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

access. The FTA affirms the parties’ rights under the WTO, which includes the following
from the WTO Agreement on Technical Barriers to Trade: “. . . no country should be
prevented from taking measures necessary . . . for the protection of human . . . life or health,
or the environment . . . at the levels it considers appropriate, subject to the requirement that
they are not applied in a manner which would constitute a means of arbitrary or unjustifiable
discrimination between countries where the same conditions prevail or a disguised restriction
on international trade, and are otherwise in accordance with the provisions of this
Agreement.”
An ancillary factor in the potential effect of the FTA is the dispute settlement mechanism.
While the USTR asserts that the agreement’s innovative process for settling auto-related
disputes would serve as a powerful deterrent against any violations of FTA commitments, 463
those in opposition to the agreement express disappointment that the burden of proof lies
with U.S. exporters. 464 The dispute settlement provisions restrict the snapback penalty on
light trucks, which in the United States are assessed a duty of 25 percent, to the rate for
passenger cars, 2.5 percent.
U.S. Imports
The Commission’s economic simulation estimates that U.S. imports from Korea of the
broader motor vehicles and parts sector are expected to increase by $1.3–1.7 billion (9–12
percent). 465 However, according to the simulation analysis in chapter 2, 55 to 57 percent of
this estimated increase in U.S. imports from Korea would be diverted from other import
sources. U.S. imports of passenger vehicles from Korea accounted for 84 percent of U.S.
motor vehicle and parts imports from Korea in 2006. 466 Given the relatively large overlap of
the products covered in this assessment with those of the economy-wide model sector, this
estimated impact on the broader sector reflects to a large degree the potential effect of the
FTA on the passenger vehicle subsector.
The expected increase in U.S. imports of passenger vehicles from Korea as a result of the
FTA would likely be the result of U.S. tariff reductions that would make Korean-built cars
more competitive in the U.S. market, 467 and, in the longer term, provide preferential market
access to Korean-built light trucks. 468 According to one industry analyst, the elimination of
the 2.5 percent tariff on U.S. imports of Korean passenger vehicles would “make Korean cars
463 USTR, “Q&As on U.S.-Korean FTA,” April 13, 2007.
464 ITAC (2) on Automotive Equipment and Capital Goods, Advisory Committee Report, April 27, 2007.
465 Impact relative to an estimated 2008 base. See chap. 2 of this report for additional information
regarding the economy-wide analysis.
466 As defined by GTAP sector 38. See chap. 2 for additional information.
467 On average, the removal of a 2.5 percent tariff on a Korean-built passenger car can result in an
approximate $250 savings per vehicle. Korean press reports indicate that Hyundai and Kia believe that the
removal of the 2.5 percent U.S. tariff would provide “minimal benefits” in light of the appreciation of the
won and other considerations, and that the tariff savings would result in the price of an imported Korean car
in the United States being reduced by $150. Seo, “Republic of Korea Daily: Abolition of Car Tariffs Will
Help U.S. More,” March 30, 2007.
468 Korean estimates of the likely increase in U.S. passenger vehicle imports from Korea vary within a
narrow range; for example, KIET estimated that Korean exports of passenger vehicles will likely increase by
$813 million over the 10 year implementation period of the agreement, the Ministry of Commerce, Industry
and Energy estimated that Korean exports may increase by $810 million, and the Korean Institute for
International Economic Policy (KIEP) estimated that Korean vehicle exports will likely increase by
$860 million in the first year of the agreement. Yonhap News, “Economic Effects of S. Korea-U.S. FTA May
Differ From Early Estimates,” April 23, 2007; and Yonhap News, “FTA to Boost S. Korea's Auto-related
Surplus by US$1 billion,” April 11, 2007.
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