Industry by the Numbers
Once protected, Korea continues to open its auto market to imports. In 2010, the market share for imported passenger cars (based on registration) was 7.8% – a 29% average annual increase since 2001. The beneficiaries of the growth in imported auto sales in Korea have primarily been Japanese and European carmakers – with U.S. autos gaining only slightly.
The difference in national market preferences may play a role in this discrepancy. Gas prices in Korea are normally over $6 per gallon, so consumers have an incentive to drive smaller cars. In fact, small cars with engine sizes of up to 2000 cc account for 77% of sales, while 94% of U.S. exports to Korea are big cars (over 2000 cc). European Union autos exports to Korea are more balanced – with bigger cars accounting for 57% of sales.
The KORUS FTA provides for strong and expedited dispute settlement procedures, including full “snap-back” provisions allowing for the U.S. to reinstate the pre-FTA tariffs on passenger cars if the agreement’s terms are violated. The FTA will also establish an Auto Working Group that will provide an “early warning system” for potential concerns about future regulatory issues.
For passenger cars, Korea will immediately reduce its tariff from 8% to 4%, with the remaining tariff eliminated in five years while the U.S. will keep its 2.5% tariff also for five years. For trucks, Korea will eliminate its 10% tariff immediately, while the 25% U.S. tariff will remain until the eighth year and then be phased out by the tenth year. For electric cars, Korea will cut its tariff from 8% to 4% immediately, then to zero over a four-year phase-out.
Taxes: To encourage lower fuel consumption, Korea imposes some vehicle taxes based on engine size – with higher taxes on cars with larger engine displacement. The KORUS FTA will significantly alter Korean auto tax provisions to reduce the emphasis on engine size (displacement).
- Korea’s “Special Consumption Tax” has tax brackets based on vehicle engine size. The agreement will reduce these from three to two. Taxes on cars with an engine larger than 2000 cc will be cut by half, leveling tax rates for all cars with engines over 1000 cc.
- Korea will streamline its “Annual Vehicle Tax” from five to three categories, and reduce the tax rates on vehicles with engines larger than 2000 cc.
- The KORUS FTA prohibits Korea from adopting new taxes based on vehicle engine size, or from modifying existing taxes to increase the disparity in tax rates between categories of vehicles.
Transparency: Tthere will be a 12-month period before auto companies must comply with any new regulation. This will ensure that auto companies have sufficient time to adjust.
Emission and Safety Standards: The U.S. and Korea will work towards the further harmonization of standards. Under the FTA: Korea commits to bringing emissions standards in line with California’s high standards – and will establish flexible standards for U.S. manufacturers that sell no more than 10,000 vehicles per year.
- Korea will introduce “fleet average system” (FAX) emission standards – providing flexibility to U.S. auto manufacturers.
- As long as the vehicles of a U.S. manufacturer selling no more than 25,000 units in Korea during the previous year comply with U.S. safety standards, they will be considered in compliance with Korean standards.
Special Motor Vehicle Safeguard:The 2010 accompanying agreement establishes an auto-specific safeguard measure against serious injury from import surges, providing additional protection to the U.S. auto industry.