CRS Reports on the Auto-Specific Provisions of the KORUS FTA

(The proposed KORUS FTA was signed in 2007, and if implemented, would eliminate tariffs on over 95% of industrial and consumer goods within five years. According to the report, the White House has indicated that it would like to see Congress approve the KORUS FTA implementing legislation by July 1, 2011, the date when the FTA between the European Union and South Korea is expected to go into effect. However, the Administration has said that it will not submit the pending FTAs (including the KORUS FTA) until it reaches an agreement with Congress on renewing Trade Adjustment Assistance consistent with the 2009 expansion to service workers, etc.)

Auto Trade Has Been Most Difficult Issue, Negotiators Revised FTA in Dec 2010

Trade in autos and auto parts have been among the most difficult issues tackled by U.S. and South Korean negotiators. In December 2010, the U.S. and South Korea made several significant changes to the 2007 agreement, which the Administration viewed as a necessary step in moving the agreement forward as "the original agreement did not go far enough to provide new market access to U.S. auto companies."

Main Auto Provisions of the KORUS FTA

The main automotive trade provisions of the KORUS FTA, including the December 2010 revisions, include the following:

Elimination of South Korean tariffs. South Korea would immediately reduce its 8% tariff on U.S.-built passenger cars, including electric vehicles and plug-in hybrids, to 4% and would immediately reduce its 10% tariff on trucks to zero. In year five, tariffs on U.S.-made motor vehicles, including electric cars and plug-in hybrids, would be reduced to zero. Tariffs would be immediately reduced to zero in each country for auto parts imported from the other.

Elimination of U.S. tariffs. The U.S. would keep its passenger vehicle tariff (which would also cover electric and plug-in hybrid vehicles) of 2.5% in place for five years. In the original agreement, the tariff would have been eliminated immediately on imports of South Korean cars with small gas engines. Tariffs on passenger vehicles with larger gas engines and diesel engines would be phased out over three years. The elimination of the 25% duty on trucks would stay in place for the first seven years after the agreement is ratified and would then be phased out in equal installments in years 8, 9, and 10 based on the 2010 revision.

Establishment of “snapback” clause. The FTA would establish a bilateral dispute settlement panel, designed to resolve automotive issues within six months. If the panel finds a violation of an auto-related commitment or the nullification/impairment of expected benefits, the complaining Party may suspend its tariff concessions on passenger vehicles and assess duties at the prevailing Normal Trade Relations (NTR) rate (i.e., "snapback" tariff reductions provided by the FTA). The renegotiated agreement does not extend the snapback to the higher 25% truck tariff.

Transparency in tax treatment of U.S. autos. Currently, a special consumption tax, an educational tax, a value-added, a registration tax, and a subway bond are among the taxes which apply to motor vehicles, and these taxes are often higher on vehicles with engines 2,000 cubic centimeters or larger. In the renegotiated 2010 agreement, South Korea agreed to additional transparency on tax treatment of U.S. automobiles.

Improvement in regulatory transparency. South Korea committed to an improvement in its regulatory process in two ways: (1) U.S. auto companies would be given one year between the time a final regulation relating to autos is issued and when U.S. automakers must comply with the new regulation and (2) South Korea agreed to develop a new post-implementation review system within two years after the agreement takes effect to ensure that existing auto regulations are applied in the least burdensome manner possible.

Harmonization of safety & environmental standards. The revised 2010 agreement provides for self-certification to U.S. federal safety standards for a limited number of U.S.-exported vehicles raising the ceiling to 25,000 per automaker per year (compared to no more than 6,500 as agreed to in 2007). U.S. automakers would be considered in compliance with new South Korean fuel economy or greenhouse gas emissions standards if “they meet a target level that is 19% more lenient than the relevant target level provided in the regulation that would otherwise be applicable to that manufacturer.” This would apply to U.S. carmakers that sold fewer than 4,500 cars in South Korea in calendar year 2009.

Creation of an Auto Working Group. The two parties agreed to create an Automotive Working Group, which would meet at least annually, and would review and resolve “issues with respect to developing, implementing and enforcing relevant standards, technical regulations and conformity assessment procedures.”

Inclusion of special motor vehicle safeguard. In the 2010 revisions, South Korea committed to add special safeguard for motor vehicles to ensure that the U.S. auto industry is not hurt as a result of any harmful surges in South Korea auto imports as a result of the FTA. The provision would allow the U.S. to impose extra duties if there is an unexpected import surge for up to two years. Any higher tariff that might be imposed could be applied for four years, instead of three under the general safeguard, and would continue for 10 years after the full elimination of tariffs. The safeguard could also be applied to a particular auto product more than once in the event of a recurring surge that causes serious injury to U.S. production of that product.

(See ITT's Online Archives or 12/06/10 news, 10120628, for BP summary of the December 2010 modifications to the KORUS FTA. See ITT's Online Archives or 04/07/11 news, 11040773, for BP summary of a International Trade Commission report on the effect of KORUS on the auto sector.)

(CRS RL34330, dated 03/24/11)