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UnitedStatesInternationalTradeCommissionInvestigationNo.
332-523USITCPublication4220March2011U.
S.
-KoreaFreeTradeAgreement:PassengerVehicleSectorUpdateAddressallcommunicationstoSecretarytotheCommissionUnitedStatesInternationalTradeCommissionWashington,DC20436U.
S.
InternationalTradeCommissionKarenLaneyActingDirectorofOperationsMichaelAndersonActingDirector,OfficeofIndustriesCOMMISSIONERSDeannaTannerOkun,ChairmanIrvingA.
Williamson,ViceChairmanCharlotteR.
LaneDanielR.
PearsonSharaL.
AranoffDeanA.
PinkertU.
S.
InternationalTradeCommissionWashington,DC20436www.
usitc.
govMarch2011Publication4220U.
S.
-KoreaFreeTradeAgreement:PassengerVehicleSectorUpdateInvestigationNo.
332-523ThisreportwaspreparedprincipallybytheOfficeofIndustriesProjectLeaderBrianAllenbrian.
allen@usitc.
govOfficeofIndustriesDavidCoffin,DeborahMcNay,andLindaWhiteOfficeofEconomicsMichaelFerrantino,DanielleTrachtenberg,andMarinosTsigasContentReviewersNannetteChristandJohnGiamalvaAdministrativeSupportPhyllisBoone,BrendaCarroll,andMonicaReedUnderthedirectionofDennisRapkins,ChiefChemicalsandTextilesDivisioniCONTENTSPageExecutiveSummary.
iiiIntroduction.
1EffectofChangestoU.
S.
-KoreaFTAonthePassengerVehicleSector.
1Assessment.
1U.
S.
exports.
2Simulationresults.
4Koreanpassengervehiclemarket.
6Changestothe2007FTAprovisionsintheaccompanyingagreement7U.
S.
imports10ChangesintheU.
S.
passengervehicleindustry.
10Effectsoftariffremoval12Safeguards13Bibliography.
15AppendixesA.
Requestletter.
A-1B.
FederalRegisternoticeB-1C.
LegaltextoftheagreementandAgreedMinutesaccompanyingtheU.
S.
-KoreaFreeTradeAgreement.
C-1D.
SummaryofpositionsofinterestedpartiesD-1E.
DescriptionofpossiblenontariffmeasuresanalysisandsimulationoftheabsenceofNTMs.
E-1Box1.
PotentialpriceandquantityeffectsofKoreanNTMsonimportsofcertainU.
S.
passengercars.
5Figure1.
Koreanimportsofpassengervehicles,bytradingpartner,2006–107iiCONTENTS–ContinuedPageTables1.
ChangestoFTAprovisionsrelatedtoU.
S.
exportsofpassengervehiclestoKorea.
32.
Korea:Passengervehiclemarket,bysource;U.
S.
producerimports;andimportsfromtheUnitedStates,inunits,2006–10.
63.
ChangestoFTAprovisionsrelatedtoU.
S.
importsofKoreanpassengervehicles114.
U.
S.
passengervehiclemarketandsalesbyKoreanproducers,inunits,2006–1012E-1.
Specificationofsensitivityanalysis:RangeofparametersinKoreanfinaldemandforpassengercars.
E-6E-2.
SimulatedeffectsforKoreanimportsofU.
S.
passengercarsfromtheremovalofthe7.
5percentpricegapthatcouldbeattributedtoKoreanNTMsunderdifferentvaluesforselectedparametersinKoreanfinaldemand.
E-6iiiExecutiveSummaryOnFebruary10,2011,theUnitedStatesandtheRepublicofKorea(Korea)exchangedthelegaltextsreflectingtheagreementtheyconcludedonDecember3,2010,tomodifycertainprovisionsofthe2007U.
S.
-KoreaFreeTradeAgreement(FTA)regardingthepassengervehiclesector.
1Thesetexts(hereinafterreferredtoasthe"accompanyingagreement"),asnotedintheletterrequestingthisreport,aretoprovideadditionalmarketaccessforU.
S.
exportstoKorea,inparticularbyaddressingnontariffmeasures(NTMs)affectingU.
S.
exports.
ThisreportupdatestheCommission's2007assessmentofthelikelyimpactoftheFTAontheU.
S.
passengervehiclesector.
ThereportfocusesontheimpactoftheaccompanyingagreementandprovidesadditionalanalysisoftheeffectsofthereductionorremovalofNTMs.
U.
S.
exportsofpassengervehiclestoKoreawouldlikelyrisesignificantlyinthelongtermundertheprovisionsofthe2007FTAasmodifiedbytheaccompanyingagreement.
TheprobableincreaseinU.
S.
exportsresultsprimarilyfromthreefactors:(1)theimmediatereduction(from8percentto4percent)andeventualeliminationofKoreantariffsonpassengercarsduringthefirstfiveyearsoftheFTA'simplementation,(2)asubstantialincreaseinthenumberofU.
S.
passengervehicleexportstoKoreathatwouldbedeemedcompliantwithKoreansafetystandards,and(3)changestothequalificationrequirementsforKoreanimportsofU.
S.
passengervehiclestomeetKoreanenvironmentalstandards.
AnyincreaseinU.
S.
exportsofpassengervehiclestoKoreaislikelytobetemperedbythelongerphase-inperiodundertheaccompanyingagreementfortheeliminationofKoreantariffs,ascomparedwiththe2007FTA,andmaybeaffectedbyKoreanmarketpreferences.
Inthisreport,theCommission'seconomicsimulationestimatesthatremovalofKoreanNTMsthataffectU.
S.
exportsofpassengercarscouldleadtoanincreaseinU.
S.
exportsof$48–66million(41–56percent).
TheCommission's2007reportincludedtheresultsofitseconomicsimulationsoftheeffectsonthebroadermotorvehiclesandpartssectorofimplementingthe2007FTA.
ThechangesinthetariffstagingintheaccompanyingagreementdonotaffecttheresultsoftheeconomicsimulationbecausetheCommission'ssimulationappliesonlytothefullimplementationoftheFTA.
Althoughthetradeeffectsthatareestimatedbysuchsimulationstendtobereasonablystableintermsofpercentagechanges,theestimatedeffectsintermsofchangesindollarvaluecanbesensitivetoannualchangesintradeflows.
Therefore,differencesbetweenthe2007estimatedeffectsandtheeffectsestimatedinthecurrentupdatearenottheresultofchangesintheFTA'spassengervehicletariffprovisions,butratherstemfromchangestotheeconomicenvironment(e.
g.
,therecenteconomicdownturn)anddeclinesintradeflowsin2009(theabsolutevolumeoftradeinmotorvehiclesandpartsbetweentheUnitedStatesandKoreawas30percentlowerin2009thanin2007).
Using2009data,theCommission'seconomicsimulationofthebroadermotorvehiclesandpartssectorestimatesthatimplementingthe2007FTAwouldlikelyleadtoanincreaseinU.
S.
sectorexportstoKoreaof$194million(a54percentincrease);thisestimatedpercentageincreaseissimilartothe2007Commissionestimate(46–59percent),whereastheestimateddollar-valueincreaseinthisupdateislower,reflectingtheeconomicdownturnandreducedtradeflowsof2009.
1Thesignedtextsconsistof(1)anexchangeofletterscontainingnewcommitmentsforthemotorvehiclesector,(2)AgreedMinutesonregulationspertainingtomotorvehiclefueleconomyandgreenhousegasemissions,and(3)AgreedMinutesonintracompanytransferee(L-1)visas.
ivU.
S.
tariffsonimportsofKoreanpassengervehiclesalsowilleventuallybeeliminatedundertheFTA.
TheeffectoftheFTAonU.
S.
importsofthesegoodswilllikelybelesspronouncedintermsofpercentageincreaseintheshorttermthaninthecaseofKoreanimportsofU.
S.
passengervehicles.
Therearethreereasonsforthedifference:(1)theU.
S.
tariffeliminationforpassengercarswillbeimplementedonlyinthefifthyearoftheFTA'simplementation,withnoreductionintheinterim;(2)currentU.
S.
tariffsonpassengervehiclesarealreadylower(2.
5percent)thanKoreantariffs(8percent)onthesegoods;and(3)passengercarproductionbyKoreanmanufacturersintheUnitedStatesmayincreaseasaresultofcapacityexpansion.
TheCommission'seconomicsimulationestimatesthatU.
S.
importsfromKoreaofproductsinthebroadermotorvehiclesandpartssectorwouldlikelyriseby$907million(11percent)followingimplementationofthe2007FTA,includingremovalofU.
S.
passengervehicletariffs;thisestimatedpercentageincreaseissimilartothe2007Commissionestimate(9–12percent),whereastheestimatedincreaseindollarvalueinthisupdateislower,againreflectingtheeconomicdownturnandreducedtradeflowsof2009.
1IntroductionThisreport,requestedbytheU.
S.
HouseofRepresentativesCommitteeonWaysandMeans(Committee)inaletterdatedJanuary27,2011,1updatesa2007U.
S.
InternationalTradeCommission(Commission)assessmentregardingthelikelyimpactoftheU.
S.
-KoreaFreeTradeAgreement(FTA)ontheU.
S.
passengervehiclesector.
2TheCommitteerequestedthattheCommissionupdateits2007assessmentofthoseFTAprovisionsaffectingthepassengervehiclesector,toreflectanychangesaffectingonlythatsectorasdetailedintheaccompanyingagreementtothe2007FTA,datedFebruary10,2011(hereinafterreferredtoas"theaccompanyingagreement").
3TheCommitteealsoaskedthattheCommissionincludeaneconomicsimulationoftheeffectsofnontariffmeasures(NTMs)affectingthepassengervehiclesectorinitsreport.
TheCommitteerequestedthattheCommissionprovideitsreportbyMarch15,2011.
TheCommission's2007assessmentofthelikelyimpactoftheFTAontheU.
S.
passengervehiclesectorwaspartofacomprehensivereportthattheCommissiontransmittedtothePresidentandtheCongressinSeptember2007.
Followingapublichearingandreceiptofinformationfrommultiplesources,thatreportassessedthelikelyimpactofthe2007FTAontheU.
S.
economyasawhole,onspecificindustrysectors,andonU.
S.
consumers.
4Theinformationanddatainthepresentreportweregatheredprimarilyfrompublicsources,submittedwrittencomments,andinterviews.
5TheCommissiondidnotholdapublichearingforthereceiptofinformationbecauseoftheshorttimeframerequestedbytheCommitteeforthereport'sdelivery.
ThereportincludespublisheddataandinformationavailablethroughFebruary2011.
EffectofChangestoU.
S.
-KoreaFTAonthePassengerVehicleSectorAssessmentInthelongterm,whentheFTAhasbeenfullyimplemented,U.
S.
exportsofpassengervehiclestotheRepublicofKorea(Korea)wouldlikelyincreasesignificantlyasaresultofmodificationstoprovisionsinthe2007FTAagreedtointheaccompanying1Foracopyoftheletterrequestingthisreport,seeappendixA.
ForacopyoftheFederalRegisternoticeinstitutingtheinvestigationtoproducethisreport,seeappendixB.
2Forthepurposesofthisstudy,"passengervehicles"includescars(classifiableinHarmonizedSystem[HS]subheadings8703.
21,8703.
22,8703.
23,8703.
24,8703.
31,8703.
32,8703.
33,and8703.
90)andlighttrucks(HSsubheadings8704.
21and8704.
31).
3ForacopyofthelegaltextoftheaccompanyingagreementandrelatedAgreedMinutes,seeappendixC.
Forinformationonthepassengervehicle–relatedprovisionsintheFTAthatwerenotchangedbytheaccompanyingagreement,suchasthoseconcerningpurchaseandownershiptaxes,seeUSITC,U.
S.
-KoreaFreeTradeAgreement,2007.
4USITC,U.
S.
-KoreaFreeTradeAgreement,2007.
5Forsummariesofthepublicsubmissionsforthisreport,seeappendixD.
2agreement.
6ThespecificchangescontributingtothisexpectedgrowthincludeanincreaseinKoreanimportlimitsperU.
S.
manufacturerforvehiclesthatmeetU.
S.
safetystandards,andchangesinqualificationbenchmarksforU.
S.
vehicleswithregardtoKoreanenvironmentalstandards.
7TheeliminationofKoreanimporttariffsonpassengervehiclesagreedtoundertheFTAwouldalsocontributesubstantiallytoanincreaseinU.
S.
exportsofpassengervehiclestoKorea.
However,theaccompanyingagreementappliesatwo-stepphase-inperiodtothetariffelimination;thetariffwillfallfrom8percentto4percentuponentryintoforceandbereducedtofreeinthefifthyearafterimplementationoftheFTA.
Thephase-inwilldelaythefullimpactoftheFTAonU.
