The United States plans to impose a 15% tariff on South Korean automobiles, which is expected to impact the South Korean automotive industry. Previously, there were no tariffs according to the Korea-U.S. Free Trade Agreement (FTA), but the United States has been levying a 25% item-specific tariff since April.
If complete vehicle manufacturers like Hyundai Motor Group increase local production in the U.S., domestic production and exports will inevitably decline. Experts point out that the automotive industry needs support for factory automation, labor flexibility, and tax incentives to enhance productivity.
The presidential office announced on the 31st that the tariff on South Korean automobiles in the U.S. has been set at 15%. This rate is on par with Japan and the European Union (EU), while South Korea previously had no tariffs until item-specific tariffs were established, whereas Japan and the EU were subjected to a 2.5% tariff.
Kim Kyung-yu, a senior researcher at the Korea Institute for Industrial Economics & Trade (KIET), remarked that "the application of a 15% tariff means that the price competitiveness we have enjoyed will be lost compared to Japan and Europe." He also noted, "However, given the improved image and technology of South Korean automobiles in the U.S. market, it is still feasible to compete at the same tariff rate."
The issue lies within the domestic automotive market. To maintain price competitiveness in the U.S., local production must inevitably be increased, but this will lead to a contraction in domestic production and exports.
The Incheon branch of the Bank of Korea noted on the 28th in its regional economic report that "if production in the U.S. expands, there are concerns regarding a potential decrease in export volumes to the U.S. in the medium to long term. Not only export-oriented automotive companies, but also related companies in Incheon's upstream and downstream sectors, such as materials, parts, and equipment, are expected to face negative impacts with a time lag."
The Ulsan branch of the Bank of Korea also stated that "it is highly likely that complete vehicle manufacturers will need to reassess their production and sales plans in the U.S.," adding, "this will act as a downward pressure on Ulsan's automotive exports." Hyundai Motor Group announced plans to invest a total of $21 billion (approximately 29.3 trillion won) for establishing a local production system of 1.2 million units and increasing the local sourcing rate of components.
The South Korean automotive industry has taken on increased costs due to the expanded ruling on standard wages and labor-friendly policies such as the Yellow Envelope Law, along with the burden of U.S. tariffs. Lee Hang-gu, a researcher at the Korea Automobile & Mobility Association, said, "It's the first time I've seen the overall environment of the Korean automotive industry deteriorate to this extent since I began research in 1987. If domestic automotive production decreases by 1 million units, tens of thousands of jobs will be lost, collapsing the local economy." According to the Korea Automobile & Mobility Association, employment in the automotive industry, both direct and indirect, is at around 1.5 million.
Experts believe that support measures are needed to enhance the competitiveness of South Korean automobiles. Senior researcher Kim Kyung-yu stated, "We need to improve the efficiency of the smart factory support projects being implemented across the government. The smart manufacturing system needs to be interconnected from complete vehicle manufacturers to parts suppliers, but currently, the government and complete vehicle manufacturers like Hyundai Motors are operating separately."
There are also calls for labor flexibility. An industry official said, "Because the Korean automotive industry frequently experiences strikes, it is necessary to allow for alternative workers during strikes and to apply flexible working hours for high-wage workers. We must improve productivity through labor-management cooperation."
There are demands for the expansion of tax credits and financial support. Kim Joo-hong, executive director of the Korea Automobile & Mobility Association, stated, "Small parts manufacturers are expected to suffer significantly from tariff damages, so urgent financial support such as loan and guarantee limits needs to be expanded. The tax credit rate for national strategic technology for future vehicles needs to be increased, and new tax credits for domestic production also need to be established."
An industry official remarked, "We need to find alternative markets to replace the decreasing exports to the U.S., and we must inevitably compete with Chinese automobiles elsewhere," adding, "it is essential to lower production cost burdens to secure price competitiveness."