(Washington D.C.)- {U.S. Rep. Sander Levin (D-MI), Chairman of the House Ways and Means Trade Subcommittee, made the following statement today at the International Trade Commission:

Honorable Sander Levin, Chairman
Ways and Means Trade Subcommittee

International Trade Commission
June 20, 2007

Testimony As Prepared for Delivery

The negotiation of the U.S. - Korea Free Trade Agreement is indeed significant.  Korea is the United States’ seventh largest trading partner and the world’s eleventh largest economy.  The U.S.-Korea FTA is the largest and most commercially significant bilateral FTA negotiated by the Bush Administration.

For policy-makers, the U.S. Korea FTA is a key test of the approach we take to trade policy.  It is a test of whether we need to shape the terms of expanded trade or assume, no matter how unbalanced, that leaving it alone to work out on its own is the best approach.  It is a test, specifically, of whether we will be active, or passive in the face of long-standing, harmful practices of the Korean government to discriminate against our products in their domestic market.  It is a test of our willingness to stand up for our domestic industry.

The role of the International Trade Commission (ITC) is a vital one, in that you are charged with providing independent analysis of the economic impact of the recently concluded trade agreement with South Korea.  You have evaluated this trading relationship for many years, including in the 2001 report, U.S.-Korea FTA: The Economic Impact of Establishing a Free Trade Agreement (FTA) Between the United States and the Republic of Korea.  As the ITC has itself documented  in its numerous analyses of Korean trade practices,  the Korean government has established and managed an economic iron curtain against all imported autos, using a powerful and extremely effective combination of tariffs, prohibitive and discriminatory taxes, and regulations designed specifically for the purpose of keeping imports out.
 
The facts tell the real-life story.  Korea is the fifth largest producer, and the ninth largest consumer automotive market in the world.  We now have an $11 billion deficit in automotive trade which is 87% of the total deficit between our two countries.  Last year, Korea sold 700,000 vehicles in the U.S.; the U.S. sold only 4,556 in Korea.

It is important when evaluating this level of import penetration, to look at the figures for other nations.  The average level of automotive imports in the 30 OECD countries is over 40%.  Korea’s auto import rate of 3.6% puts it at 30th out of 30, or the bottom of all OECD countries.
 
Today, you will hear compelling testimony on the history of our trading relationship with Korea in the automotive sector.  You will hear from Ford Motor Company which has tried to break through the Korean market about the extensive use of discriminatory tax structures and non-tariff barriers used by Korea to keep its auto market closed. 

We also know through experience – two previous Korean formal automotive trade agreements that the United States called the 1995 and 1998 “Memorandums of Understanding” (MOUs)  – that it is very difficult to move the Koreans to end these non-tariff barriers to U.S. exports.

Against this backdrop, I believe the FTA as negotiated will simply lock in a structure of one-way trade between the two industrialized nations and allow the Korean auto industry to continue an export driven strategy using the profits from their protected home market to fund R & D and broader incursions into the US and other major markets.  It is the wholesale acceptance of this completely  imbalanced and  damaging trade model that the US has actually rewarded in this FTA that I find so damaging and so dangerous.

Discriminatory Taxes

Korea has long used its tax structure to discriminate against imported vehicles.  The FTA reduces – but does not eliminate – two discriminatory taxes and leaves a third tax completely intact.

The Industry Trade Advisory Committee to USTR and U.S. auto companies have long recommended that we negotiate an end to Korea’s use of engine displacement as a basis for accessing its unusually high automotive taxes.  Three of Korea=s eight automotive taxes are based on engine displacement, which disproportionately falls on U.S. vehicles and other imports with larger engines.  The final agreement only modifies two of these taxes by reducing the number of displacement categories or tiers and lowering some tax rates.  The modifications to the consumption tax phase in over three years and the modifications to the annual vehicle registration tax – while immediate – continue to place U.S. exports in the highest category – a category 40% higher than the one that applies to most Korean automobiles.

As to the discriminatory subway bond tax, it is not eliminated, but simply capped at current levels.  We all know from the personal experience of carrying rebate receipts around in our wallets until they expire, that any additional effort by the Korean government to publicly advertise this rebate to consumers will not mitigate the upfront impact of paying the tax.

Existing Non-Tariff Barriers

During the course of the negotiations, four existing non-tariff barriers were identified by the auto industry.  The result was not elimination, but delay of one onerous discriminatory regulation, delay of another with an exemption dependent on a low volume of sales, an artificial resolution of the third and no handling of the fourth.

On-Board Diagnostics (OBD II) regulation – The FTA simply delays the phase in for compliance, it does nothing to change the fact that the Korean OBD applies a different testing regime than the U.S. OBD regulation so U.S. companies will have to pay for expensive new tests just for this market.
 