S.
exportsbeyondtheshortterm.
Theaccompanyingagreementalsodelaysthephase-inperiodforeliminatingU.
S.
tariffsonmostimportsofKoreanpassengervehicles.
ThischangeislikelytominimizetheimpactoftheFTAonU.
S.
importlevelsintheshorttomediumterm.
U.
S.
importsofpassengercarsfromKoreawouldlikelyincreaseuponcompleteeliminationofthe2.
5percenttariffinthefifthyearaftertheFTAentersintoforce.
However,theimpactofremovalofthe25percenttariffonlighttrucksislessclear,becauseKoreaiscurrentlynotaleadingmanufacturerorexporteroflighttrucks.
U.
S.
ExportsThe2007FTAandtheaccompanyingagreementaddresscertaintariffandtaxmeasures,aswellasNTMs,thathaveimpactedmarketaccessforU.
S.
exportsofpassengervehiclestoKorea,8andprescribeasystemforconsultationanddisputesettlementonrelatedissues(table1).
TheresultingstagedreductionandeventualeliminationoftariffsonU.
S.
passengervehicleexportstoKorea,alongwithchangestopoliciesthatpreviouslyactedasNTMsaffectingtheseexports,couldleadtoasignificantincreaseinU.
S.
exports,accordingtotheCommission'seconomicsimulations.
MuchoftheincreaseintheearlyyearsoftheFTA'simplementationwilllikelybeinpassengercars,asU.
S.
exportsoflighttruckstoKoreawerequitesmallin2010.
9Thisearlyincreaseisunlikely6Forthelegaltextsexaminedinthisupdatedassessment,seeUSTR,"FinalUnitedStates–KoreaFTATexts,"2007;USTR,"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterJong-HoonKim,"February10,2011;USTR,"AgreedMinutesonRegulations,"February10,2011.
OnFebruary10,2011,theUnitedStatesandKoreaexchangedthelegaltextsreflectingtheagreementtheyconcludedonDecember3,2010,tomodifycertainprovisionsofthe2007FTA.
Thesignedtextsconsistof(1)anexchangeofletterscontainingnewcommitmentsforthemotorvehiclesector,(2)AgreedMinutesonregulationspertainingtomotorvehiclefueleconomyandgreenhousegasemissions,and(3)AgreedMinutesonintracompanytransferee(L-1)visas.
ForacopyofthelegaltextoftheaccompanyingagreementandrelatedAgreedMinutes,seeappendixC.
7VariousprovisionsoftheFTAareintendedtoaddresssomeoftheNTMsaffectingKorea'smarketforpassengervehicles,includingprovisionsinchapter2("NationalTreatmentandMarketAccessforGoods"),chapter9("TechnicalBarrierstoTrade"),theconfirmationletteronspecificautoregulatoryissues,andannex22-Bofthechapteroninstitutionalprovisionsanddisputesettlement,concerningalternativeproceduresfordisputesconcerningautomotiveproducts.
Provisionsaddressingpassengervehicle–relatedNTMsarealsoamaincomponentoftheaccompanyingagreementdatedFebruary10,2011.
8USITC,U.
S.
-KoreaFreeTradeAgreement,2007,3-75to3-78;industryofficials,interviewbyUSITCstaff,Washington,DC,February3,2011;industryofficials,interviewbyUSITCstaff,Washington,DC,February4,2011.
9TheUnitedStatesexported135lighttruckstoKoreain2010,whichwas0.
04percentoftotalU.
S.
lighttruckexportsinthatyear.
USITC,DataWeb(accessedMarch3,2011).
3TABLE1ChangestoFTAprovisionsrelatedtoU.
S.
exportsofpassengervehiclestoKoreaProvisionOriginal(2007FTA)New(accompanyingagreement)Cars(HSsubheadings8703.
21,8703.
22,8703.
23,8703.
24,8703.
31,8703.
32,8703.
33)Immediatetariffreductionfrom8percenttofreeImmediatetariffreductionfrom8percentto4percentandreductiontofreeinthefifthyearonallsubheadingsCarswithneithersparkorcompressionignitionengines(e.
g.
,electriccars)(HSsubheading8703.
90)Tariffreducedfrom8percenttofreein10equalannualstagesImmediatetariffreductionfrom8percentto4percent,thenreductionby1percentannuallyuntilfreeinthefifthyearSafetystandardsU.
S.
producerssellingfewerthan6,500unitsinKoreaexemptfromKoreanstandardsaslongasU.
S.
standardsaremetLimitraisedtonomorethan25,000unitspermanufacturerEnvironmentalstandardsU.
S.
producersthatsell10,000orfewerunitsinKoreawouldbeconsideredcompliantwithcertainagreedenvironmentalstandardsDuring2012–15,U.
S.
producerswillbeconsideredcompliantwithKoreanenvironmentalstandardsiftheiremissionsarewithin19percentofKoreanrequirementsPurchasetaxNumberofengine-displacementcategorieswaslowered,andtaxesoneachcategorywerereducedInadditionto2007FTAprovisions,agreedtoincreasetransparencyinthecreationofnewregulations,includingapubliccommentperiodandanimplementationperiodofusuallynotlessthan12monthsAnnualvehicletaxSimplifiedandreducedInadditionto2007FTAprovisions,agreedtoincreasetransparencyinthecreationofnewregulations,includingapubliccommentperiodandanimplementationperiodofusuallynotlessthan12monthsSafeguardmeasuresMaybeappliedonetimeonly,foraperiodofuptotwoyearsplusaone-timeextensionofuptooneyear,duringthe10-yeartransitionperiodthatrunsfromthetimetheFTAentersintoforce.
Iftheperiodofthemeasureexceedsoneyear,theimportingpartymustliberalizethemeasureatregularintervals.
Theimportingpartyisrequiredtopaycompensation,andintheabsenceofagreementoncompensation,theexportingpartymaysuspendconcessionshavingtradeeffectssubstantiallyequivalenttothesafeguardmeasure.
Maybeappliedmorethanonce,foraperiodofuptotwoyearsplusaone-timeextensionofuptotwoyears,duringthetransitionperiodthatbeginsuponentryintoforceoftheFTAandendsonthedatethatis10yearsaftertheendofthetariffeliminationperiod(e.
g.
,15yearsforpassengercarsand20yearsforlighttrucks).
Thereisnorequirementtoliberalizeameasurethatexceedsoneyear.
Thereisthesamecompensationobligationorrighttosuspendconcessionsasforotherproducts,exceptthat,inthecaseofameasureinvolvingmotorvehicles,theexportingpartymaynotexerciseitsrighttosuspendconcessionsduringthefirst24monthsthatasafeguardmeasureisineffect.
Sources:USTR,"FinalUnitedStates–KoreaFTATexts,"2007;USTR,"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterJong-HoonKim,"February10,2011;andUSTR,"AgreedMinutesonRegulations,"February10,2011.
4toincludemanyplug-in,electric,orfuelcellvehicles,asfewtonovehiclesofthistypeareexpectedtobeexportedtoKoreain2011.
10SimulationResultsTheCommission'seconomicsimulation11oftheeffectsonthebroadermotorvehiclesandpartssector12ofimplementingthe2007FTAestimatesthatimplementationwouldlikelyleadtoanincreaseinU.
S.
sectorexportstoKoreaof$194million(54percent);inpercentageterms,thisestimatedincreaseissimilartothe2007Commissionestimate(46–59percent),whereastheestimatedincreaseintermsofdollarvalueislower,reflectingtheeconomicdownturnandreducedtradeflowsof2009.
13AseparateCommissioneconomicsimulationestimatesthatremovalofNTMsaffectingU.
S.
exportsofpassengercarscouldleadtoanincreaseinU.
S.
exportsof$48–66million(anincreasefromapproximately$119milliontoapproximately$167–185million,or41–56percent)(box1).
14Anestimated50percentofthisincreasewouldbeattributabletothedisplacementofimportsintoKoreafromothercountries.
TheeffectofKoreanNTMsinraisingthecostofU.
S.
passengervehicleexportsappearstohavebeensignificant.
During2008–10,theaveragepriceofU.
S.
small-displacementpassengercars15importedintoKoreawas16.
6percenthigherthanthepriceofcomparableU.
S.
exportsworldwide.
Thispricegapissimilartothepricegapof20percentfoundinthe2007assessment.
16ImportsofU.
S.
large-displacementpassengercars,17whichwerenotexaminedinthe2007assessment,showedapricegapof1.
2percent.
ThefiguresresultingfromtheCommission'seconomicsimulationoftheeffectsofremovingNTMsonexportsofU.
S.
passengercarstoKoreaarelikelyanupperboundestimate,asitispossiblethatimplementationoftheFTAwouldnotcompletelyeliminatethepricegap.
Inaddition,factorsthatcouldnotbeaddressedbytheeconomicsimulationmayaffectthisestimate.
18Koreanconsumerpreferences,forexample,couldlessentheimpactofNTM(andtariff)removalonU.
S.
passengervehicleexportstoKorea.
TheKoreanmarkethaslongbeen10Jung,"ChevroletVolttoSetEVPaceinKorea,"October22,2010.
11ThequantitativeanalysisinthissectionregardingthetariffprovisionsoftheFTAisbasedonGlobalTradeAnalysisProject(GTAP)sector38,MotorVehiclesandParts.
TheinformationpresentedinthissectionregardingtheeffectsofKoreanNTMsisbasedontheCommission'seconomicsimulationasdetailedinbox1.
12Thequalitativeanalysishereinfocusesonthesubsetofpassengercarsandlighttrucks,orpassengervehicles.
OtherGTAPsector38productsincludeautomotivepartsandengines,commercialtrucks,buses,specialtyvehicles,andcertaincontainersandtrailers.
13Theseestimatesarebasedonincorporating2009tradedataintotheeconomicsimulationusedforthe2007Commissionstudy.
Useoftheupdateddataaccountsforanydifferencebetweenthe2007andcurrentresults.
SeeUSITC,U.
S.
-KoreaFreeTradeAgreement,2007,2-8.
TotaltradebetweentheUnitedStatesandKoreainmotorvehiclesandpartswas$12.
0billionin2007and$8.
5billionin2009.
14Foranexplanationoftheeconomicsimulationresults,seeappendixE.
TheestimatesoftheimpactofthetariffremovalandtheremovaloftheNTMsuseseparateeconomicsimulationsandassumptionsandshouldnotbecombinedinthisformtoconstructasingleestimate.
15Small-displacementpassengercarshaveanenginedisplacementof1,500–3,000cubiccentimeters(cc)(e.
g.
,theDodgeCaliber).
16USITC,U.
S.
-KoreaFreeTradeAgreement,2007,3-77.
17Large-displacementpassengercarshaveanenginedisplacementofgreaterthan3,000cc(e.
g.
,theFordTaurus).
18SeeappendixEforfurtherdiscussionofthelimitationsoftheeconomicsimulations.
5BOX1PotentialpriceandquantityeffectsofKoreanNTMsonimportsofcertainU.
S.
passengercarsU.
S.
producersseekingtoexportpassengercarstoKoreahaveidentifiednontariffmeasures(NTMs)thatmayhaveimpededtheiraccesstotheKoreanmarket.
Thesemeasuresincludeburdensomestandards,testing,andcertificationrequirements;specialtaxes;andanopaqueregulatoryenvironment.
TheymayrestrictthequantityofU.
S.
passengercarimportsintotheKoreanmarket,raisethepriceoftheseimports,orboth.
NTMQuantificationKoreanimportsofsmall-displacementpassengercarsaaresubstantiallylowerinquantitythanimportsofthesameproductintomostothereconomies,relativetothesizeoftheKoreaneconomy.
Moreover,theunitvaluefortheseimportsissubstantiallyhigherthanformostothercountries.
Theexistingtariffof8percentadvaloremappearstobetoolowbyitselftoaccountfortherelativelylowquantityortherelativelyhighpriceofimports.
ThepricedifferencemayreflecttheeffectsofKoreanNTMs,butitcouldalsobeinfluencedbysuchfactorsasmarketstructure,productdifferentiation,andconsumerpreferences.
Koreanimportsofsmall-displacementpassengercarsin2007–09represented0.
03vehiclespermilliondollarsofgrossdomesticproduct($GDP),comparedtothemedianfigurefor55comparablecountriesof0.
35vehiclespermillion$GDP.
Korearanked53rdoutofthe55countriesinimportsofthesecarsrelativetothesizeofitseconomy,withonlyJapanandIndiarankinglower.
Thisisthemostrecentperiodforwhichsuchabroadinternationalcomparisoncanbemade.
AvailabledataforKoreafor2010showanincreaseinimportsofthesecarsforthatyear,to0.
05permillion$GDP,butthiswouldstillleaveKorearanking53rdcomparedtoothercountries'importsfor2007–09.
