hankyoreh

Mexican Secretary of Economy Ildefonso Guajardo Villarreal (far left) and Hyundai Motor Group Chairman Chung Mong-koo at a commemoration event for the launch of the K3 (Forte) at Hyundai’s manufacturing plant in Mexico. (provided by KIA Motors)

After US President Donald Trump suggested once again on Sept. 1 that Canada could be entirely excluded from the North American Free Trade Agreement (NAFTA), attention is focusing on the potential repercussions.

If Canada leaves NAFTA, the biggest impact is likely to be on the automobile industry. “Canada leaving the NAFTA would inevitably sow massive chaos in the automobile industry,” the Nihon Keizai Shimbun, a Japanese daily newspaper, reported on Sept. 2.

In 2017, global automakers manufactured more than 2.2 million automobiles in Canada, of which the majority – over 1.89 million – were exported to the US. In the same year, over 4.07 million automobiles were produced in Mexico, and more than 2.7 million of these were exported to the US.

If Canada is booted from NAFTA, sedans that are made in Canada and exported to the US will be subjected to a 2.5 percent tariff, while sports utility vehicles (SUVs) and trucks will be slapped with a 25 percent tariff.

The parts supply network that has come into being between the US and Canada across the Great Lakes would suffer a major shock as well. Manufacturing cars involves sending numerous car parts between American industrial cities such as Detroit and major Canadian cities such as Toronto. If Canada drops out of NAFTA, Canadian-made car parts that are exported to the US will face a tariff of 2.5 percent while American-made parts exported to Canada will face tariffs of around six percent. And as parts bounce back and forth across the border, tariffs will increase exponentially.

This also creates a serious dilemma for Kia Motors, which has set up operations in Mexico. The basic agreement that the US and Mexico reached on the revised version of NAFTA on Aug. 27 bolsters the “place of origin” rules for automobiles that enjoy a tariffs waiver. Previously, automobiles could be exported without tariffs if at least 62.5 percent of their parts were procured within the NAFTA zone, but the revised version bumps that up to 75 percent. Furthermore, between 40 and 45 percent of the parts must be made by workers who are paid at least US$16 an hour. That makes it tougher for Kia’s local office to export cars to the US.

Furthermore, Trump ordered officials at the end of May to review the idea of applying steep tariffs to automobiles imported to the US, and he tweeted at the end of June that the US was looking into applying a 20 percent tariff to imported automobiles. Since South Korea is currently exporting automobiles to the US tariff-free under the provisions of the Korea-US Free Trade Agreement (KORUS FTA), this measure, if adopted, would cause major havoc. Last year, 845,000 of the 2.53 million vehicles exported by South Korean automakers, or 33 percent, went to the US.

By Gil Yun-hyung and Hong Dae-seon, staff reporters

Please direct comments or questions to [english@hani.co.kr]