U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

import activities have continued “in a more subtle and indirect manner” and “continue to
have a strong residual effect on consumers today.” 450
FTA Provisions
The FTA addresses certain tax and TBT issues as described above, and also prescribes a
system for consultation and dispute settlement. 451 The provisions of the agreement that relate
to the passenger vehicle sector are described in box 3.4.
Effect of FTA Provisions
Removal of the 8 percent tariff on passenger cars and the 10 percent tariff on light trucks
would likely have a positive effect on U.S. exports, potentially enabling U.S. exporters to
lower their prices because of the tariff savings; further, the overall tax burden on the Korean
consumer who purchases an imported vehicle would be reduced, more or less equalizing the
total taxes paid on imported and domestic vehicles. Of particular interest is the treatment of
hybrid vehicles. For hybrid vehicles in which the gas- or diesel-powered engine “provides
the vehicle’s power system its essential character,” the 8 percent tariff would be immediately
removed. 452 There are a number of hybrid vehicles currently produced or slated to be
produced in the United States in the coming model years, and U.S. officials assert that all of
the U.S.-built hybrids currently on the market would benefit from the immediate elimination
of the 8 percent Korean tariff. 453 Consequently, the removal of this tariff could increase the
competitiveness of U.S.-produced hybrid vehicles in the Korean market, particularly in light
of the fact that there are currently no Korean-built hybrid vehicles.
The FTA provisions on market access and national treatment address Korea’s motor vehicle
tax system. The reduction of the special consumption tax and the annual vehicle tax, and the
restructuring of the vehicle classifications of those taxes, make the taxes less discriminatory
against U.S. exports; the systems, however, continue to be based on engine size, and the
overall effect is expected to be positive but likely minimal. As noted by Schott, Bradford,
and Moll (2006), “[e]ven if the tariffs disappear on bilateral trade under an FTA, foreign
automakers fear that the structure of domestic taxes will continue to depress demand in the
Korean market for large-engine cars relative to small cars.” 454 Moreover, the FTA
commitments on taxes would be applied on a multilateral basis, meaning that U.S. exports
would not benefit from preferential taxation treatment. As can be discerned from the data in
table 3.16, 95 percent of all vehicles sold in Korea in 2005—imports and domestically
produced—were vehicles with engines over 1,000 cc and would therefore be assessed the
reduced special consumption tax rate of 5 percent at full implementation. Regarding the
annual vehicle tax, 79 percent of all vehicles sold in Korea have engines over 1,600 cc; the
450 Biegun, “Responses to Commissioners' Questions to Mr. Stephen Biegun,” written submission to the
USITC, June 27, 2007.
451 For additional analysis regarding TBTs and other NTMs, see chap. 5 of this report.
452 For hybrid vehicles in which the gas- or diesel-powered engine “does not give the vehicle’s power
system its essential character,” the 8 percent tariff would be phased out over 10 years.
453 U.S. government official, interview by Commission staff, Washington, DC, June 11, 2007.
454 Schott, Bradford, and Moll, “Negotiating the Korea-United States Free Trade Agreement,” June 2006.
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