TheKoreanaverageimportprice(cost-insurance-freight)forsmall-displacementpassengercarsimportedfromtheUnitedStatesfortheperiodJanuary2008–November2010was$18,108percar.
Thispriceis17.
6percenthigherthantheaverageU.
S.
exportprice(f.
o.
b.
)ofsimilarcars($15,393)overthesameperiod.
Allowingfora1percentmarkupfortransportcosts,theresultingestimatedKoreanpricegapforsmall-displacementpassengercarsfromtheUnitedStatesis16.
6percent.
TheestimatedKoreanpricegapforlarge-displacementpassengercarsbfromtheUnitedStatesis1.
2percent.
SimulatedEffectsThepricegapforacombinationofsmall-displacementandlarge-displacementpassengercarsimportedfromtheUnitedStatesis7.
5percent.
Thispricegapisatrade-weightedaverageofthepricegapsthatcouldbeattributedtoKoreanNTMsappliedtothesepassengercarsimportedfromtheUnitedStatesduringJanuary2008–November2010,subjecttothecaveatsstatedabove.
Theeffectsoftheremovalofthe7.
5percentpricegapareestimatedwitheconomicsimulations.
TheseeffectsarelikelyupperboundestimatesoftheprobableeffectsoftheFTA'sprovisionsregardingKoreanNTMsforU.
S.
passengercars.
Thesesimulationssuggestthat,intheabsenceofthe7.
5percentpricegap,U.
S.
exportsofpassengercarstoKoreawouldrisefromanaveragelevelofapproximately7,700unitstoapproximately10,80012,000units,anincreaseof41–56percent.
ThevalueofU.
S.
exportsofpassengercarstoKoreawouldincreasefromapproximately$119milliontoapproximately$167–185million,alsoanincreaseof41–56percent.
Theeconomicsimulationssuggestthatlessthan10percentoftheincreaseinU.
S.
passengercarexportsisattributabletoanexpansionintheKoreanpassengercarmarket;approximately50percentoftheincreasewoulddisplaceimportsfromothersources,andapproximately40percentwoulddisplacedomesticproduction.
Forfurtherinformationonthesetwotopics—specifically,thecalculationandinterpretationofthequantityandunit-valueinformation,andthesimulatedeffectsofNTMremoval—seeappendixE.
Source:USITCstaffanalysis.
aSmall-displacementpassengercarshaveanenginedisplacementof1,500–3,000cubiccentimeters(cc)andareclassifiableinHSsubheading8703.
23.
bLarge-displacementpassengercarshaveanenginedisplacementofgreaterthan3,000ccandareclassifiableinHSsubheading8703.
24.
6perceivedaspreferringdomesticoverimportedpassengervehicles,whichcouldmakeKoreanconsumerslesssensitivetochangesinpriceandincreasedavailabilityofimportedpassengervehicles.
19Inaddition,thereisaconcernthatconsumerswillviewvehiclesthatdonotmeetKoreansafetystandardsasunsafeandavoidpurchasingthem,20althoughU.
S.
safetystandardsreportedlyarecurrently"amongthemoststringentintheworld.
"21SomeobserversclaimthatthemarketforimportedcarsinKoreaisalreadygraduallyimproving,asevidencedbyimports'growingmarketshare(table2).
22Inaddition,theKoreanmarkettendstobemorebrandconsciousthantheU.
S.
market,suggestingthatKoreanconsumersmaybelessresponsivetochangesinprice.
23ThismaybeanadvantageforU.
S.
manufacturers;forexample,inJanuary2011,GeneralMotorseliminatedtheDaewoobrandnameinKoreaandbegantobrandGMvehiclesinKoreaasChevrolets,inresponsetoitsKoreancustomers'preferencefortheChevroletname.
24TABLE2Korea:Passengervehiclemarket,bysource;U.
S.
producerimports;andimportsfromtheUnitedStates,inunits,2006–1020062007200820092010Total976,2111,039,8061,020,5021,235,7361,192,780Domesticproduction935,681986,416958,8541,174,7431,102,218Marketshare(percent)95.
994.
994.
095.
092.
4Imports40,53053,39061,64860,99390,562Marketshare(percent)4.
25.
16.
04.
97.
6ImportsofGM,Ford,andChryslervehiclesa4,5566,2356,9806,1407,450Marketshare(percent)0.
470.
600.
680.
500.
62TotalKoreanimportsfromUnitedStatesb3,4356,8497,7736,64213,044Marketshare(percent)0.
350.
660.
760.
541.
09Sources:GTIS,GlobalTradeAtlasDatabase(accessedFebruary25,2011);KoreanAutomobileandDistributorsAssociation,Statistics:NewRegistrations(accessedFebruary25,2011).
Note:DatapresentedintermsofvehicleregistrationswiththeKoreangovernment.
Figuresmaynotsumbecauseofrounding.
aDoesnotincludepassengervehiclesproducedbyGM,Ford,orChryslerinKorea,orbrandsthatwereonceownedbyFordorGM(e.
g.
,SaabandVolvo),butincludesGM,Ford,andChryslerimportsfromtheUnitedStatesandothercountries.
bIncludespassengervehiclesproducedintheUnitedStatesbyforeign-basedproducers,suchasNissan.
KoreanPassengerVehicleMarketTheKoreanpassengervehiclemarketisthe12thlargestintheworld,withmorethanonemillionregistrationsperyear.
25Thismarketisunusualbecauseoftheextremelylowlevel19Thispreferencemaycontinuetobeinfluencedbyearlierpublicpractices—e.
g.
,government-led"buyKorean"campaignsaswellasovertbureaucraticpressure,suchasautomatictaxauditsforpurchasersofforeignvehicles—eventhoughthesespecificpracticeshavelongbeenended.
Schott,"NegotiatingtheKorea-UnitedStatesFreeTradeAgreement,"June2006,9;PublicCitizen,writtensubmissiontotheUSITC,February14,2011,3.
20PublicCitizen,writtensubmissiontotheUSITC,February14,2011,3.
21Biegun,testimonybeforetheHouseWaysandMeansCommittee,January25,2011,2.
22Industryofficial,interviewbyUSITCstaff,Washington,DC,February17,2011.
23Industryofficial,interviewbyUSITCstaff,Washington,DC,February16,2011.
24Greimel,"GMtoDropDaewooNameinKorea,SwitchtoChevrolet,"January20,2011.
25EIU,"DataTool"(accessedFebruary28,2011).
7ofimportpenetration;26domesticproductionaccountedfor92–96percentofKoreanvehicleregistrationsfrom2006to2010(table2).
Duringthisperiod,passengervehiclesbuiltintheUnitedStatesaccountedforonly11percentofKoreanimports(figure1),orlessthan1percentoftheKoreanpassengervehiclemarket.
EuropeanUnion60%Japan29%UnitedStates11%Source:GTIS,GlobalTradeAtlas(accessedFebruary25,2011).
Changestothe2007FTAProvisionsintheAccompanyingAgreementWithrespecttotariffs,Koreaagreedintheaccompanyingagreementtoimmediatelyreduceitspassengercartarifffrom8percentto4percentandtoreducethetarifftofreeinthefifthyearafterimplementation.
27Forpassengercarswithneithersparknorcompressionignitionengines(e.
g.
,electricandfuelcellvehicles),thetariffwillbereducedfrom8percentto4percentuponentryintoforce,andthenreducedinequalannualstagesuntilthetariffiscompletelyeliminatedinthefifthyear.
Asnotedearlier,tariffeliminationwilllikelylowerthecostofvehiclesimportedintotheKoreanmarketfromtheUnitedStates,whichwouldcontributesubstantiallytoanincreaseinU.
S.
exportsofpassengervehiclestoKorea.
28WithrespecttoNTMs,theaccompanyingagreementaddressestwosignificantissues—Koreansafetyregulationsandemissionsrequirements—thatreportedlyimposethelargestNTM-relatedcostsonU.
S.
passengervehicleexportsbecauseofthecostsofresearch,design,andimplementationtomeetKoreanrequirements.
29TheUnitedStates26AAPC,writtensubmissiontotheUSITC,February14,2011,1;PublicCitizen,writtensubmissiontotheUSITC,February14,2011,3.
ForfurtherdiscussiononacomparisonofimportpenetrationinKoreaandothermarkets,seebox1.
27Koreawillimmediatelyeliminateitstariffonlighttrucksunderthe2007FTA.
28USITC,U.
S.
-KoreaFreeTradeAgreement,2007,3-78;industryofficials,interviewbyUSITCstaff,Washington,DC,February16,2011;industryofficials,interviewbyUSITCstaff,Washington,DC,February17,2011.
29Industryofficial,interviewbyUSITCstaff,Washington,DC,February3,2011.
FIGURE1Koreanimportsofpassengervehicles,bytradingpartner,2006–108andKoreaagreedtoincreasethenumberofU.
S.
vehiclesproducedtoU.
S.
safetystandardsthatcanbesoldintheKoreanmarket,whichhasdifferentsafetystandards.
30Asaresult,"anoriginatingmotorvehicleproducedbyamanufacturerthatsoldnomorethan25,000originatingmotorvehiclesintheterritoryofKoreaduringthepreviouscalendaryear"willbedeemedcompliantwithKoreanmotorvehiclesafetystandardsifthemanufacturercertifiesthatitsmotorvehiclesexportedtoKoreameetU.
S.
safetystandards.
31Thepreviouslimitforcalendar-yearexportswas6,500units,andatleastoneU.
S.
producerwasconcernedthatsuchalimitwouldkeepexportspermanufactureratapermanentlylowlevel.
32UponfullimplementationoftheFTA,33thesechangeswillreportedlylowerthecostofenteringtheKoreanmarketforU.
S.
firms,astheywillbeabletoexportvehiclesfromtheUnitedStateswithoutincurringtheadditionalresearchanddevelopment(R&D)andproductioncostsassociatedwithvehiclemodification.
34Whenafirm'sannualsalesinKoreaapproachthe25,000-unitthreshold,upontherequestofeitherFTAparty,theUnitedStatesandKoreawillconductareviewtoreconsiderthatthreshold.
35AnotherimportantchangeregardingNTMsprovidedintheAgreedMinutesoftheaccompanyingagreementallowsvehiclesexportedtoKoreabycompaniesthatsoldlessthan4,500vehiclesinKoreain2009tobeconsideredcompliantwithKoreanfueleconomyandgreenhousegasemissionsstandardsduring2012–15iftheyarewithin19percentofeithertheKoreanfueleconomyorgreenhousegasemissionsstandards(table1).
36ThereisnolimitonthenumberofpassengervehiclesthatcanqualifytobesoldinKoreaunderthisprovision,whichisachangefromthe2007FTAprovision.
TheKoreanemissionsstandardlimitsgreenhousegasemissionstonomorethan225gramspermileandrequires,ineffect,afleetaveragefuelefficiencyof40milespergallon(mpg)by2015.
37AnewU.
S.
standardrequiresfleetaveragefuelefficiencytoreach30Korea'ssafetystandardsareacombinationofU.
S.
,European,anduniqueKoreanstandards.
Cooperetal.
,"TheProposedU.
S.
-SouthKoreaFreeTradeAgreement(KORUSFTA),"November12,2010;Platzer,"PendingU.
S.
andEUFreeTradeAgreementswithSouthKorea,"September1,2010.
31USTR,"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterJong-HoonKim,"February10,2011.
32Biegun,testimonybeforetheUSITC,June20,2007,241.
33Accordingtoonesource,someoftheNTM-relatedprovisionsmaynotbepassedbytheKoreanlegislature.
USW,writtensubmissiontotheUSITC,February14,2011,1–2.
34Industryofficial,interviewbyUSITCstaff,Washington,DC,February3,2011.
35USTR,"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterJong-HoonKim,"February10,2011.
36USTR,"AgreedMinutesonRegulations,"February10,2011.
GM,Ford,andChryslerwillqualifyforthisexception,aswillcertainothermotorvehiclemanufacturers,whileBMW,Honda,Mercedes,Nissan,andToyotawillnot.
Foramorecompleteexplanationandlist,seeKoreanMinistryofEnvironment,EnvironmentalTransportationDivision,"ConfirmationontheScopeofSmall-scaleManufacturersConcerningtheEnvironmentalRegulationsforAutomotives,"n.
d.
(accessedMarch3,2011)[inKorean].
Foranunofficialtranslation,seehttp://trade.
ec.
europa.
eu/doclib/docs/2011/january/tradoc_147432.
pdf(accessedMarch3,2011).
37Schott,"KORUSFTA2.
0,"December2010,2.
935.
5mpg(39mpgforpassengercars)by2016.
38Withthe19percentallowanceprovidedintheaccompanyingagreement,U.
S.
automakerswillbeabletoexportU.
S.
-madepassengervehiclestoKoreaduring2012–15astheyincreasetheirfuelefficiencylevelstomeetthe2016U.
