On the Road

Free trade agreements roil global auto manufacturers

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When I was in South Korea for five days last month, I noticed that very few European and American cars were on the road in Seoul and Keosu. Ninety-nine percent of the motor vehicles were Korean brands.

But in the past few years, the South Korean government began opening its car market to other countries by signing free trade agreements (FTAs). In December 2010, US President Barack Obama hopefully declared that a landmark trade deal with South Korea mandating tariff reductions would give manufacturers of American cars and trucks much more access to the lucrative South Korean market. The US-South Korea FTA took effect in March 2012, so it’s too early to tell whether it is a win-win deal for both countries. Incidentally, in 2011, the total number of Hyundai and Kia cars sold in the United States hit 1.13 million.

On Oct. 6, 2010, in Brussels, the European Union officially signed an FTA with South Korea that was applied provisionally beginning in July 2011. In the FTA, specific commitments to prevent non-tariff obstacles to trade were agreed upon in sectors including automobiles, pharmaceuticals and electronics. The EU customs duties on passenger cars with small engines would be fully liberated in year 5 of the agreement while those on large and medium engines would be liberated in year 3. Last year, the trade deal cut tariffs on imported South Korean cars to 8 percent from 10 percent.

Level playing field. But did the EU-South Korea FTA create a level playing field? From July 2011, when the FTA was provisionally applied, up to May 2012, the shipment of Korean cars to the 27-nation European Union rose 40 percent, compared with the year-earlier period, to 400,000 units per data from Seoul’s customs agency. In contrast, EU exports to South Korea increased only 13 percent over the past year to 73,000 cars.

The influx of imported South Korean cars and their production in lower-end Eastern European countries like Czech—where the Hyundai Motor Group that includes Kia has a plant  rolling out 300,000 units a year—have affected the sales of France’s PSA Peugeot-Citroen. While Hyundai’s European market share rose to 2.6 percent in 2011 from 2.3 percent in 2010 and 1.7 percent in 2007 before the euro sovereign-debt crisis hit, Peugeot’s European market share fell one percentage point in 2011 to 13 percent. Last March, Peugeot’s market share slid further to 12.6 percent while Hyundai’s rose to 3 percent and Kia’s to 2.3 percent.

Last week, Peugeot announced the closure of a plant in France, slashing 8,000 jobs. It was the first car plant closure in a decade in France, where major plant closures are rare due to strong unions and government support. Analysts said that the Korean car makers enjoy a clear advantage not only in lower East European labor costs over Peugeot, with its still large production capacity in Western Europe, but also because of the weak South Korean currency. What’s more, Korean auto manufacturers specialize in economy cars, posing a threat to the smaller cars that are Peugeot’s bread and butter.

Warning sign. The large increase in imported Korean cars, said Sergio Marchionne, chief executive of Fiat and head of the European Carmakers’ Association ACEA, was “a warning sign” about a proposed FTA with Japan, Asia’s biggest car exporter. The European Commission in Brussels is asking the EU’s 27 governments for a mandate to negotiate a FTA with Japan, challenging strong resistance from carmakers who fear a surge in cheaper imports hitting their home markets. Trade Commissioner Karel De Guchi assured them that Europe would not reduce tariffs before Japan reduced its regulatory barriers in the car sector. He added that the automakers should not use foreign competition as a scapegoat for their declining sales.

Akio Toyoda, chair of the Japan Automobile Manufacturers Association and also president of Toyota Motor Corp., played down the European auto industry’s concern that a FTA with Japan might prompt a surge in car exports from Japan to the European Union like what happened when a trade deal with South Korea took effect. At a regular news briefing, Toyoda pointed out that many Japanese car makers build cars for the EU market at factories located within the trading bloc. While South Korean manufacturers have two factories in Europe, the Japanese have 13 local plants. Toyota, Nissan Motor and Honda Motor all have manufacturing bases in European countries like France, Spain and the United Kingdom and in neighboring markets like Turkey. In the past fiscal year ending in March, vehicle shipments from Japan to the European Union accounted for just 10 percent of Japan’s total vehicle exports, the fifth straight year of decrease.

Barriers. Meanwhile, the spokesman for the European Automobile Manufacturers’ Association, the industry’s main lobby group in Brussels, said that European exports are being hampered by the continuing existence of automotive non-tariff barriers in South Korea such as emissions, safety and other regulations. European manufacturers gripe that the non-tariff barriers prevent them from selling cars freely in the rapidly growing South Korean car market.

On the other hand, some analysts say the growing South Korean presence in the European market is not only due to lower cost, but also to the considerable improvement in reliability of Korean cars over the past few years. It has made Korean cars more attractive to European consumers, they say (Sources: The WSJ, Reuters, The Korea Herald).

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