[Inside Chodong] U.S. Auto Trade: FTA Matters More Than IRA

US Presidential Election Unlikely to Affect IRA
$36.6 Billion Surplus in US Auto Trade
Concerns Over Potential Korea-US FTA Renegotiation

The sector that earns the most money for South Korea through trade with the United States is the automobile industry. Last year, the trade surplus with the U.S. was $44.4 billion, of which the automobile and automobile parts sector alone accounted for $36.6 billion, making up more than 80% of the total surplus. As South Korea’s automobile exports to the U.S. rapidly increase, they have become a significant source of foreign currency earnings.

The United States has been focusing on automobile distribution since the early 20th century and has long been regarded as the world’s largest automobile importer. U.S. trade officials, including those from the Trade Representative’s office, reportedly treat automobiles as a highly important item in negotiations with foreign countries. This is likely due to several factors: the vast land area making passenger cars virtually essential goods, the large upstream and downstream industries, and the recent rapid changes across the mobility industry.

While South Korea can take pride in its record-high automobile exports, from the U.S. perspective, South Korea has become a major culprit in the expanding trade deficit. Passenger cars represent the largest deficit among the U.S.’s major import items, with a deficit of $76.5 billion in the first half of this year alone (according to the U.S. Department of Commerce International Trade Administration, hereafter the same). This deficit has increased by more than $10 billion compared to the first half of last year.

Until 2021, Japan was the country from which the U.S. suffered the largest deficit in passenger car trade. From the following year, Mexico took the lead. Following last year, South Korea has rapidly risen this year. Both Mexico and South Korea have free trade agreements with the U.S., enabling them to quickly increase exports to the U.S. Mexico is geographically close and hosts global major automakers’ assembly plants. The deficit scale with South Korea ($18.9 billion) has become comparable to that with Japan ($19.4 billion).

The slogan that free trade is mutually beneficial has already become outdated even in the U.S. The political experience that protecting domestic industries and attracting foreign capital to increase jobs for local workers translates into votes underpins this shift. The Biden administration, which came after Trump, maintains a similar stance. From a protectionist perspective, Biden is often criticized for being even more stringent than Trump.

Lee Seung-jo, Executive Vice President and Chief Financial Officer of Hyundai Motor Company, recently stated while announcing the Q2 earnings that regardless of who wins the U.S. presidential election at the end of this year, the Inflation Reduction Act (IRA) is unlikely to be significantly affected. Since the regions benefiting from the IRA are considered Republican-leaning or battleground areas, even if Trump becomes president again, it is unlikely that the law will be repealed or reset.

The issue is not the IRA but the Free Trade Agreement (FTA). The U.S. and South Korea have already renegotiated the Korea-U.S. FTA during the Trump administration. At that time, the U.S. argued that the trade environment was unfair in certain sectors such as steel and automobiles and pushed for renegotiation. An official involved in the negotiations said that the U.S. was likely to raise concerns about the relatively lax automobile origin rules and that preparations were made to respond accordingly.

The origin recognition standard for automobiles under the Korea-U.S. FTA is 35%, which is less than half of the 75% standard set by the United States-Mexico-Canada Agreement (USMCA). For South Korean automobile companies, which source many generic parts from low-cost countries like China, raising this standard would require a major overhaul of their parts supply chains. Meanwhile, the U.S. is already highly alert to China’s circumvention exports. With the increased possibility of an economic recession in the U.S., there is a higher chance that the U.S. will shift its focus overseas. For South Korea, this means it is time to refine its trade policies even more meticulously.