S.
standard.
39Withtheallowance,U.
S.
producerscantarget2016forfuelefficiencyimprovementinU.
S.
-madevehiclesandexportvehiclestoKoreawithoutincurringadditionalR&DexpenditurestomeetKoreanemissionsrequirementsduring2012–15.
40Designing(orredesigning)U.
S.
passengervehiclestomeetKoreansafetystandardsandemissionsrequirementswouldbeespeciallyexpensivebecausethenear-termcostswouldbespreadamongthesmallvolumeofvehiclescurrentlydestinedfortheKoreanmarket.
41Althoughestimatesofthecostofmeetingtherequirementsareunavailable,oneindustrysourceestimatedthat,forexample,alocalretrofit(noextraR&Dorredesign)ofavehicletomeetasingleKoreansafetystandardwouldcost$500pervehicle.
42AnotherindustrysourceindicatedthatKoreansafetystandardsandemissionsrequirementsincreasethecostofexportingtoKoreatosuchalevelthatonlyvehiclesinlessprice-sensitivesectors(e.
g.
,luxuryvehicles)areabletocompeteintheKoreanmarket.
43InadditiontoreducingtheeffectsofKoreansafetystandardsandemissionsrequirementsonU.
S.
passengervehicleexports,theaccompanyingagreementimprovestheregulatorytransparencyofKoreanmotorvehicleregulationsandtaxation.
44TheaccompanyingagreementbindstheUnitedStatesandKoreatotreatmotorvehicletaxationinitiativesrelatedtoemissionsandfuelefficiencyastheywouldanyotherregulation,withadvancenoticeandapubliccommentperiod.
45Furthermore,increasedregulatorytransparencyandinstitutionofacommentperiod,combinedwitha"periodusuallynotlessthan12months"46forU.
S.
automakerstomeetnewstandards,wouldlikelyprovideU.
S.
automakerstimetoincorporatedesignortechnologicalchangesneededtomeetcertainneworchangedKoreanstandardswithoutdisruptingexportstoKorea.
4738Forthe2012modelyear,theUnitedStateswillrequireafleetaveragefuelefficiencyof29.
7mpg(33.
3mpgforpassengercarsand25.
4mpgforlighttrucks),whichincreaseseachyearuntilitreachesthe2016standardof37.
8mpgforpassengercarsand28.
8mpgforlighttrucksforacombinedcorporateaveragefuelefficiencyof34.
1mpg.
Thisstandardisaimedatreducingfleetaveragecarbondioxideto250gramspermile.
The34.
1mpgstandardassumesthatsomeofthereductioninCO2emissionswillcomefromchangestotheairconditioningsystem;ifallgainsresultedfromincreasedfuelefficiency,therequiredfleetaveragewouldbe35.
5mpg(39mpgforcars).
FurtherincreasesintheU.
S.
fleetaveragefuelefficiencystandardhavenotyetbeendetermined.
EPAandNHTSA,Light-DutyVehicleGreenhouseGasEmissionsStandardsandCorporateAverageFuelEconomyStandards;FinalRule,40C.
F.
R.
Parts85,86,and600;49C.
F.
R.
Parts531,533,536,etal.
39Schott,"KORUSFTA2.
0,"December2010,2.
40Biegun,testimonybeforetheHouseWaysandMeansCommittee,January25,2011.
41Industryofficial,interviewbyUSITCstaff,Washington,DC,February3,2011.
42Industryofficial,interviewbyUSITCstaff,Washington,DC,February16,2011.
43Industryofficial,interviewbyUSITCstaff,Washington,DC,February3,2011.
44Inthe2007FTA,theKoreangovernmentagreedtosimplifyitsvehiclepurchasetax,whichisdeterminedbyenginedisplacementsize,andreducethetaxesimposedoneachcategoryofpassengervehicles,withaparticularemphasisonreducingthetaxrateforvehiclesinthelargestengine-displacement-sizecategories,whichincludesmostU.
S.
exports.
USITC,U.
S.
-KoreaFreeTradeAgreement,2007,3-77.
45USTR,"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterJong-HoonKim,"February10,2011.
46Ibid.
47Industryofficial,interviewbyUSITCstaff,Washington,DC,February16,2011;industryofficial,interviewbyUSITCstaff,Washington,DC,February17,2011.
10U.
S.
ImportsThe2007FTAandtheaccompanyingagreementremoveU.
S.
tariffsthatmayhaveaffectedmarketaccessforU.
S.
importsofpassengervehiclesfromKorea.
TheCommission'seconomicsimulationofimplementingthe2007FTAestimatesthatU.
S.
importsfromKoreaofproductsinthebroadermotorvehiclesandpartssectorwouldriseby$907million(11percent);thisestimatedpercentageincreaseissimilartotheCommission's2007estimate(9–12percent),whereastheestimatedincreaseindollarvalueislower,againreflectingtheeconomicdownturnandreducedtradeflowsof2009.
Anestimated44percentofthisincreasewouldlikelybeattributabletothedisplacementofothercountries'exportstotheUnitedStates.
48BecausetheU.
S.
importtariffonpassengercarswillnotbecompletelyeliminateduntilthefifthyearofimplementation,anduntilyear10forlighttrucks,mostoftheimpactonU.
S.
importsofKoreanpassengervehicleswilllikelybeexperiencedinthemediumtolongterm(table3).
AlthoughtheU.
S.
tariffonpassengervehicleswithoutaninternalcombustionengine(e.
g.
,electricandfuelcellvehicles)willbereducedimmediatelyupontheFTA'sentryintoforceandcompletelyremovedinthefifthyearofimplementation,theimpactwillbeminimalinthenearterm,asnoKoreancompanycurrentlyproducessuchvehiclescommercially.
AlthoughtheHyundaiGroupisdevelopingelectricandfuelcellvehicles,ithasnotpubliclyannouncedanyplanstoexportthemtotheUnitedStates.
49ChangesintheU.
S.
PassengerVehicleIndustryTheU.
S.
marketforallpassengervehiclesdeclined30percentbyvolumefrom2006to2010,to11.
6millionunits(table4),largelybecauseoftherecenteconomicdownturn.
Despitetheserelativelylowsaleslevels,theUnitedStatesrankedasthesecond-largestpassengervehiclemarketintheworldin2010.
50ThisdecreaseddemandcontributedtotherestructuringofGMandChryslerin2009,51whichresultedintheshutteringoflargeamountsofpassengervehicleproductioncapacityinNorthAmerica.
52In2010,theHyundaiGroup,whichownsthetwoKoreanbrands(HyundaiandKia)thatsellpassengercarsintheUnitedStates,addedanewKiaproductionfacilityinWestPoint,GA,increasingtheHyundaiGroup'sproductioncapacityintheUnitedStatestomorethan630,000units.
53ThisdecreaseddemandcontributedtotherestructuringofGMandChryslerin2009,54whichresultedintheshutteringoflargeamountsofpassengervehicleproduction48Theseestimatesarebasedonincorporating2009tradedataintotheeconomicsimulationusedforthe2007Commissionstudy.
Useoftheupdateddataaccountsforanydifferencebetweenthe2007andcurrentresults.
SeeUSITC,U.
S.
-KoreaFreeTradeAgreement,2007,2-8.
TotaltradebetweentheUnitedStatesandKoreainmotorvehiclesandpartswas$12.
0billionin2007and$8.
5billionin2009.
49HyundaiMotorAmerica,"HyundaiUnveilsTucsonixFCEV,"February14,2011;HyundaiMotorCompany,"HyundaiUnveilsItsFirstElectricCar,"September9,2010.
50EIU,"DataTool"(accessedFebruary28,2011).
Chinawastheworld'slargestmarketin2010.
51Binder,Ward'sAutomotiveYearbook,2009,153.
52Ibid.
53Beene,"HyundaiPonders2ndU.
S.
PlantasSalesRise,"January17,2011;Greimel,"HyundaiMayNeedtoSourceElantrafromKoreatoMeetDemand,"January28,2011;industryofficial,interviewbyUSITCstaff,Washington,DC,February28,2011;KiaMotorsManufacturingGeorgia,Inc.
,http://www.
kmmgusa.
com/our_company.
aspx(accessedMarch7,2011).
54Binder,Ward'sAutomotiveYearbook,2009,153.
11TABLE3ChangestoFTAprovisionsrelatedtoU.
S.
importsofKoreanpassengervehiclesProvisionOriginal(2007FTA)New(accompanyingagreement)Cars(HSsubheadings8703.
21,8703.
22,8703.
23,8703.
24,8703.
31,8703.
32,8703.
33)Tariffof2.
5percentimmediatelyreducedtofreeuponentryintoforceforHSsubheadings8703.
21,8703.
22.
and8703.
23;tariffof2.
5percentonothersubheadingsreducedinthreeequalannualstagesuntilfreeTariffof2.
5percentinplaceforfouryears,thenfreeinfifthyearCarswithneithersparkorcompressionignitionengines(e.
g.
,electriccars)(HSsubheading8703.
90)Tariffof2.
5percentreducedtofreein10equalannualstagesTariffof2.
5percentreducedtofreeinfiveequalannualstagesLighttrucks(HSsubheadings8704.
21and8704.
31)Tariffof25percentreducedtofreein10equalannualstagesTariffof25percentinplaceforsevenyears,thenreducedtofreeinthreeequalannualstagesSafeguardmeasuresMaybeappliedonetimeonly,foraperiodofuptotwoyearsplusaone-timeextensionofuptooneyear,duringthe10-yeartransitionperiodthatrunsfromthetimetheFTAentersintoforce.
Iftheperiodofthemeasureexceedsoneyear,theimportingpartymustliberalizethemeasureatregularintervals.
Theimportingpartyisrequiredtopaycompensation,andintheabsenceofagreementoncompensation,theexportingpartymaysuspendconcessionshavingtradeeffectssubstantiallyequivalenttothesafeguardmeasure.
Maybeappliedmorethanonce,foraperiodofuptotwoyearsplusaone-timeextensionofuptotwoyears,duringthetransitionperiodthatbeginsuponentryintoforceoftheFTAandendsonthedatethatis10yearsaftertheendofthetariffeliminationperiod(e.
g.
,15yearsforpassengercarsand20yearsforlighttrucks).
Thereisnorequirementtoliberalizeameasurethatexceedsoneyear.
Thereisthesamecompensationobligationorrighttosuspendconcessionsasforotherproducts,exceptthat,inthecaseofameasureinvolvingmotorvehicles,theexportingpartymaynotexerciseitsrighttosuspendconcessionsduringthefirst24monthsthatasafeguardmeasureisineffect.
Source:USTR,"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterJong-HoonKim,"February10,2011.
12TABLE4U.
S.
passengervehiclemarketandsalesbyKoreanproducers,inunits,2006–1020062007200820092010Totalsales16,559,62516,089,22213,194,74110,401,68211,554,576SalesofKoreanimports690,802643,949562,947577,042561,626Marketshare(percent)4.
24.
04.
35.
54.
9SalesofHyundaiGroup(HyundaiandKia)749,882772,482675,139735,127894,496Marketshare(percent)4.
54.
85.
17.
17.
7Salesofimports581,677534,493486,788534,756512,991Marketshare(percent)3.
53.
33.
75.
14.
4SalesofU.
S.
production168,145237,989188,351200,371381,505Marketshare(percent)1.
01.
51.
41.
93.
3SalesofGMDaewoo(imports)109,125109,45676,15942,28648,635Marketshare(percent)0.
70.
70.
60.
40.
4Sources:Binder,Ward'sAutomotiveYearbook,2008–10;Ward'sAutomotiveReports,"LightVehicleSalesSegmentation,"January17,2010.
Note:Totalsmaynotsumduetorounding.
capacityinNorthAmerica.
55In2010,theHyundaiGroup,whichownsthetwoKoreanbrands(HyundaiandKia)thatsellpassengercarsintheUnitedStates,addedanewKiaproductionfacilityinWestPoint,GA,increasingtheHyundaiGroup'sproductioncapacityintheUnitedStatestomorethan630,000units.
56InspiteofasmallerU.
S.
passengervehiclemarket,totalsalesbytheHyundaiGroupincreasedduring2008–10,withacorrespondingincreaseinmarketsharefrom5.
1percentin2008to7.
7percentin2010.
TheHyundaiGroup'smarketsharereportedlyincreasedbecauseoftheprogressivelymorefavorableperceptionoftheirvehiclesintheU.
S.
marketduetoimprovedqualityanddesignchanges.
57EffectsofTariffRemovalTheremovalofthe2.
5percentU.
S.
importtariffonpassengercarsinthefifthyearoftheFTA'simplementationwouldlikelyresultinincreasedU.
S.
importsofpassengercarsfromKorea.
