Canada’s Auto Industry Wary of South Korea Trade Deal

OTTAWA – A trade agreement struck between Canada and South Korea last week has raised fears within the Canadian automotive industry about a potential increase in auto exports from the Asian country.

Upon the agreement’s ratification, which may happen within a year, South Korea will remove all existing tariffs, including the 8% duty on passenger cars and light trucks, and duties ranging from 3% to 8% on auto parts exported from Canada.

Canada, in turn, will remove the current 6.1% tariff on South Korea-made cars and light trucks within three to five years. In addition, 69.8% percent of all South Korean auto-parts tariff lines exported to Canada will become duty-free on implementation, while the remaining tariffs of up to 8.5% will be phased out within three to five years.

Unifor, the labor coalition incorporating the former Canadian Auto Workers union, is concerned the Canadian federal government has not done enough to ensure the agreement is reciprocal.

“We look at current situation of trade between Canada and Korea, and it stands as a one-way street from Korea,” Unifor researcher Angelo DiCaro tells WardsAuto. “It’s a bad situation now and it’s going to get worse.”

Estimates of South Korean vehicle exports to Canada in 2013 range from 100,000 to 131,000 units, and 100 to 3,000 exports from Canada to South Korea.

Steve Rodgers, president of Canada’s Automotive Parts Manufacturers’ Assn., notes a potential increase in South Korean auto exports into Canada could affect local sales and production. “If all of a sudden because of the free-trade agreement, (South) Koreans can import more vehicles into Canada, then somewhere production has to decrease to offset that rise in imports,” he says.

However, he says the agreement probably will not significantly affect production in the other North American Free Trade Agreement countries, the U.S. and Mexico, since Canada accounts for only 9% of NAFTA vehicle sales.

Rodgers adds Canadian exporters face other challenges to accessing the South Korean market, notably the high cost of shipping parts to the country. In addition, South Korean automakers tend to favor using local parts suppliers.

DiCaro says significant South Korean non-tariff trade barriers for Canadian exporters still exist, and he raises concerns about the potential for the South Korean government to manipulate its currency-exchange rate to give it an additional competitive advantage.

Canada actually can help South Korea make better cars by exporting key technologies such as vehicle lightweighting and advanced composite structures, he says.

An official at the Korea Automobile Manufacturers Assn., who had worked on the trade-deal talks, tells WardsAuto the phasing out of duties will make auto exports to Canada more price- competitive, encouraging automakers to increase export volumes.

South Korean automobile exporters also are building on their products’ improving reputation in North America: “The perception of Korean automobiles is getting better and better when it comes to the quality of the vehicles...by people in the U.S. and Canada,” the official says. “That is why we expect an affirmative direction from Canadian consumers (as Korean car prices come down).”

He notes that midsize cars are the most popular market segment in Canada and the Hyundai Sonata is a model that could prove popular in any export-sales increase.

The official predicts the two South Korean-owned auto plants in the U.S. (in Georgia and Alabama) will be unable to meet an increase in Canadian demand, because sales in the U.S. also are growing. “These two production facilities may cover the demand in the U.S., but they are not (large) enough to support supplies of vehicles to Canada,” he said.

As there currently is “no fixed plan to have a (Korean-owned) car plant in Canada,” he says, an increase in Canadian demand largely would be satisfied by increased exports of South Korea-made vehicles.

The official hopes the Canadian and South Korean governments will facilitate technical discussions on bringing their vehicle-certification regulations closer together to further promote trade. Under the trade agreement, he adds, Canadian automakers “have a chance to broaden their export volumes (to South Korea) in the future.”

In 2012, Canada’s imports from South Korea included $2.06 billion of automobiles with engines between 1.5L and 3.0L, and $141.3 million of autos with engines 3.0L or larger. Canada’s exports to South Korea in the same categories were only $834,551 and $1.65 million, respectively.

– with Kitty So