With just a few hours left before their negotiation deadline, the US, Canada, and Mexico reached a dramatic agreement on Sept. 30 to amend NAFTA. With the three countries’ agreement effectively focused on the area of automobiles, some are predicting negotiations on Section 232 of the Trade Expansion Act and that South Korean automobiles will also gain momentum.

Analysts are forecasting that US President Donald Trump’s offensive aimed at gaining more export markets for US automobiles will continue on from Mexico and Canada to also target Japan and South Korea.

The three sides’ agreement was announced around midnight on Sept. 30 in a joint statement by US Trade Representative Robert Lighthizer and Canadian Minister of Foreign Affairs Chrystia Freeland. The agreement is officially to be known as the United States-Mexico-Canada Agreement (USMCA) rather than NAFTA.

According to the new agreement, retaliatory tariffs of 25% will still apply to Canadian and Mexican automobiles exported to the US market in accordance with Section 232, but with tariffs waived on up to 2.6 million vehicles annually for each, Reuters and other news outlets reported. In 2017, Canada exported around 2 million vehicles to the US tariff-free, while Mexico exported around 1.8 million.

The new agreement also included new provisions of origin extending the value content requirement for automobiles to 75% from 62.5% in the previous NAFTA agreement, while requiring at least 40% of automobile parts to be produced in workplaces with minimum hourly pay of at least US$16. This addition was made to prevent the relocation of production bases to Mexico to take advantage of its lower personnel costs in a bid for US exports.

With hourly wages in Mexico averaging around US$7, the change stands to directly impact the Kia Motors production plant in Mexico. No South Korean automobile factories have yet been established in Canada. Pressure from the US is expected to intensify in negotiations with South Korea on automobiles, with the stronger place of origin and minimum wage requirements in the trilateral agreement serving as a standard. The current South Korea-US Free Trade Agreement applies the relatively loose standard of at least 35% of total value-added in terms of rules of origin for tariff-free exports.

The addition was made to head off a trend of outsourcing production bases to Mexico to take advantage of its lower personnel costs in a bid for US exports. With hourly wages at US and Canadian automobile factories averaging over US$20 compared to US$7 in Mexico, the change stands to directly impact Kia Motors, which has a local production plant in Mexico (221,500 vehicles produced last year). No South Korean automobile factories have yet been established in Canada.

“The US has yet to mention quotas with regard to South Korean automobiles,” Minister for Trade Kim Hyun-chong said on Oct. 1 while announcing export and import trends for September.

“In the case of South Korean vehicles, there are few elements we will need to consider in terms of whether complete [tariff] exemptions may be possible [without quotas],” he added.

Kim went on to say that South Korea would “proceed with its negotiations with the US after a complete review of the content of the US’ negotiations with the European Union and Japan.” The message suggests the assignment of Section 232 tariffs and quotas on South Korean automobiles is heavily impacted by the results of negotiations with major partners including Mexico, Canada, Japan, and the EU. South Korea exported around 930,000 vehicles to the US market last year.

The stiffer rules of origin and minimum hourly wage requirements in USMCA could potentially become an issue in future South Korea-US automobile negotiations as well. Regarding rules for place of origin of tariff-free exports, the current KORUS FTA stipulates that at least 35% of total value-added (according to the net cost method) must be produced within South Korea and/or the US.

“We will examine how rational the provisions are on rules of origin, mandatory use of parts, and minimum wages [at automobile parts factories] as we approach the negotiations,” Kim Hyun-chong said in the briefing that day.

By Cho Kye-wan, staff reporter

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