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Korea-U.S. Auto Talks Essay, Research Paper

INTRODUCTION On 20 October 1998, Korea and the U. S. reached an agreement on auto trade after the tediously long time, almost 1 year. The negotiation had been a matter of concern and interest in both countries especially in Korea because it would bring great impacts on auto industry. Korean economy has heavily depended on auto export and on American market. Therefore, everyone worried that conflicts on negotiation table led to sanction on auto export of Korea. Additionally, domestic auto market needed some refreshments to revitalize domestic sales that had been reduced by 50% since the economic crisis. During the negotiation, the issues on annual auto registration tax that is progressive and import tariff were hardest to come to an agreement on. After overcoming the continuous deadlocks, both finally came to an agreement. According to the newspapers of Korea, both sides were satisfied with the result of the talks. However, there were also some criticism in Korea that the U. S. that is major creditor to Korea pushed harder pressure for further car market opening resorting to the IMF to solve the automobile issue. I will try to find out the important results of the talks and assess those results. Furthermore, I want to seek some fundamental measures to cope with American pressure after investigating the trend of American auto trade policy. BODY Major Agreements of the Korea- U. S. Auto Talks First of all, I gathered the results of the talks. Tariff and annual auto vehicle registration tax were harder to agree on as mentioned before. The U. S. kept insisting on reducing tariff rate to 2.5%, the same as American level and on the abolition of progressive tax system. Korea also could not easily yield to the request of the U. S. because those measures would drastically change Korean auto market condition. Thus, Korea kept persuading the U. S. to understand unique situation of Korea and explaining that Korean tariff rate is the same as other advanced European countries. And the U. S. changed its initiative harsh attitude after Korean economy got into deep trouble at the end of 1997. Then, both came to an agreements like following. 1. Tariff 2. Annual Auto Vehicle Registration Tax 3. Special Excise Tax 4. Other Taxes 5. Self Certification 6. Auto Mortgage 7. Steps for Talks 8. Customer’s Perception Assessment of the Korea-U.S. Auto Talks Positive 1. Korea could narrowly escape possible U. S. retaliation against Korean auto exports to the U. S. market under the Trade Act Super 301 as the two governments were able to iron out their differences in the auto trade dispute which erupted last October. The possible retaliationary action would have great impacts on Korean economy because car is the major export item of Korea amounting 215,684 in number and 1,793,610,000 in dollar in 1997. 2. Reduction in various tax rate will lead to reduction in customer’s burden. As shown in table 1, consumer will benefit from the agreement with price cut ranging 48,000 won to 4,594,000 won. Table 1: XChange in Car Price Resulting from Agreements of the Korea-U. S. Auto Talks | (1,000 won) ( I: current price, II: could-be price after expiration of 30% cut in special excise tax without the agreement next year, III: new price accommodating the agreement ) 3. Korea did not give in to the U. S. demand that import tariff rate on foreign vehicles should be cut from the current 8% to the U. S. tariff rate, 2.5%. By maintaining 8% tariff rate and granting the same tariff rate to the WTO, it is expected that there will be positive effects to inform major trading partners of Korea’s will to open Korean market. Instead, Korea promised to participate actively in multilateral talks for tariff rate reduction as one member of WTO and APEC. That means Korea will take the same tariff policy as other WTO members and APEC members such as China, ASEAN, and Russia. With tariff reduction, Korea will have chances to get into larger foreign markets as well as pressure to open Korean car market. 4. The agreements are expected to boost the sagging domestic auto market. The steps to reduce tax imposed in the acquisition and registration process have been continuously requested by domestic auto makers. According to Maeil Business Newspaper, there will be 7-9% car sales growth due to those tax reduction steps. Negative 1. Most of all, Korea had to admit the power of the U. S. the only hegemonic power in political, military, and economic terms in these days. Even in the era of the WTO, the U. S. demanded bilateral trade negotiations taking advantage of Korean economic crisis and Korea rather subjected to the U. S. power and set up its trade policy through the bilateral talks not through the multilateral talks in WTO. The WTO has once demanded, through Trade Policy Review Mechanism, to rectify the U. S. dependence more on bilateral talks than on multilateral talks. But the U. S. reiterated an odd assertion that it used bilateral agreement in order to promote free trade. 2. The agreements will revise the domestic tax system again so that taxes will be more on mileage than on vehicle acquisition. The domestic tax system was firstly negotiated in 1995 Korea-U. S. auto talks, and it was fatal that Korean government permitted to negotiate domestic taxes in bilateral talks. Now it seems that domestic tax system is, of course, one of negotiation objects at the request of the super power. 3. With the reduction of auto taxes that are mostly local taxes, local governments are expected to suffer revenue shortage. Thus, central government promised to support local governments with 2,900,000,000,000 won, being burdened with budget deficit that usually ends up with current account deficit. 4. There will be more demand for large cars while less demand for middle-sized cars with larger reduction in larger car price. This expected consumption shift from middle-sized cars to large cars seems to have little

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