However,inadevelopmentthatcouldpartiallyoffsettheeffectoftariffremoval,theHyundaiGroupmaybeconsideringaddingathirdproductionfacilityintheUnitedStatesbecauseitisalreadyproducingatcapacityatitstwoexistingU.
S.
factories.
58Duringthe2007FTAassessment,someconcernwasexpressedthatremoval55Ibid.
56Beene,"HyundaiPonders2ndU.
S.
PlantasSalesRise,"January17,2011;Greimel,"HyundaiMayNeedtoSourceElantrafromKoreatoMeetDemand,"January28,2011;industryofficial,interviewbyUSITCstaff,Washington,DC,February28,2011;KiaMotorsManufacturingGeorgia,Inc.
,http://www.
kmmgusa.
com/our_company.
aspx(accessedMarch7,2011).
57Economist,"Hyundai'sSurprisingSuccess,"March5,2009;Griffith,"Hyundai's'Overnight'Successa20-YearProject,"March1,2010.
58Characterizationsofcapacityarecurrentasofearly2011andarenotreflectedinthe2010data.
Beene,"HyundaiPonders2ndU.
S.
PlantasSalesRise,"January17,2011;Greimel,"HyundaiMayNeedtoSourceElantrafromKoreatoMeetDemand,"January28,2011;industryofficial,interviewbyUSITCstaff,Washington,DC,February28,2011;KiaMotorsManufacturingGeorgia,Inc.
,http://www.
kmmgusa.
com/our_company.
aspx(accessedMarch7,2011).
13ofthetariffwouldeliminatetheincentivetoexpandproductionintheUnitedStates,59buttariffchangesareonlyonevariableinafirm'sdecisiontobuildinaforeignlocation.
60TheeffectonU.
S.
importsofremovalofthe25percenttariffonlighttrucksismoreuncertain.
Currently,theUnitedStatesdoesnotimportlighttrucksfromKorea,andtheHyundaiGroup(thelargestvehiclecompanyinKoreaandvehicleexportertotheUnitedStates)doesnotcurrentlyproducealighttruckforsaleintheU.
S.
market.
61However,giventhe3-to5-yeardesigncycleforvehicles,itisconceivablethataKorean-ownedcompanycouldproducealighttruckforsaleintheU.
S.
marketbythetimethetariffonlighttrucksisremovedfullyin10years.
62AKoreanproducerthatdoesnotcurrentlyexporttotheUnitedStates,Ssangyong,producesalighttruckcalledtheActyonSportsthatitexportstoAustraliaandEurope.
SsangyongisintheprocessofbeingpurchasedbyIndia-basedMahindra&MahindraLtd.
,63whichisseekingapprovalfortheexportofitsownlighttrucktotheUnitedStates.
64SafeguardsTheaccompanyingagreementmodifiestheproceduresforapplyingsafeguardmeasurestoimportsofpassengervehiclesusingtheproceduresinthetraderemedieschapter(chapter10)oftheFTA.
65Incontrasttotheprovisionsinchapter10thatapplytosafeguardmeasuresingeneral,inthecaseofpassengervehicles,thechangesallowtheimportingcountry(1)toapplyameasureforaperiodofupto10yearsaftertheendofthetariffeliminationperiod;(2)toextendameasureforuptotwoyearsbeyondtheendoftheinitialperiodofthemeasure;(3)toapplyameasuremorethanonce;and(4)toapplyameasurewithouthavingtoprogressivelyliberalizeitifitextendsbeyondoneyear.
Themodificationsalsocreateanexceptiontowhatwouldotherwisebetherightofanexportingpartytosuspendtradeconcessionsongoodshavingsubstantiallyequivalenttradeeffectsiftheimportingpartyappliesasafeguardmeasureandthepartiesareunable59Levin,writtensubmissiontotheUSITC,June20,2007;Meyer,"TheUnitedStates-KoreaFreeTradeAgreement(KORUSFTA),"writtensubmissiontotheUSITC,June20,2007.
60Industryofficial,interviewbyUSITCstaff,Washington,DC,February28,2011;Figueiredo,Guimaraes,andWoodward,"AsymmetricInformationandLocation,"2002,1–2;InvestinCanada,"Automotive,"July8,2010;MacCarthyandAtthirawong,"CriticalFactorsinInternationalLocationDecisions:ADelphiStudy,"2001,1–2;Blonigen,"AReviewoftheEmpiricalLiteratureonFDIDeterminants,"2005;Helpman,"Trade,FDI,andtheOrganizationofFirms,"2006;SturgeonandVanBiesebroeck,"CrisisandProtectionintheAutomotiveIndustry:AGlobalValueChainPerspective,"September2009,2–3.
61Binder,Ward'sAutomotiveYearbook,2009,176–177,179–180.
62Industryofficial,interviewbyUSITCstaff,Washington,DC,February3,2011.
63Seo,"MahindraMayCompleteAcquiringSsangyongControllingStakeinEarly2011,"October13,2010.
64Dolan,"Mahindra'sU.
S.
TruckWaylaidbyDistributorLawsuit,"July27,2010.
65TheaccompanyingagreementmodifiestheproceduresformotorvehiclesgenerallyclassifiableinHSheadings8703and8704.
UnderArticle10.
1oftheFTA,apartymayapplyasafeguardmeasureif,asaresultofthereductionoreliminationofadutyundertheFTA,anoriginatinggoodoftheotherpartyisbeingimportedinsuchincreasedquantities,inabsolutetermsorrelativetodomesticproduction,andundersuchconditionsthattheimportsofsuchagoodfromtheotherpartyconstituteasubstantialcauseorthreatofseriousinjurytoadomesticindustryproducingalikeordirectlycompetitivegood.
ThesafeguardmeasuremaybeintheformofasuspensionofthefurtherreductionoftherateofdutyonthegoodprovidedforundertheAgreement,oranincreaseintherateofdutytoalevelnottoexceedthelesserofthecurrentappliedmost-favored-nation(MFN)rateofdutyonthegoodineffectthattheactionistaken;andtheMFNappliedrateofdutyonthegoodineffectonthedayimmediatelyprecedingthedatethisagreemententersintoforce.
14toagreeoncompensation.
Inthecaseofasafeguardmeasureinvolvingpassengervehicles,theexportingcountrywouldnotbepermittedtoexerciseitsrighttosuspendconcessionsforthefirst24monthsduringwhichthemeasureisineffect.
6666Consultationsoncompensationbetweentheimportingandexportingpartieswouldneverthelessbeexpectedtotakeplacewithin30daysafterameasureisapplied.
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"GMtoDropDaewooNameinKorea,SwitchtoChevrolet.
"AutomotiveNews,January20,2011.
16———.
"HyundaiMayNeedtoSourceElantrafromKoreatoMeetDemand.
"AutomotiveNews,January28,2011.
Griffith,Bill.
"Hyundai's'Overnight'Successa20-YearProject.
"BostonOverdrive,March1,2010.
http://www.
boston.
com/cars/newsandreviews/overdrive/2010/03/hyundais_overnight_success_a_2.
html.
Helpman,Elhanan.
"Trade,FDI,andtheOrganizationofFirms.
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3(2006):589–630.
HyundaiMotorAmerica.
"HyundaiUnveilsTucsonixFCEV.
"Newsrelease,February14,2011.
HyundaiMotorCompany.
"HyundaiUnveilsItsFirstElectricCar.
"Newsrelease,September9,2010.
Jung,Seung-hyun.
"ChevroletVolttoSetEVPaceinKorea.
"KoreaJoongAngDaily,October22,2010.
http://joongangdaily.
joins.
com/article/view.
aspaid=2927439.
KoreanMinistryofEnvironment,EnvironmentalTransportationDivision.
"ConfirmationontheScopeofSmall-scaleManufacturersConcerningtheEnvironmentalRegulationsforAutomotives.
"Newsrelease,n.
d.
http://www.
me.
go.
kr/kor/notice/notice_02.
jsp%20id=notice_02&cate=&dirinfo=&key=subject&search=&search_regdate_s=&search_regdate_e=&order=&desc=asc&pg=1&mode=view&idx=176519(accessedMarch3,2011).
Levin,Sander.
WrittentestimonysubmittedtotheU.
S.
InternationalTradeCommissioninconnectionwithinv.
no.
TA-2104-024,U.
S.
-KoreaFreeTradeAgreement:PotentialEconomy-wideandSelectedSectoralEffects,June20,2007.
MacCarthy,Bart,andWalailakAtthirawong.
"CriticalFactorsinInternationalLocationDecisions:ADelphiStudy.
"ProceedingsoftheTwelfthAnnualConferenceoftheProductionandOperationsManagementSociety,2001.
Meyer,Douglas.
WrittentestimonysubmittedtotheU.
S.
InternationalTradeCommissioninconnectionwithinv.
no.
TA-2104-024,U.
S.
-KoreaFreeTradeAgreement:PotentialEconomy-wideandSelectedSectoralEffects,June20,2007.
Platzer,MichaelaD.
PendingU.
S.
andEUFreeTradeAgreementswithSouthKorea:PossibleImplicationsforAutomobileandOtherManufacturingIndustries.
CRSReportforCongressno.
41389.
CongressionalResearchService(CRS),September1,2010.
http://assets.
opencrs.
com/rpts/R41389_20100901.
pdf.
PublicCitizen.
WrittensubmissiontotheU.
S.
InternationalTradeCommissioninconnectionwithinv.
no.
332-523,U.
S.
-KoreaFreeTradeAgreement:PassengerVehicleSectorUpdate,February14,2011.
Schott,JeffreyJ.
"KORUSFTA2.
0.
"PetersonInstituteforInternationalEconomics.
PolicyBriefPB10-28,December2010.
http://www.
iie.
com/publications/pb/pb10-28.
pdf.
Schott,JeffreyJ.
,ScottC.
Bradford,andThomasMoll.
"NegotiatingtheKorea–UnitedStatesFreeTradeAgreement.
"PetersonInstituteforInternationalEconomics.
PolicyBriefPB06-4,June2006.
http://www.
iie.
com/publications/pb/pb06-4.
pdf.
17Seo,Sookyung.
"MahindraMayCompleteAcquiringSsangyongControllingStakeinEarly2011.
"Bloomberg,October13,2010.
http://www.
bloomberg.
com/news/2010-10-13/mahindra-may-complete-acquiring-ssangyong-controlling-stake-in-early-2011.
html.
Sturgeon,Timothy,andJohannesVanBiesebroeck.
"CrisisandProtectionintheAutomotiveIndustry:AGlobalValueChainPerspective.
"WorldBank.
PolicyResearchWorkingPaper5060,September2009.
U.
S.
InternationalTradeCommission(USITC).
U.
S.
-KoreaFreeTradeAgreement:PotentialEconomy-wideandSelectedSectoralEffects,USITCPublication3949.
Washington,DC:USITC,2007.
http://www.
usitc.
gov/publications/332/pub3949.
pdf.
UnitedStatesTradeRepresentative(USTR).
"AgreedMinutesonRegulationsPertainingtoAutomotiveFuelEconomyandGreenhouseGasEmissions.
"Washington,DC:USTR,February10,2011.
———.
"ExchangeofLettersbetweenU.
S.
TradeRepresentativeKirkandKoreanTradeMinisterKimJong-Hoon.
"Washington,DC:USTR,February10,2011.
———.
"FinalUnitedStates–KoreaFTATexts.
"Washington,DC:USTR,2007.
UnitedSteelworkers.
WrittensubmissiontotheU.
S.
InternationalTradeCommissioninconnectionwithinv.
no.
332-523,U.
S.
-KoreaFreeTradeAgreement:PassengerVehicleSectorUpdate,February14,2011.
APPENDIXARequestLetterCOMMITTEEONWAYSANDMEANS·D.
OC~:·NUMBERU.
S.
HOUSEOFREPRESENTATIVESWASHINGTON,DC20515,_Id-7~3lJanuary27,2011-OfficeoftheSecretaryInt'JTradeComrTlJssionDearChairmanOkun,InSeptember2007,theCommissionpublisheditsreportontheKorea-U.
S.
(KORUS)FreeTradeAgreement(FTA)pursuanttosection2104(1)oftheTradeActof2002(US.
-KoreaFreeTradeAgreement:PotentialEconomy-wideandSelectedSectoralEffects,InvestigationNo.
TA-2104-24(USrTCpub.
3949)).
Asyouknow,theUnitedStatesandSouthKorearecentlyconcludednegotiationsthatwillprovideadditionalmarketaccessforU.
S.
autoexportstoSouthKorea,inparticular,byaddressingnon-tariffbarrierstoU.
S.
exports.
Accordingly,pursuanttoSection332(g)oftheTariffActof1930,asamended,andonbehalfoftheCommitteeonWaysandMeansoftheHouseofRepresentatives,IrequestthattheCommissionupdateitsassessmentoftheimpactofthemotorvehicle-relatedprovisionsintheKORUSITA,includingthesupplementalautosagreement,ontheU.
