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The $68 Billion U.S.-South Korea Trade Question


Ford and the UAW want Washington to keep a 25 percent tariff on pickup truck imports into the U.S. South Korea wants it phased out

When heads of state gather for fancy dinners and friendly chatter, leaders sometime cut through their own ponderous bureaucracies and actually get something done. President Barack Obama and South Korean President Lee Myung Bak did just that on June 26 when they announced at the Group of 20 summit in Toronto that they intended to revive a trade agreement inked back in 2007 but never approved by either country's legislature.

Both sides aim to rework the deal by November, when the G-20 next meets in Seoul. With nearly $68 billion in two-way trade, it would be the largest U.S. free-trade pact since Nafta in 1994 and could help Obama make good on a March pledge to double American exports in five years.

Obama hasn't sent the existing deal to Congress because of labor opposition. The U.S. economy's massive job losses—15 million people were jobless as of May—doesn't help matters. An even more intractable problem in the way of a new agreement involves trucks. Ford Motor (F) and the United Auto Workers want Washington to keep a 25 percent tariff on pickup truck imports into the U.S. (Ford's F-series is America's best-selling vehicle.) The deal with the South Koreans would require the U.S. to phase out that tariff over the next decade.

Right now, Hyundai Motor and Kia Motors, the two largest Korean automakers, don't make trucks that could compete with the American brands. However, in a September filing to the U.S. Trade Representative, the UAW said: "It would be relatively easy for Korean manufacturers to ramp up production for export to the U.S." Adds Barbara Somson, the UAW's top official in Washington: "A lot of damage could be done to our jobs in pickup plants."

Ford makes a different case: By agreeing to cut tariffs, the U.S. is trading away its best bargaining chip to pry open the Korean market to American-branded vehicles, something the U.S. has tried and failed to do since the 1990s. This deal "represents the last, best chance to open the Korean market," Ford said in a statement. "There certainly is a problem in Korea," says Daniel J. Ikenson, associate director at the Center for Trade Policy Studies. Still, he believes the Big Three are "more concerned with market competition in the U.S. than in gaining Korean market share."

South Korea's passenger carmakers have made huge inroads in the U.S., which imported $8.4 billion worth of autos and auto parts from Korea in 2009. That could increase by as much as $1.7 billion a year as a result of the free-trade deal, the U.S. International Trade Commission estimates. By contrast the U.S. sent only 6,140 autos to Korea last year, a total Ford blames on a variety of taxes, customs, and regulatory standards that discriminate against foreign competition. "Korea is the classic example of bad trade policy: keeping everyone else out while going on a worldwide export binge," says Stephen J. Collins, president of the American Automotive Policy Council, which represents Ford, General Motors, and Chrysler. "We are open to looking at a good trade agreement, but this one flunked." GM, which has a South Korean unit, GM Daewoo Auto & Technology, is sitting out the debate, he says. GM makes and sells cars in the Korean market and uses the Daewoo unit to sell to China as well.

One skeptic Obama will have to bring around is House Ways & Means Chairman Sander Levin (D-Mich.), whose suburban Detroit district is home to thousands of autoworkers. Levin offered a proposal in 2007 to make sure as many U.S. cars enter Korea duty-free as Korean cars enter the U.S. duty-free. The 25 percent truck tariff? It would stay in place.

The bottom line: The big hurdle to a U.S.-South Korea trade deal may be Ford Motor, which wants to protect its pickup truck market.

Drajem is a reporter for Bloomberg News. Naughton is a reporter for Bloomberg News.

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