to personally intervene with the highest levels of the Korean
government to resolve a license plate issue demonstrates the level of the NTB
problem.
2. Self-Certification
Investigation Change - After the current FTA negotiations began, Korea
proposed making a major change to its auto safety certification process that
would reverse commitments and progress made in past agreements with the United
States to “not take any new measures that directly or indirectly adversely
affect market access for foreign passenger vehicles”.
The proposed change would:
- adversely impact import automakers, but have no impact on Korean
automakers;
- significantly increase the certification burden, with no societal
benefit, and;
- withdraw commitments made under the two previous US-Korea bilateral auto
agreements.
This is a transparent effort to
further thwart import automakers to the benefit of the Korean automakers, and
should be permanently dropped as part of this FTA
3. Korea’s new auto emissions
regulations (K-ULEV)—now effective 2009.
While this proposed new rule is
based on California’s stringent emissions regulations, Korea made some
significant changes in its implementation that results in a disproportionate
burden being placed on importers, over domestic automakers. This is what is
called “cherry picking” from regulations. The immediate result is while Korea’s
emissions regulations offers no higher level of emissions containment, some
imported cars will be withdrawn from sale in the market and fewer new import
models will be exported.
The California and Korean
regulations achieve the same emissions outcome, but the Korean regulation does
not provide the flexibility that was purposely designed into the California
program. US automakers meet the California regs, but will not be able to offer
their vehicles for sale to consumers in Korea. The US Government has tried to
help US automakers with this barrier, but to no avail.
In advance of the launching of the
US-Korea FTA negotiation, Korea agreed to delay full implementation of the
K-ULEV regulation until 2009. Although somewhat helpful, the two-year delay
only puts off the problem until a later date. It did not the fix the problem.
Korea’s K-ULEV regulations should be modified to allow vehicles that meet
California regulations to meet the Korean regulations.
The importance of eliminating the current auto NTBs cannot
be overstated. Full access will not be achieved unless this is accomplished.
But equally important is getting a commitment from Korea that will avoid the
implementation of future auto NTBs.
For more than a decade, the U.S. auto industry has worked
with various USTRs and their staff who have spent many months negotiating
with the Koreans to eliminate one after another unnecessary NTB. The
persistence of USTR efforts to get rid of a single NTB – as minor as license
plate sizes – has succeeded, but at a high cost in U.S. government resources,
both politically and financially. Inevitably, within weeks of the resolution
of one ‘show stopper’ NTB, another one pops up to replace it.
Korea’s track record of using NTBs to protect its auto
market is endless and has no equal in any other OECD country. And its does not
deserve to be glossed over or tacitly accepted by the United States in
formalizing an FTA with one of America’s largest trading partners.
V. What has the US done about this situation?
The seriousness of problems caused by Korea’s closed auto
market is not new. They were recognized as severe enough a decade ago that
USTR filed a Section 301 unfair trade practices case against Korea’s auto
policies, one of the rare uses of that powerful tool in U.S. trade law. USTR
then negotiated two specific auto trade MOU agreements with Korea (in l995 and
l998) in which Korea clearly and formally committed to eliminate anti- import
policies, as well as tax and regulatory NTBs that discriminated against US auto
products.
Chart #4 highlights just some of the still current goals and
commitments of those l995 and l998 agreements that were not achieved. These
were two solid, if traditional, trade agreements designed to reduce market
barriers. They looked outstanding on paper. But they did not work, because
Korea countered with a new strategy to implement a powerful mix of non-tariff
barriers. The results: Despite two tough negotiations and auto trade agreement
with Korea in l995 and l998, exports of US autos to Korea barely moved from
4000 in 1995 to 4,500 in 2006. Imports from all countries are also dismal.
ATPC believes that Korea’s obvious failure to meet its
commitments and promises to the U.S. in these two formal trade agreements is
both a loud warning and a legitimate basis for insisting that we not repeat the
same mistake a third time. This is why we have urged that any FTA with Korea
must be creative, assertive and reflect the reality of auto trade with Korea .
We have urged USTR to look beyond the traditional negotiating strategy, not
because our industry inherently deserves something better or special, but
because there is such a clear, unquestionable trail of evidence of the failure
of Korea to live up to previous agreements with the USG.
VI. The Current Status of the Negotiations
So where are we now, less than two weeks before the deadline
for completing these negotiations?
1. Immediately after the launch of these talks, ATPC offered
a comprehensive proposal to USTR for addressing the totality of barriers that
have prevented access to the Korean market and the failure of two prior US
trade auto agreements. This proposal placed the responsibility fully on the
Korean government to demonstrate that commitment by results and not just
promises. The USTR appears not to have accepted this approach.
2. The Korean Government, to the best of our knowledge, has
not come forward with a proposal that fully addresses the closed market issue.
3. Earlier this month, a bipartisan group of members of the
House and the Senate, including Chairman Rangel and Chairman Levin, sent a
letter to the President presenting a “Congressional Proposal to Open Korea
Automotive Market”. The members proposed “moving beyond previous negotiating
strategies and embarking on a new approach that addresses the United States’
legitimate concerns that Korea will not obtain additional access to the US
market unless there is reciprocal opening of the Korean auto market”. The
Congressional proposal deals with both the respective countries’ automotive tariffs
and a system for addressing both current and future NTBs in Korea auto market,
and other sectors as well”.
4. ATPC deeply appreciates this effort by Members to offer a
constructive proposal to secure a fair trade deal for the US auto industry in
an FTA with Korea. ATPC said that this Congressional proposal “captured the
industry’s frustration with Korea’s refusal to abide by past auto trade
commitments by ensuring that the Korean government will have to provide US
automakers with real and meaningful access to Korea’s auto market if they are
to be given preferential access to our market”. We are not aware of whether US
negotiators have accepted any or all of the recommendations contained in this
Congressional proposal to resolve the auto issue.
5. The latest information we have received concerning the
negotiations is most disturbing. It is now widely reported that the Korean
Government has demanded the immediate elimination of the US auto tariffs as
their number one priority in this negotiation.
Finally, Mr. Chairman, ATPC does not know what will happen
over the next two weeks. But we do know with certainty the record of Korea over
the past two decades.
I would like to leave you, and the US negotiating team, with
what President Roh of Korea told his negotiators last week in his Cabinet
meeting as they prepared for the final stretch of these talks, as publicly
reported in the Korea Times on March 15:
President Roh told his team:
“I will give you some instructions
in principle: Please consider real economic benefits – act just like merchants.
And do not consider security or other non- economic factors.”
Thank you
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