S.
passengervehiclesector.
TheCommissionshouldusethemostrecentdataavailableandshouldincludeamodelingsimulationoftheeffectsoftheautonon-tariffbarriersinitsassessment.
Inpreparingitsupdatedassessment,theCommissionshouldconsiderthetextoftheAgreement,whichweunderstandwillbemadepublicbytheendofJanuary,aswellasanyotherinformationappropriateandconsistentwiththeCommission'sstatutorymandate.
Iaskthatthisassessmentbedeliveredattheearliestpossibledate,butnolaterthanMarch15,2011.
Asweintendtomakethereportavailabletothepublic,werequestthattheCommissionnotincludeconfidentialbusinessinformationinitsreport.
Thankyouforyourcontinuedcooperationandassistanceinthismatter.
Sincerely,DaveCampChairmanAPPENDIXBFederalRegisterNoticeB-3FederalRegister/Vol.
76,No.
22/Wednesday,February2,2011/Notices5825INTERNATIONALTRADECOMMISSION[InvestigationNo.
332–523]U.
S.
-KoreaFreeTradeAgreement:PassengerVehicleSectorUpdateAGENCY:UnitedStatesInternationalTradeCommission.
ACTION:Institutionofinvestigationandrequestforwrittenstatements.
SUMMARY:FollowingreceiptofarequestdatedJanuary27,2011,fromtheU.
S.
HouseofRepresentativesCommitteeonWaysandMeans(Committee)undersection332(g)oftheTariffActof1930(19U.
S.
C.
1332(g)),theU.
S.
InternationalTradeCommission(Commission)institutedinvestigationNo.
332–523,U.
S.
-KoreaFreeTradeAgreement:PassengerVehicleSectorUpdate.
DATES:February14,2011:Deadlineforfilingwrittenstatements.
March15,2011:TransmittalofCommissionreporttotheCommittee.
ADDRESSES:AllCommissionofficesarelocatedintheUnitedStatesInternationalTradeCommissionBuilding,500EStreet,SW.
,Washington,DC.
AllwrittensubmissionsshouldbeaddressedtotheSecretary,UnitedStatesInternationalTradeCommission,500EStreet,SW.
,Washington,DC20436.
ThepublicrecordforthisinvestigationmaybeviewedontheCommission'selectronicdocket(EDIS)athttps://edis.
usitc.
gov/edis3-internal/app.
FORFURTHERINFORMATIONCONTACT:BrianAllen,Co-ProjectLeader,OfficeofIndustries(202–205–3034orbrian.
allen@usitc.
gov)orDeborahMcNay,Co-ProjectLeader,OfficeofIndustries(202–205–3425ordeborah.
mcnay@usitc.
gov)forinformationspecifictothisinvestigation.
Forinformationonthelegalaspectsofthisinvestigation,contactWilliamGearhartoftheCommission'sOfficeoftheGeneralCounsel(202–205–3091orwilliam.
gearhart@usitc.
gov).
ThemediashouldcontactMargaretO'Laughlin,OfficeofExternalRelations(202–205–1819ormargaret.
olaughlin@usitc.
gov).
Hearing-impairedindividualsmayobtaininformationonthismatterbycontactingtheCommission'sTDDterminalat202–205–1810.
GeneralinformationconcerningtheCommissionmayalsobeobtainedbyaccessingitsInternetserver(http://www.
usitc.
gov).
PersonswithmobilityimpairmentswhowillneedspecialassistanceingainingaccesstotheCommissionshouldcontacttheOfficeoftheSecretaryat202–205–2000.
Background:InApril2007,theU.
S.
TradeRepresentative(USTR)requestedthattheCommissionprepareareport,asspecifiedinsection2104(f)oftheTradeActof2002(19U.
S.
C.
3804(f)),assessingthelikelyimpactoftheU.
S.
-KoreaFreeTradeAgreement(FTA)ontheU.
S.
economyasawholeandonspecificindustrysectorsandtheinterestsofU.
S.
consumers.
TheCommissiontransmitteditsreport(U.
S.
-KoreaFreeTradeAgreement:PotentialEconomy-wideandSelectedSectoralEffects,inv.
No.
TA–2104–24,USITCpub.
3949)totheUSTRinSeptember2007.
TheUnitedStatesandKorearecentlyconcludednegotiationstomodifytheFTA,includingcertainprovisionsrelatingtothepassengervehiclesector.
Initsrequestletter,theCommitteerequestedthattheCommission,undersection332(g)oftheTariffActof1930,updateits2007assessmentwithrespecttothepassengervehiclesector.
TheCommitteeaskedthattheCommissionusethemostrecentdataavailableandincludeamodelingsimulationoftheeffectsoftheautonontariffmeasuresinitsassessment.
WrittenSubmissions:BecauseoftheshorttimeframerequestedbytheCommittee,theCommissionwillnotholdapublichearinginconnectionwiththisinvestigation.
However,interestedpartiesareinvitedtosubmitwrittenstatementsconcerningthisinvestigation.
AllwrittensubmissionsshouldbeaddressedtotheSecretary,andshouldbereceivednotlaterthan5:15p.
m.
,February14,2011.
Allwrittensubmissionsmustconformwiththeprovisionsofsection201.
8oftheCommission'sRulesofPracticeandProcedure(19CFR201.
8).
Section201.
8requiresthatasignedoriginal(oracopysodesignated)andfourteen(14)copiesofeachdocumentbefiled.
Intheeventthatconfidentialtreatmentofadocumentisrequested,atleastfour(4)additionalcopiesmustbefiled,inwhichtheconfidentialinformationmustbedeleted(seethefollowingparagraphforfurtherinformationregardingconfidentialbusinessinformation).
TheCommission'srulesauthorizefilingsubmissionswiththeSecretarybyfacsimileorelectronicmeansonlytotheextentpermittedbysection201.
8oftherules(seeHandbookonElectronicFilingProcedures,http://www.
usitc.
gov/docket_services/documents/handbook_on_electronic_filing.
pdf).
PersonswithquestionsregardingelectronicfilingshouldcontacttheSecretary(202–205–2000).
Anysubmissionsthatcontainconfidentialbusinessinformation(CBI)mustalsoconformwiththerequirementsofsection201.
6oftheCommission'sRulesofPracticeandProcedure(19CFR201.
6).
Section201.
6oftherulesrequiresthatthecoverofthedocumentandtheindividualpagesbeclearlymarkedastowhethertheyarethe''confidential''or''non-confidential''version,andthattheconfidentialbusinessinformationbeclearlyidentifiedbymeansofbrackets.
Allwrittensubmissions,exceptforconfidentialbusinessinformation,willbemadeavailableforinspectionbyinterestedparties.
Initsrequestletter,theCommitteestatedthatitintendstomaketheCommission'sreportavailabletothepublicinitsentirety,andaskedB-45826FederalRegister/Vol.
76,No.
22/Wednesday,February2,2011/NoticesthattheCommissionnotincludeanyconfidentialbusinessinformationinthereportthattheCommissionsendstotheCommittee.
AnyconfidentialbusinessinformationreceivedbytheCommissioninthisinvestigationandusedinpreparingthisreportwillnotbepublishedinamannerthatwouldrevealtheoperationsofthefirmsupplyingtheinformation.
ByorderoftheCommission.
Issued:January28,2011.
WilliamR.
Bishop,HearingsandMeetingsCoordinator.
[FRDoc.
2011–2286Filed2–1–11;8:45am]BILLINGCODEPAPPENDIXCLegalTextoftheAgreementandAgreedMinutesAccompanyingtheU.
S.
-KoreaFreeTradeAgreementEXECUTIVEOFFICEOFTHEPRESIDENTTHEUNITEDSTATESTRADEREPRESENTATIVEWASHINGTON.
D.
C.
2O5O8February10,2011TheHonorableJong-HoonKimMinisterforTradeSeoul,RepublicofKoreaDearMinisterKim:IhavethehonortoconfirmthefollowingunderstandingreachedbetweentherepresentativesoftheGovernmentoftheRepublicofKoreaandtheGovernmentoftheUnitedStatesofAmerica("theParties")duringthecourseofdiscussionsregardingissuesrelatedtotheUnitedStates-KoreaFreeTradeAgreement(KORUS):SectionA:Tariffs1.
Notwithstandingparagraph2ofArticle2.
3andtheUnitedStatesScheduletoAnnex2-BoftheKORUS,theUnitedStatesshalleliminatedutiesoncertaingoodsasfollows:(a)Fororiginatinggoodsofheading8703subjecttostagingcategory"A"or"C",dutiesshallremainatthebaserateduringyearsonethroughfour.
Suchgoodsshallbeduty-free,effectiveJanuary1ofyearfive;(b)Fororiginatinggoodsofsubheading870390,dutiesshallbereducedinfiveequalannualstages,andsuchgoodsshallbeduty-free,effectiveJanuary1ofyearfive;and(c)Fororiginatinggoodsofheading8704subjecttostagingcategory"G",dutiesshallremainatthebaserateduringyearsonethroughseven.
BeginningonJanuary1ofyeareight,dutiesonsuchgoodsshallbereducedinthreeequalannualstages,andsuchgoodsshallbeduty-free,effectiveJanuary1ofyearten.
2.
Notwithstandingparagraph2ofArticle2.
3andKorea'sScheduletoAnnex2-BoftheKORUS,Koreashalleliminatedutiesoncertaingoodsasfollows:(a)Fororiginatinggoodsofheading8703subjecttostagingcategory"A",dutiesshallbereducedtofourpercentadvaloremonthedatetheKORUSentersintoforce.
Dutiesshallremainatfourpercentadvaloremduringyearsonethroughfour,andsuchgoodsshallbeduty-free,effectiveJanuary1ofyearfive;(b)Fororiginatinggoodsofsubheading870390,dutiesshallbereducedtofourpercentadvaloremonthedatetheKORUSentersintoforce.
BeginningonJanuary1ofyeartwo,dutiesshallbereducedinfourequalannualstages,andsuchgoodsshallbeduty-free,effectiveJanuary1ofyearfive;and(c)Fororiginatinggoodsofitem0203299000,dutiesshallbereducedto16percentadvalorem,effectiveJanuary1,2012;12percentadvalorem,effectiveJanuary1,2013;eightpercentadvalorem,effectiveJanuary1,2014;fourAPPENDIXDSummaryofPositionsofInterestedPartiesD-3SummaryofPositionsofInterestedParties1AmericanAutomotivePolicyCouncil(AAPC)2Inawrittensubmission,theAAPCprovidedcommentsonbehalfofitsmembercompanies—ChryslerGroup,LLC;FordMotorCompany;andGeneralMotorsCompany—insupportoftheUnitedStates–KoreaFreeTradeAgreement(FTA).
TheAAPCstatedthatbecauseofKorea'slonguseoftariffandnontariffbarrierstoprotectitsdomesticautoindustryfrominternationalcompetition,atleast75percentofthetotalU.
S.
tradedeficitwithKoreaisattributabletotradeinautosandautoparts.
TheAAPCnotedthedifficultyofpenetratingKorea'smarketwiththefollowingtradestatistics:itsmembers"werelimitedtoselling"1,238vehiclesinamarketof1.
4millionvehiclesin2000;itsmemberssold7,450vehiclesinamarketof1.
5millionvehiclesin2010;andKoreahadthesecond-lowestimportmarketshare(5.
8percent)forvehiclesamongmembercountriesoftheOrganisationforEconomicCo-operationandDevelopmentin2010.
TheAAPCstatedthattheFTAnegotiatedandsignedin2007withKoreawas"insufficienttogainrealmarketaccessforautos.
"ItidentifiedthefollowingareasofimprovementinthemodifiedautomotiveprovisionsintheDecember2010agreementthatistoaccompanytheFTA:automotivesafetyandenvironmentalstandards,taxes,transparency,carandtrucktariffphaseouts,andtheinclusionofaspecialmotorvehiclesafeguardandenforcementmechanism.
TheAAPCstatedthatitsmembers'productswillbemoresuccessfulandcompetitiveintheKoreanmarketiftheU.
S.
-KoreaFTAisfullyimplementedandenforcedasmodified.
PublicCitizen3Inawrittensubmission,PublicCitizensaidthatitisanonprofitpublicinterestorganizationwith150,000membersandsupportersthatadvocatesforcitizeninterestsbeforeCongress,executivebranchagencies,andthecourts.
PublicCitizen'ssubmissiondoesnotspecificallystatesupportfororoppositiontothemodificationstotheKoreaFTAthataffectpassengervehicles,butitprovidesitsassessmentoftheCommission'seconomicsimulationexerciseforthe2007KoreaFTAstudyandoffersconsiderationsformodelingthenewsupplementalautoagreement.
