[US Presidential Election D-50 Trade Check] Outwardly 'China Containment', Damage Hits Korean Cars and Steel

US Auto Trade Deficit Expected to Reach Record High
Potential Direct and Indirect Impact from China Containment
Increased Competition Due to China's Steel Restrictions...Profitability Declines

The scale of the U.S. automotive trade deficit is expected to reach an all-time high this year. It has long been a category with a large deficit due to heavy imports of high-priced vehicles, but there is a growing possibility of resolving the deficit structure after the presidential election. In particular, as the U.S. intensifies efforts to counter China in advanced mobility sectors such as electrification, the impact on our companies is also expected to be significant.

The U.S.'s tough stance toward China could initially provide a windfall benefit to Korean companies, but since the overall supply chain heavily depends on China, there is also a possibility of disadvantages. Pyo In-su, an advisor at the law firm Bae, Kim & Lee LLC, said, "As protectionist policies strengthen, there is a strong tendency to view the increasing trade deficit unfavorably."

Former U.S. Republican presidential candidate Donald Trump
[Photo by Yonhap News, AP]

Heightened Attention on Strengthening Origin Rules

According to U.S. Department of Commerce statistics on the 20th, the passenger car sector deficit from January to July this year was $90.5 billion. Compared to the same period last year, the deficit increased by more than $10 billion. The U.S. passenger car deficit reached a record high of $145 billion last year, and if the current trend continues, a new record is expected within a year. This year, exports of automobiles have stalled while imports have increased, expanding the deficit.

By country, the largest deficit is with Mexico at $25 billion, followed by Japan ($23.3 billion), Korea ($21.9 billion), Germany ($9.8 billion), and Canada ($6.7 billion). Korea ranks third in terms of passenger car deficit size but leads in terms of increase rate. Before COVID-19, Korea's share of the U.S. passenger car deficit was only about 11%, but this year it has more than doubled to 24%. This is due to Hyundai Motor and Kia strategically increasing exports, valuing the U.S. market, and Korea GM also increasing production mainly of small models with the U.S. market in mind.

For us, this means we have earned a lot of money through automobile trade with the U.S., but it is not something to be entirely welcomed. The increase in the automobile deficit before and after the election could be a point of contention. Former President Donald Trump pointed out in his first year in office that imports of automobiles from Korea increased while exports decreased, leading to a revision of the Korea-U.S. Free Trade Agreement (FTA), citing that the agreement was flawed and causing losses to the U.S.

U.S. Democratic presidential candidate Vice President Kamala Harris
[Photo by Yonhap News, AP]

Even if former President Trump, running as a Republican candidate, is not elected, the issue remains. The U.S. is raising trade barriers targeting China. One reason Korean automobile companies have been able to increase exports to the U.S. with competitive products is that they source parts from China, which helps maintain price competitiveness.

The U.S. has decided to raise tariffs on Chinese electric vehicles from 25% to 100% starting late this month. There is talk that such measures could be expanded to the entire automobile sector, where the deficit has widened. Some are pushing to enforce this. Connected cars are a representative example.

Production line of Chinese electric vehicle company Lingpao (Leapmotor)
[Photo by Yonhap News, AFP]

This refers to technology or parts that exchange communication information between vehicles, and a preliminary investigation is underway to regulate connected cars using Chinese parts. A regulatory draft was announced earlier this February, and opinions are currently being gathered from various sectors. Our government has conveyed to the U.S. that "the global value chain of the automobile industry is very complex and could lead to increased costs," and that "it would place excessive burdens on consumers and ultimately affect both governments."

In particular, rules of origin for automobiles are likely to become an issue. Under the Korea-U.S. FTA, the rules of origin for automobiles are relatively lax at about 35%. Even if many foreign parts are used, if about one-third of the parts are domestic and the final assembly is done in Korea, the vehicle is recognized as "Made in Korea" and receives tariff benefits when exported to the U.S. The U.S. has long argued for strengthening the origin criteria of the Korea-U.S. FTA and may demand this for Korean automobiles to regulate Chinese products.

‘Quota System’ Further Shrinks Korean Steel

The U.S. has already imposed import restrictions on Korean steel products. This is a consequence of the quota system introduced in 2018 under the Trump administration as part of protectionist measures. Korean steel exports to the U.S. have been capped at around 2.63 million tons for seven consecutive years.

At that time, the U.S. Department of Commerce stated, "(Replacing U.S. steel imports) poses a serious impact that exposes the U.S. to the risk of failing to meet national security requirements," and imposed a 53% tariff on countries including Russia, China, and Korea.

Korean steel regulations targeted China. Korea's steel export structure involved importing Chinese steel, processing it, and then exporting it to the U.S., which was seen as a circumvention route by the Chinese government. The steel industry is cautious, warning that the U.S.'s "Chinese steel crackdown" could intensify competition in other offshore regions including Europe and Southeast Asia, as well as domestically.

An industry official said, "Due to U.S. import restrictions on Chinese products, the volume of dumped steel entering the market has already increased," adding, "As price competition intensifies, domestic steelmakers are facing greater difficulties."

Following the U.S. presidential election, there are forecasts that the new administration may impose additional tariffs, creating a strong sense of contraction in the domestic steel industry. There are concerns that the export base could weaken. Apart from the steel quota, Korean hot-rolled steel plates are also subject to countervailing duties. Hyundai Steel and Dongkuk Steel are each subject to a 1.08% countervailing duty on hot-rolled steel plates. At that time, the U.S. Department of Commerce pointed out that "Korea's cheap industrial electricity effectively acted as a subsidy for Korean steel companies."