ion>The ambitious Trans Pacific Partnership (TPP) is edging towards a vote in the US Congress in 2015 or early 2016. But tariffs on the export of motor vehicles could put the brakes on the TPP. Last November, Chinese President Xi Jinping and South Korea’s Park Geun-hye signed a preliminary agreement on free trade between their two Asian economic powerhouses. Conspicuously absent in the deal is the auto trade. The accord follows a free trade agreement between the US and South Korea, one which took effect in 2012. The biggest exception to an immediate lifting of tariffs, and one the Obama administration insisted on: cars and trucks.
Nissans roll off the Genuine Ace at the Port of Virginia
Nissans roll off the Genuine Ace at the Port of Virginia
The US, Canada and ten Asia-Pacific nations, including Japan but not China, are negotiating an even more ambitious free-trade regime. If all goes well for the Obama administration – and it rarely does in Washington these days – the US Congress could vote on the Trans Pacific Partnership, or TPP, by the end of 2015 or early 2016. The major remaining sticking point? You guessed it: vehicles. “We’re afraid if the TPP isn’t structured properly, it can undo some of the incentives to build [vehicles] in the US,” says Scott Paul, president of the Alliance for American Manufacturing. Adds Brad Markell, executive director and AFL-CIO Industrial Union Council, and admittedly not the most objective of observers. When it comes to auto manufacturing, “the TPP is shaping up for being a train wreck.” For decades, the auto and truck industry has assumed a prodigious importance throughout Northern Asia and across the Pacific, and for good reason. It remains a gigantic business. Worldwide auto sales last year topped 71 million, of which more than 70% were in Asia and North America, according to data aggregator Statista Inc. Asian car sales are now almost double that of the US, with China the biggest and fastest growing market. Vehicles remain one of the largest components in trans-Pacific trade. In the Port of Los Angeles, for example, motor vehicles and motor vehicles parts constitute the two biggest import categories. Together they accounted last year for more than $20 billion, or almost 10% of total business. It’s a big and highly visible sector that continues to draw out nationalist fervor, protectionist tendencies and just a whole lot of finger wagging. No wonder that autos are such a critical component in trade negotiations. The auto sector has “always been an outsized presence in free trade agreements,” says Arthur Bodek, a partner specializing in trade law at Grunfeld Desiderio Lebowitz Silverman and Klestadt LLP. However, the lines in this economic battleground are lot harder to define than they were in the 1980s when the US and Japan first knocked heads on the issue and when they fashioned “volunteer” quotas that led to Japanese factories in the US. American-made Toyotas are now exported to South Korea. The Buick Encore, a small SUV, contains almost 90% Korean and Chinese content, according to the National Highway Traffic Safety Administration. The vehicles trade map that crisscrosses Asia and winds its way across the Pacific will get even more complex in the years ahead. While Japanese and Korean car companies stand as the most immediate trans-Pacific rivals to America’s Big Three, China’s auto – and more critically auto parts – industry looms large. Trade flows are shifting along with manufacturing and ownership interests. Just Witness This: Later this year, the first batch of Chinese-made cars is expected to reach American shores. It won’t be the Brilliance, Wuling or Chery. Rather it will be a Volvo sedan. Volvo is now owned by China’s Zhejiang Geely Holding Co. “The more likely scenario is that brand-name vehicles assembled in China rather than Chinese brands will start to be imported into the US,” says Edward Alden, a senior fellow at the Council on Foreign Relations. In a similar fashion, when negotiating the trade deal with China, South Korea was most concerned about being flooded with Chinese-made vehicles. But Korean carmakers don’t feel threatened by cheap Chinese domestic brands like the Great Wall Coolbear or Geely Panda, at least not yet. Instead, they fear that European brand names like Volkswagen, BMW and Mercedes Benz would roll out of Buson and Pyungtaek without having to pay duties, since they are all now made in China. Korean manufacturers themselves have embraced China, now the fastest growing vehicle market in the world. Hyundai is China’s second most popular brand, after VW. Late last year, it announced it would build two new factories in China, in addition to the three now operating. Hyundai affiliate KIA said it would expand capacity of one of its three factories. Together, the two anticipate capacity of 2.7 million vehicles by 2018. Hyundai Motors now sells more cars in China than in its home country or in the US. Critics of both the US-Korea FTA and the TPP are particularly concerned that Chinese auto parts makers will use Korea, Japan or Southeast Asian countries like TPP member Malaysia as a kind of back-door, duty-free entry into the United States, moving Chinese-made components first into other Asian countries before they are assembled and shipped to the US. That’s already happening with Korean cars, says Markell. “The opportunity for Chinese parts to flow through the TPP is huge,” says Adam Hersh, a senior economist at the Center for American Progress and a China specialist. While the TPP is being touted as a kind of counter to Chinese economic ascendency, when it comes to vehicles, China could actually benefit from the agreement, critics charge. The Chinese government began emphasizing the auto industry in the mid-1980s as a pillar of the country’s economy. During the current five-year plan, which ends this year, Beijing’s economic planners have emphasized consolidation of the auto and auto-parts industry as well as R&D designed to improve the quality as well as focus on energy-saving technologies such as batteries. Chinese manufacturers have acquired some American and European auto parts makers and gathered technology through mandatory joint ventures with others. China, says a 2013 Congressional Research Service study on the industry, seeks to not only make individual parts but become systems integrators of complex assemblies. China’s push comes as the global auto parts industry undergoes a huge transformation. “There’s a trend toward standardization, which is more efficient,” explains Hersh. “The industry is consolidating and it’s going to consolidate even more. The question is where is it going to happen.” The US imported about $16 billion worth of auto parts from China in 2013, the latest figures available from the Census Department. That figures pales in comparison to, say, Chinese electronics imports. But it’s almost triple the size it was just five years ago. It already equals that of Japan and analysts believe it could begin to rival leading exporter Mexico by the end of the decade. “The growth of Chinese auto parts exports has been spectacular,” says Markell. Add to all this long-standing friction a variety of non-tariff barriers that remain in Japan and South Korea after decades of fights. They include regulations related to everything from emissions control to vehicle distribution. Currency disputes have also become prominent again recently. The Japanese yen has declined against the dollar by more than half in three years, making Japanese-made vehicles much more competitive. Japan, which is trying hard to maintain its domestic car industry, in 2013 exported almost $38 billion worth of cars to the US. “There’s gross imbalance,” says Paul. “Japan still exports 1.4 million vehicles to the US, while our vehicle exports to Japan are 20 or 25,000.” For the US, one leverage point is a decades-old tariff on trucks. While cars imported into the US carry with them only a 2.5% duty, light trucks are assessed 25%. That’s the result of an old retaliatory tariff imposed in 1964 by then-President Lyndon Johnson against France and Germany, which had taxed American chickens. The so-called “chicken tax” remains. It has kept imported light trucks to a minimum and insured that The Big Three’s biggest profit center remains intact. With South Korea, a standard 2.5% duty on cars will be lifted next year. The much steeper duties on trucks imported into the US won’t be fully done away with until 2021. For the TPP to pass Congressional muster, it could have an even longer phase-out period, with some suggesting as much as 20 years. Bodek predicts “if the TPP follows the model of other trade issues,” vehicle imports will have their own timetable separate from the rest of the agreement. “It’s probably the hardest issue remaining in [TPP] negotiations,” says Alden.