PublicCitizenidentifiedandreferencedstudiestosupportthefollowingkeyconcernsrelativetotheCommission's2007KoreaFTAeconomicsimulationexercise,asfollows:(1)Therelianceontheresultsofacomputablegeneralequilibrium(CGE)modeltodevelopquantitativepredictionsoftheeffectoftheKoreaFTAontheU.
S.
economy,whichtheyfound"disturbing"becausepastresultsofCGE-basedmodelinghaveunderestimatedtheeconomiceffectsofFTAsontheU.
S.
economyandresultedin"verypooraccuracy.
"1Thisappendixreflectsonlytheprincipalpointsmadebytheparticularparty.
TheviewssummarizedarethoseofthesubmittingpartiesandnottheCommission.
Commissionstaffdidnotundertaketoconfirmtheaccuracyof,orotherwisecorrect,theinformationdescribed.
Forthefulltextofwrittensubmissions,seeentriesassociatedwithinvestigationno.
332-523attheCommission'sElectronicDocketInformationSystem(http://edis.
usitc.
gov/edis3-internal/app).
2AAPC,writtensubmissiontotheUSITC,February14,2011.
3PublicCitizen,writtensubmissiontotheUSITC,February14,2011.
D-4(2)ThetendencyofCGEmodelstotaketariffchangesintoaccountexclusiveofotherlessquantifiablefactorssuchastheattractionformultinationalcorporationstoshiftproductiontotheterritoryofFTApartnersbecauseofthelimitedoptionsforgovernmentstoregulateforeignanddomesticcompanies.
(3)TheapplicationofthesameArmingtonelasticity(2.
8)tobothKoreanandU.
S.
autoconsumersdespiteinformationthatKoreanandU.
S.
autoconsumersviewimportedcarsatdifferentdegreesofsubstitutabilityfordomesticcars.
(4)Theuseof"coarsecategorizations"—littleornoadverseeffect,significantadverseeffect,andsubstantialadverseeffect—todescribethequantitativeresultsofapartialequilibriummodel.
PublicCitizensuggestsusingthefullnumericalresultsinconjunctionwiththestandardcategories.
Tomodelthepotentialeffectoftheaccompanyingagreement,PublicCitizensuggestedthattheCommissiontakeintoaccount"lessquantifiablemitigatingfactors"andseparatecompletiondatesfortariffeliminationsandimplementationofchangestonontariffmeasures.
PublicCitizenexplainsthatthechangesintheregulatoryrequirementsforU.
S.
autosimportedintoKoreamandatedintheaccompanyingagreementwilllikelyresultina"negligible"increaseinU.
S.
autosexportedtoKoreabecause(1)previousKoreancommitmentstoreducebarrierstoU.
S.
autoimportsdidnotresultinhigherKoreanconsumptionand(2)theexemptionofU.
S.
autosfromKorea'senvironmentalandsafetystandardsmayintensifyan"alreadyexistentperception"byKoreanconsumersthatU.
S.
autosareinferiortotheirdomesticmanufacturedproductintermsofsafetyandenvironmentalsafeguards.
Also,PublicCitizencautionedagainstincludingenvironmentalexemptions(scheduledtoexpireinyear2015)withphased-outtariffs(scheduledforyear10ofimplementation)whenmodelingforlong-termeffect,becausetheenvironmentalexemptionswillnolongerbeinplace.
UnitedSteelworkers(USW)4Inawrittensubmission,theUSWsaidthatitrepresents850,000membersthatproduceproductsusedinthemanufactureofautomotivevehicles,includingsteel,tires,glass,andaluminum.
TheUSWstatedthatafteranalyzingtheoriginalU.
S.
-KoreaFTAinconjunctionwiththerecentlynegotiatedprovisions,theydetermined"thattheFTAwouldundermineU.
S.
economicinterests"andtheUSWwouldopposeitspassage.
TheUSWexpressedconcernthattherecentlynegotiatedprovisionsarenot"self-executing"andthatiftheUnitedStatesactsbeforeKoreatopassboththeoriginalFTAandtherecentlynegotiatedprovisions,theKoreangovernmentmaysubsequentlyenactonlytheoriginalagreementwithoutthefollow-onamendments.
TheUSWstatedthat,undertherulesoforiginprovisionsofthe2007agreement,themethodologyforcalculatingregionalvaluecontentwouldallowaproduceranaveragecontentthresholdof35percentoverthatproducer'sfiscalyearforaclassofvehicles,meaningthatKoreacouldproduceaqualifyingmodelvehicleusing100percentKoreanoriginatingcontentfordomesticconsumptionandproduceanothervehicleofthesameclassusingonly5percentKoreancontentand95percentthird-countrycontentforexporttotheUnitedStates.
TheUSWexpressedconcernthatthisregional-valuecontentprovisioncouldallowathirdcountrytoproducethemajorityofthecomponentsthat4USW,writtensubmissiontotheUSITC,February14,2011.
D-5wouldreceivepreferentialtarifftreatmentundertheU.
S.
-KoreaFTA(afterincorporationintoaqualifyingpassengervehicle)eventhoughthosecomponentswouldbesubjecttoexistingU.
S.
antidumpingandcountervailingdutiesandsafeguards.
TheUSWalsonotedthatthe2007rulesoforiginprovisionsallowautoproducerstochooseamongthreedifferentmethodologiestocalculatepercentofcontent,dependingonwhichismostadvantageous,andthattheproducershavetheoptionofswitchingmethodologiesatanytime.
TheUSWrecommendsthattheCommission'sinvestigationincludeananalysisastohowthesemethodologiescouldbeusedtominimizecontentfromtheFTApartnercountriesandmaximizecontentfromothercountries.
TheUSWalsoexpressedconcernsabouttheKaesongFreeTradeZone(FTZ)insouthernNorthKorea.
TheUSWstatedthatthereappearstobenocommitmentthatwouldlimitbenefitsfromaccruingtotheNorthKoreansforcomponentsproducedwithintheKaesongFTZifsuchcomponentsweretobeincludedinfinalproductsexportedtotheUnitedStates.
Instead,theoriginalU.
S.
-KoreaFTAtransfersauthorityconcerningthetreatmentofproductsfortheKaesongFTZtoacommitteescheduledtobecreatedaftertheFTAentersintoforce.
TheUSWrecommendsthattheCommissiontakeintoconsiderationthelong-termpotentialofproductsorcomponentsfromKaesongFTZenteringtheUnitedStatesandreceivingpreferentialtradebenefitsundertheU.
S.
-KoreaFTA.
APPENDIXEDescriptionofPossibleNontariffMeasuresAnalysisandSimulationoftheAbsenceofNTMsE-3DescriptionofPossibleNontariffMeasuresAnalysisandSimulationoftheAbsenceofNTMsThefirstsectioninthisappendixprovidesfurtherinformationonthecalculationandinterpretationofthequantityandunit-valueinformationreportedinbox1ofthemaintextofthestudy.
Thesecondsectionprovidesfurtherinformation,includingsomecaveats,abouttheeconomicmodelusedtosimulatetheabsenceoftheestimatedpricegapthatcanbeattributedtoKoreannontariffmeasures(NTMs)onimportsofU.
S.
passengercars.
UseofIndicativeQuantitativeInformationtoAssessPossibleNontariffMeasuresAffectingKoreanImportsofU.
S.
ProductsTheanalysisofNTMsaffectingtradebeginswiththeunderstandingthattheireffectsareanalogoustotariffs—i.
e.
,NTMsrestrictthequantityofimportedgoodsandraisetheirprices.
Animporttariffraisesthepricetoconsumersofaninternationallytradedproductandcreatesa"wedge,"or"gap,"betweenthepricepaidbyconsumers/importersandthepricereceivedbysellers/exportersoftheproduct.
Insimilarways,importing-countrypoliciesthataddtothecostofsellingthegoodintheircountriesalsocreatesuchapricegap.
1Policiesthatrestrictquantitiesraisepricesaswell,becausethescarcityinducedbythequantityrestrictioncausesconsumerstopaymore.
IntheabsenceofNTMs,onewouldexpecttheimportpricesforagoodofuniformspecificationsandqualitytobeidenticalinallcountries,varyingonlybydifferencesintransportationcosts.
Leavingasidetransportationcosts,iftheonlytradepolicyaffectingimportpricesweretariffs,onewouldexpectdifferencesacrosscountriesinthepriceofagoodincludinganytariffs,knownasthelanded-duty-paidprice,toberoughlyequivalenttodifferencesintariffrates.
Themorewidelyavailable,internationallycomparablemeasureofimportpricesisthecost-insurance-freight(c.
i.
f.
)price,whichdoesnotincludetariffs.
Inanidealcase,inwhichonecountryexportsanidenticalgoodtomanydifferentcountries,differencesinc.
i.
f.
importpricesshouldreflectonlydifferencesintransportcosts.
However,ifthereareseveralvarietiesfortheproductinquestion,thendifferentcountriesmightimportadifferentmixofvarieties,whichcouldalsoleadtoadifferenceinaveragec.
i.
f.
importprices.
2ThisreportusesvariouscomparisonsofinternationaltradedatainassessingthepotentialeffectsofNTMsintheKoreanmarket.
DirectlycomparingimportunitvaluesandimportquantitiesforasmallnumberofproductsofimportancetoU.
S.
exportersmayhelp1Forexample,cumbersomecustomsproceduresorregulatorymeasuressuchascertificationoftechnicalstandardsmayraisethecostofimportedgoods.
Higherpricesinturnleadtolowerquantitiesofimportsbecausethefinalconsumerislesswillingtopaythehigherprice.
Theanalysispresentedhereisintendedtoaddressthesemarketeffects,nottheextenttowhichsuchmeasuresmayormaynotpromotedomesticpolicyobjectivesrelatedtohealthorsafety.
2Partner-specificexporttaxesandsubsidiesalsocouldinducevariationinthec.
i.
f.
price.
E-4illustratetheimpactsofthesemeasures.
3InthepresenceofNTMs,onewouldexpecteitherthatKoreanimportunitvaluesarenoticeablyhigherthanonemightexpect,thatquantitiesimportedbyKoreaarenoticeablylowerthanonewouldexpect,orboth.
Inpreviouswork,USITCanalystsandothershaveusedavarietyofmethodstoassesstheeffectsofNTMsongoodstrade.
4Ifproductswerehomogeneous,i.
e.
,allcountriesimportedexactlythesametypeandqualityofproductswithinatradeclassification,calculatingpriceeffectsoftradepolicymeasureswouldbestraightforward;comparingtheimportpriceofaparticularcountrythatappliesNTMswiththatofcountriesknownnottoapplyNTMs(andadjustingfortransportationcostdifferences)wouldprovideareasonableestimateofapricedifferential.
However,productswithinatradecategory(e.
g.
,productsgroupedaccordingtoagiven6-digitHarmonizedSystem[HS]code)aregenerallymoreheterogeneousthanthis.
Countriesdonotimportthesamemixofproducts,andacountry'simportswithinaparticularcategorymaydifferinqualityaswellfromthoseofanothercountry.
IndevelopingNTMpricegapsforthisreport,wecalculatethepercentagebywhichKorea'sunitvalueofimportsfromtheUnitedStatesexceedstheU.
S.
exportunitvaluetotheworld.
(Thiscomparison,ineffect,assumesthatwhatU.
S.
exportersselltoKoreaiscomparabletowhattheyselltotheworld.
)Someofthisdiscrepancymaybeattributabletoshippingcosts,butwheretheimportunitvaluedifferencesarerelativelylarge,onemayinferthatsomeareduetothecaptureofrentsbyvariouspartiesinvolvedintheinternationaltransaction.
WealsoperformquantitycomparisonsinwhichaverageKoreanimportquantitiesfromtheworld,attheHS-6level,arecomparedwithimportquantitiesofothercountries.
Becauseonewouldexpectthatlargereconomiesimportmore,thecomparisonsaremadeintermsofimportquantitypermilliondollarsofgrossdomesticproduct(GDP).
5PriceandquantitydataweretakenfromGlobalTradeAnalyzer,aproductofGTIS,whichreportsprimary-countrytradedataforasampleofmorethan60countries,agroupthatincludesmostlargetraders.
PricesarecalculatedasunitvaluesandaveragedfortheperiodJanuary2008–November2010.
Quantitycomparisonsareaveragedfortheperiod2007–09.
Therelativeunitforpassengervehiclesisnumberofvehicles.
Comparisonsof3BecausepriceschargedforgoodssubjecttoanNTMarelikelyhigherthanthosethatwouldbegeneratedfromproductionandtransportcostsalone,theymaygeneratebenefits,or"rents,"forsomeentityinthesupplychain.
