With exports down, Korea bets on domestic EV tax breaks to protect supply chain

Korea Herald

5 days ago

The Korean government is considering a tax credit for domestically produced electric vehicles amid rising concerns about a potential decline in automotive production.
The proposed credit is part of the ruling Democratic Party's broader plan to support key strategic technology sectors, including future mobility, clean hydrogen, displays, biomedicine, batteries and semiconductors.
According to the party's bill proposals, companies could receive a corporate tax exemption of up to 30 percent of their production costs, provided both production and initial sales occur within South Korea.
'We are considering the introduction of a domestic production promotion tax program for strategic industries, but details are yet to be clarified,' said an official from the Ministry of Economy and Finance's tax policy division.
With trade accounting for over 80 percent of Korea's gross national income, the government has been cautious about introducing measures that could be seen as production subsidies and trigger unfair trade disputes.
However, this stance appears to be shifting, as growing global protectionism raises concerns about the potential weakening of Korea's automotive industry.
'There are many possible approaches, but after careful consideration, I concluded that a tax system that promotes domestic manufacturing is the most effective,' said President Lee Jae Myung, then a presidential candidate from the Democratic Party of Korea, during a visit to Hyundai Motor's Korean plant in February.
'Japan and the US have already moved in this direction. Korea also needs a tax deduction for local production.'
Japan, for example, offers corporate tax credits of up to 400,000 yen ($2,700) per electric vehicle produced domestically. France and India are also intensifying efforts to localize their electric vehicle supply chains through targeted subsidy programs and protective tariffs.
In the US, federal tax credits for domestically assembled EVs are currently available but set to expire in September. Meanwhile, the US has imposed a 25 percent tariff on imported vehicles and parts to encourage domestic production and secure its automotive supply chain.
The move has already had a significant impact on Korea's auto industry, particularly among Korea's parts suppliers, many of which have been transitioning their portfolios toward EV components in response to the growing electrification trend.
'High tariffs in the US, which account for over half of our total automotive exports, led to a 16.5 percent decline in exports to the US in the first half of the year. For EVs, the drop was even steeper — 88 percent,' said Kang Nam-hoon, CEO of the Korea Automobile Manufacturers Association, calling for swift implementation of a production-focused tax incentive.
Although the Korean government is currently in talks with the US to resolve tariff issues, many industry experts foresee long-term challenges for Korea's automotive base, as countries increasingly move to secure their supply chains.
'The World Trade Organization system, which once drove global division of production, is now essentially meaningless,' said Lee Hang-gu, a researcher at the Korea Automotive Technology Institute. 'There's no effective response left against the aggressive subsidy programs of the US and China. And now, every country is doing the same.'
Essential move, lingering worries
Experts say efforts to reduce supply costs are essential to help Korea's automotive supply chain withstand growing export challenges amid an increasingly unstable global trade environment.
'When major automakers moved production overseas, small and mid-sized Korean parts suppliers were able to follow and continue exporting their products. But that may no longer be possible,' Lee Hang-gu added.
'Many could be limited to supplying parts only for vehicles produced in Korea, but the domestic market is far too small to sustain their businesses.'
In 2024, only 1.7 million new cars were sold in Korea, while the country produced a total of 4.1 million vehicles.
To minimize the risk of trade disputes, Korea's proposed production promotion tax system is being designed with a restriction: It would apply only to products sold within the domestic market.
Under the WTO rules, subsidies are generally subject to dispute only if they are linked to exports and cause adverse effects on other countries' industries. Additionally, the WTO allows governments to offer subsidies exclusively to domestic producers, as long as they do not discriminate against imported goods.
Still, concerns remain that such a measure could weaken Korea's negotiating position as global trade tensions persist.
'We must remember that this could also encourage other countries to adopt similar policies to promote their local industries,' said Kwon Yong-joo, professor of automotive and transportation design at Kookmin University.
'While this measure might help protect our supply chain in the short term, it remains uncertain whether such support would be more effective to hold car production domestically than subsidies directed at buyers.'