Hyundai, Kia lose FTA edge as Korea accepts US tariff parity

Korea Herald

2 days ago

Auto giants to boost US production, cut costs, shift supply chain to offset tariff burden
The reduction of US tariffs on South Korean automobiles to 15 percent offers only limited relief for Hyundai Motor Group, which faces mounting challenges in the world's second-largest car market. Stripped of its former zero-tariff advantage under the FTA, the automaker is bracing for a tougher fight to maintain its competitive edge.
According to Seoul's presidential office, Korea and the US negotiated a 15 percent tariff on Korean-made automobiles on Thursday, lowering the rate from 25 percent. This adjustment addresses item-specific tariffs that were initially imposed to protect strategic US industries alleged to have contributed to trade imbalances.
Japan and the EU had previously faced a 2.5 percent tariff on automobile exports to the US before securing their respective 15 percent trade deals. In contrast, South Korean automobiles entered the US tariff-free under the Korea-US Free Trade Agreement.
Citing this discrepancy, Seoul had pushed for a lower 12.5 percent tariff rate in the latest negotiations. However, Washington rejected the proposal, saying it faced political pressure to apply a uniform 15 percent tariff across all three regions.
'When Japan first secured the 15 percent rate, it had already faced strong backlash from the United Auto Workers and Detroit's Big Three US automakers (General Motors, Ford and Stellantis),' said Trade Minister Yeo Han-koo during a press briefing earlier in the day.
Emphasizing that Korea might have risked any chance of tariff reduction if it had insisted on the 12.5 percent levy, Yeo added, 'From the US perspective, maintaining a minimum 15 percent levy was crucial to protect its auto industry and align with the political climate, regardless of (our) FTA status.'
Yeo noted that further tariff reductions are unlikely for the time being, given the need of the US to maintain a balance with other partners like Japan and the EU. He emphasized the government's commitment to capitalizing on every chance to lower tariffs 'even if it's by just 1 percent.'
Industry insiders indicate that the 15 percent auto tariff represents an 'unsuccessful bargain' for Korea, as it loses the advantage it had over Japan, the EU and other competitors under the FTA-based zero tariff benefits it previously held.
'While Korea, Japan and the EU are now subject to the same 15 percent auto tariff, Korea must address the additional costs brought on by losing the 2.5 percent tariff advantage it previously held over the other two regions under the FTA,' said Kim Pil-su, an automotive engineering professor at Daelim University.
'Although 15 percent is better than the previous 25 percent, it's not a win for Korea,' Kim added.
Kim Tae-hwang, an international trade professor at Myongji University, echoed that view and noted, 'Even if Korea had granted the US full access to its rice and beef markets, Donald Trump wouldn't have allowed a single-digit tariff on Korean automobiles, citing the need for fairness with other car exporters. From the start, it was a losing game for Korea.'
According to NH Investment & Securities, under the 15 percent levy, Hyundai's annual tariff burden is projected to be approximately 2.6 trillion-2.7 trillion won ($1.87 billion-$1.94 billion) annually. Samsung Securities estimates Kia's annual tariff impact to be 2.3 trillion won.
Hyundai Motor and Kia already experienced the impact of 25 percent US tariffs in the second quarter. Despite a surge in sales revenue, Hyundai and Kia's operating profit declined on-year by 15.8 percent to 3.6 trillion won and 24.1 percent to 2.8 trillion won, respectively. The combined negative effect of tariffs on the two carmakers totaled 1.6 trillion won.
Kim, the engineering professor, stated that Hyundai Motor Group's key strategy would involve fast-tracking its production in the US while expanding its presence in other key auto markets such as Europe.
On March 24, Hyundai Motor Group Chair Chung Euisun announced a $21 billion investment over four years in the US, focusing on achieving an annual production capacity of 1.2 million vehicles.
In its second-quarter earnings conference call, Hyundai Motor said it plans to implement flexible pricing strategies and cost-saving measures and bolster production in the US, including local sourcing of auto parts. Kia vowed to redirect approximately 25,000 vehicles produced at its Georgia plant toward the US market.
In response to the finalized tariffs, Hyundai Motor Group stated, 'We extend our deepest gratitude to the government departments and the National Assembly for their dedicated efforts in resolving the tariff issues with the US.'
'Hyundai Motor and Kia plan to pursue diverse strategies to minimize the impact of tariffs while further strengthening their competitiveness through enhanced quality, stronger brand positioning and technological advancements.'