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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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