Auto industry representative Stephen Collins explained to a Ways and Means subcommittee in 2007:
...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.
Collins was with the the Automotive Trade Policy Council.