Dependingonwhereinthesupplychainthesemeasuresareimplementedandonthebargainingpowerofdifferentagentsinthesupplychain,thehigherpricesarisingfromNTMsmaybeobservedatpointsotherthanatthepointofunloading(thec.
i.
f.
price).
Forexample,"behind-the-border"restrictions,suchasexcisetaxes,mayleadtohigherwholesaleorretailprices.
Comparisonsinthisstudyaremadeintermsofc.
i.
f.
pricesnotonlybecauseoftheavailabilityofinternationallycomparabledata,butbecausec.
i.
f.
pricesareineffectimportprices,andthemeasuresinquestionareusuallyunderstoodtoaffecttheactofimportinginsomeway.
NTMpricegapspresentedinthisreportaremeanttobesuggestiveratherthandispositive.
4SeeUSITC,India,2009;USITC,GlobalBeefTrade,2008;LinkinsandArce,"EstimatingTariffEquivalentsofNon-TariffBarriers,"2002(foundationaldiscussionofestimatingpricegapsofNTMs);Dean,Feinberg,andFerrantino,"EstimatingtheTariff-EquivalentofNTMs,"2005,289–310(econometricmethodsusingpricedata);Ferrantino,"QuantifyingtheTradeandEconomicEffectsofNon-TariffMeasures,"2006(broaderreviewincludingbothpriceandquantitymethodsbyavarietyofresearchers).
5Thisisequivalenttomaintainingthehypothesisthatimportdemandoftherepresentativeinternationalconsumerisunitelasticwithrespecttoincome,i.
e.
,thata1percentincreaseinincomeleadstoa1percentincreaseinimportdemand.
Exploratoryeconometricsshowedthatthisisareasonableassumptionfortheproductsunderconsiderationinthisstudyand,inmostcases,isaconservativeassumption.
Consequently,mostofthetrueincomeelasticitiesarelikelytobesomewhathigherthan1.
Ifthesewereusedintheanalysis,itwouldbemorelikelytofindthatKoreanimportquantitiesappearedunusuallylow.
E-5quantitiesexcludeafewcountrieswhoseunitofmeasureforpassengervehiclesiskilogramsorsomeothernoncomparableunit.
Thismayaffectthequalityofthecomparisonsandhasbeennotedwhenapplicable.
TheAppliedGeneralEquilibriumSimulationModelTheappliedgeneralequilibrium(AGE)modelthatisusedtosimulatetheeffectsofKoreanNTMsforU.
S.
passengercarsissimilartothecomparative-staticGlobalTradeAnalysisProject(GTAP)modelthatwasusedtosimulatetheU.
S.
-KoreaFTAinthe2007USITCreportregardingthepotentialeconomy-wideeffectsoftheFTA.
6UnlikethestandardGTAPmodel,however,themodelusedinthisreporttracksdemandforU.
S.
productsbyspecificindustryandconsumersinKorea;inotherwords,thesourcingofimportedproductsisimplementedattheindustryandconsumerlevel.
7Thisfeatureofthemodelallowsamoreprecisespecificationofthesimulation.
AssumingthatimportedpassengercarsinKoreaaredestinedforfinaldemanduseandthattheyarenotusedasintermediateinputs,thesimulationcanfocusonKoreandemandforU.
S.
passengercarseventhough,inthemodel'sdatabase,passengercarsareaggregatedwithotherproductsintheGTAPsector"MVH,"whichrepresentsmotorvehiclesandparts.
ThedataarefromGTAPversion7.
8SimulationSpecificationTheresultsreportedinbox1inthemaintextofthestudyarefromasimulationoftheresultsofremovingtheestimated7.
5percentpricegapforU.
S.
passengercarsthatareimportedintoKorea.
Nootherpolicyischangedinthissimulation.
The7.
5percentpricegapisatrade-weightedaverageoftheestimatedpricegapsthatcouldbeattributedtoKoreanNTMs,appliedtoimportsofsmall-displacement(HS8703.
23)andlarge-displacement(HS8703.
24)passengercarsfromtheUnitedStatesduring2008–10.
Theestimatedpricegapforsmall-displacementpassengercarsis16.
6percent,andtheestimatedpricegapforlarge-displacementpassengercarsis1.
2percent.
SensitivityAnalysisTherangeoftheeffectonU.
S.
passengercarexportstoKoreareportedinbox1isfromthesensitivityanalysisregardingdemandandtradeelasticitiesforKoreandemandforpassengercars.
ThemoresubstitutableU.
S.
passengercarsarewithKoreanpassengercars,thegreatertheU.
S.
exporteffectislikelytobe.
ThreeKoreanfinaldemandelasticitieswereselectedforsensitivityanalysisinthissimulation:theown-pricefinaldemandelasticityforall(domesticandimported)passengercarsinKorea;theArmingtontradeelasticitythatdeterminesthesourcingofimportedpassengercars(parameterσMintheGTAPmodel)forfinaldemand;andtheArmingtontradeelasticitythatdeterminessubstitutionpossibilitiesbetweendomesticandimportedpassengercarsinKorea6Foradiscussionofthecomparative-staticGTAPmodel,seeUSITC,U.
S.
-KoreaFreeTradeAgreement,2007,app.
F.
7ThestandardGTAPmodelappliestheassumptionofnationalproductdifferentiation.
Accordingtothisassumption,themodeltracksthesourcingofimportedproductsfortheeconomyasawhole.
Thus,theassumptionofnationalproductdifferentiationdoesnotallowthemodeltotracktheuseofU.
S.
productsbyspecificindustriesandconsumers.
8NarayananandWalmsley,GlobalTrade,Assistance,andProduction,2008.
E-6(parameterσDintheGTAPmodel,whichiscomputedasσD=σM/2).
TableE.
1liststherangeofelasticityvaluesthatwereconsideredinthesensitivityanalysis.
TABLEE.
1Specificationofsensitivityanalysis:RangeofparametersinKoreanfinaldemandforpassengercarsParameterStandardGTAPvalueLowvalueHighvalueOwn-priceelasticityforpassengercarsinKoreanfinaldemand–0.
42–0.
23–0.
60Armingtonelasticities:σM(σD=σM/2)5.
60(2.
80)*4.
87(2.
435)*6.
33(3.
165)**Source:Herteletal.
,HowConfidentCanWeBeinCGE-BasedAssessmentsofFreeTradeAgreementsMay2003.
SimulationResultsThesimulationresultsforKoreanimportsofU.
S.
passengercarsfromtheremovalofthe7.
5percentpricegaparepresentedintableE.
2.
Nootherpolicyischangedinthissimulation.
TABLEE.
2SimulatedeffectsforKoreanimportsofU.
S.
passengercarsfromtheremovalofthe7.
5percentpricegapthatcouldbeattributedtoKoreanNTMsunderdifferentvaluesforselectedparametersinKoreanfinaldemand(percentchange)Armingtonsourcingelasticityforpassengercars:σM(σD=σM/2)Own-priceelasticityforpassengercarsinKoreanfinaldemandLowStandardGTAPHighLow40.
660347.
979255.
6602StandardGTAP40.
671447.
991255.
6731High40.
681948.
002555.
6853Source:USITCstaffsimulations.
AllthevariationinthesimulatedeffectsstemsfromvariationsintheArmingtontradeelasticities.
Theown-priceelasticityofoveralldemandforpassengercarsisnotinfluentialbecausetotalimportsrepresentasmallshareoftotaldemandforpassengercarsinKorea.
Thesimulatedresultssuggestthat,intheabsenceoftheestimated7.
5percentpricegap,KoreanimportsofU.
S.
passengercarswouldexperienceanincreaseintherangeof40.
66–55.
69percent.
During2008–10,theaverageannuallevelofKoreanimportsofU.
S.
passengercarswasapproximately7,700units.
Thus,thepercentchangesreportedintableE.
2suggestthat,intheabsenceoftheestimated7.
5percentpricegap,KoreanimportsofU.
S.
passengercarswouldhaveincreasedfromroughly7,700unitstoroughly10,80012,000units;thevalueofU.
S.
exportsofpassengercarstoKoreawouldhaveincreasedfromroughly$119milliontoroughly$167–$185million,alsoanincreaseintherangeof40.
66–55.
69percent.
9Asnotedaboveandinbox1inthemaintextofthestudy,KoreanNTMsappliedtoU.
S.
passengercarslikelycontributetothispricegap.
9ThesimulatedpercentchangesinthevolumeandvalueofU.
S.
passengercarexportstoKoreaarethesamebecausetheremovalofthe7.
5percentpricegapcausestheU.
S.
exportpriceofpassengercarstoincreaseonlyslightly.
E-7MeasuringtheImpactsofKoreanNTMsforU.
S.
PassengerCarsandModelLimitationsTheprobableeffectsofKoreanNTMsforU.
S.
passengercarsareestimatesofthemarginaleffectsoftheNTMs,whicharesummarizedbytheestimatedpricegaps,holdingconstantallotherexogenousvariables,suchaschangesintechnologyandbusinesspractices,changesinconsumerpreferences,orchangesinmacroeconomicpolicyorothertradepolicies.
Thesemodelresultsshouldnotbeconsideredasforecastsorpredictionsoffuturetradeflowsbecausemanythingsaffectthoseflows,includingothereconomicvariablesthatwerenotconsideredinthisanalysis.
Asstated,changesinU.
S.
exportsofpassengercarstoKoreaarecalculatedaspercentagedeviationsfromthebasedataandarequitestablewithrespecttochangesinthedatabase.
Thatistosay,ifthebasedatareferredtoadifferenttimeperiod,themarginalpercent-changeeffectsofthepricegaponU.
S.
exportsofpassengercarstoKoreaestimatedbythemodellikelywillstillbesimilartothosepresentedhere,relativetothenewdatabase.
Economicmodelscapturethemostimportantfactorsforthequestionunderconsideration.
Theyarelimited,however,intheirabilitytoreflectthedegreeofcomplexityevidentintherealworld.
10Thus,anumberofcaveatsarenecessaryregardingthismodelingframework.
Onesourceofbias,foundinvirtuallyanyquantitativeanalysisofeconomicdata,arisesfromtheprocessofdataaggregation.
Internationaltradeoccursinthousandsofdifferentproductsandservices:theUnitedStatescollectstradedataunderabout17,000statisticalcategoriesandsome10,000-plustariffratelines.
Formostgeneralequilibriumanalyses,thesegroupingsrepresentfartoomuchdetailtobetractablecomputationally.
Furthermore,analysisandcomparisonofdatacollectedfromdifferenteconomiesrequirethatdatabeaggregatedintocategoriesthataregenerallycomparablefromoneeconomytoanother;findingorconstructingcomparablecategoriescanbeverydifficult.
Thisaggregationprocessintroducestwogeneraltypesofbiasintoamodelingexercise.
Onetypeinvolvesthecalculationofpricegapsforaggregatedproductcategories.
Inthisstudy,atrade-weightedaveragepricegapwascalculated.
Thevalueoftradeinatarifflineprovidestheweightforthepricegapforthattariffline.
Thisproceduretendstomasktheimportanceofthoseproductswithintheaggregatedproductcategoriesthathaveparticularlyhighpricegapsandthatthereforepresentagreaterbarriertoimportsthanwouldbethecaseifallgoodswithintheaggregationhadthesameaveragepricegap.
Asaresult,theanalysismayunderstatetheeffectofremovingthepricegapofahigh-price-gapcomponent(inthiscase,small-displacementpassengercars)oftheaggregatedproductcategories.
Anothertypeofaggregationbiasisthelikelihoodthatgoodswithinanaggregatedproductcategorymaynotbeclosesubstitutesforoneanother.
Importedgoodsofaparticularcategorymaybequitedissimilartoaneconomy'sdomesticproductinthatcategory.
Whenthepriceofanimportfalls,forexample,themodelmayindicateacertainamountofsubstitutionofthatimportforthedomesticproductwhen,infact,they10Examplesofreal-worldcomplexitiesthataredifficulttoreflectinthemodelincludethechangingrelativegrowthofdifferenteconomies;politicallymotivatedexport-orientedinvestment;relationshipsbetweenmultinationalsubsidiariesthatinfluencetradepatterns;andsuchthingsascatastrophicweatherorviolencethatareinherentlyunpredictable(atleastintheirdetails).
E-8arenotclosesubstitutes.
Inthiscase,themodelwouldoverstatetheeffectofagivenaveragepricegapremoval.
11Despitetheselimitations,thesimulationsperformedherecanbequiteusefulinprovidinginsightsontheeffectsofKoreanNTMsforU.
S.
exportsofpassengercars.
Themodelpresentsaunifiedframeworkinwhichtoassessthelikelyeffectsofthepolicy.
11Thistypeofbiasisreducedinempiricaltrademodels,suchastheGTAPmodel,thatapplytheArmingtonassumption,whichtreatsproductsfromdifferenteconomiesasimperfectsubstitutes.
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