Self-certification safety standards – Again, the recommendation was to eliminate, but the Agreement provides only a two-year moratorium and an exemption dependent on a low volume of sales.  If you sell less than 6, 500 units you can meet the U.S. standards, if you sell more than 6,500 units you would have to comply with unique Korean standards that contain within them 42 different regulations.

Low Emission Vehicle regulation – The recommendation was to ensure that vehicles certified for sale in California be deemed in compliance with Korean emissions requirement.  The FTA harmonizes with the California regulation but the fleet averaging provision implemented for an auto company’s much smaller Korean fleet would have a very different impact.

Insurance regulation – USTR refused to address a new discriminatory practice by Korean auto insurance policies that arbitrarily place imported vehicles in the highest risk classification.  The result is that owners of imported vehicles will pay the highest premium possible for their auto insurance.

USTR also includes on its list of accomplishments that the FTA re-states the same ineffective commitments of previous agreements:

Technical Barriers to Trade (TBT) – The agreement contains a commitment to abide by the WTO’s TBT agreement.  These provisions are either identical to the MOU commitments or the WTO TBT agreement, both of which have failed to provide effective mechanisms to open Korea’s highly protected auto market.  This is not a breakthrough. 

Anti-import bias – The FTA uses hortatory language similar to the MOUs that neither party will discourage purchase of goods or services of the other parties.  Korea did not comply before and there is no reason to think that it will now.

The claim by USTR in its fact sheet that the “agreement contains a comprehensive package of unprecedented provisions that will ensure the Korean market is open to U.S. automobile manufacturers” seems incredulous upon examination beneath the surface of these provisions and is made even worse by the ineffective mechanism for dispute settlement.

Dispute Settlement

Since the FTA was concluded, USTR has heralded as “innovative” the dispute settlement system for auto-related measures.  Indeed, the only thing “innovative” about it might be that the expedited structure assures failure sooner.  The dispute settlement system requires the U.S. to demonstrate both “nullification and impairment of expected benefits” and that the measure at issue has “materially affected the sale” of U.S. automotive products.  This will make it even more difficult to win a case than it is to win a case under WTO dispute settlement rules.  In addition, the heralded Asnap back@ is limited to the reimposition of the 2.5% auto tariff and incredulously does not include the meaningful 25% pick-up truck tariff.   And, if the dispute settlement mechanism is not used successfully within ten years, it goes away completely.

By contrast, the bi-partisan Congressional Proposal to Open Korea’s Automotive Market contained a truly innovative approach to Korea’s revolving sets of hurdles and pervasive web of obstacles – a dispute settlement system with a reverse burden of proof so that U.S. companies could get relief based upon reasonable evidence of a discriminatory measure while the Koreans had the burden to establish that the measure did not exist or does not operate to afford protection to a domestic industry in Korea.

Future Non-Tariff Barriers

The FTA creates an “automotive working group” tasked with providing a “specialized early warning system to address regulatory issues that may develop in the future.”  The reality is this group is not mandated to meet even once, and most of its monitoring tasks appear to be discretionary based on the repeated use of the word, “should” to describe its responsibilities.

It is vital that the ITC and others take a hard look at the results of the negotiations because I believe the approach taken by USTR toward these negotiations was fundamentally flawed from the onset.  Their approach resulted from a combination of factors, based on all of the evidence I can glean from key parties, including Congressional hearings and my own conversations with USTR during the course of the negotiations.

The first factor appeared to be an indifference and ignorance about domestic manufacturing.  USTR contended in our discussions that the 2.5% tariff meant little to Korea because more and more Korean production was shifting to the U.S.    This flew in the face of numerous public comments by Korean government officials that one of their top priorities in the whole negotiation was the immediate elimination of US automotive tariffs. Of course, this position by USTR also ignores the Japanese experience where domestic production has not replaced exports to the U.S. and it ignores the high level of Korean content in cars assembled here.  It also completely discounts that advantage that our competitors draw from protecting their home markets and investing these huge profits into research and development.

There was also no one person within the higher echelons of USTR with a background in the motor vehicle or other manufacturing industries and I have heard from several sources that the one person designated to negotiate the auto sector was shut out of the final negotiations.  Astonishingly, after the agreement was noticed and USTR continued to negotiate several key details, including tariff schedules, they were unaware that U.S. companies produce hybrid automobiles.

The second factor appeared to be a callous calculation about the type of votes necessary for passage of this bilateral FTA.  Beef, rice, autos – all being played off one another in the search for votes.  We were told that the 25% pick-up truck tariff – an issue far too important and sensitive to be handled in any bilateral negotiations rather than the WTO round – could not be taken off the table because the Koreans wanted to take rice off the table.  What happened?  Rice is off the table, and the truck tariff is on the chopping block.  The beef issue was simply punted allowing Korea to show magnanimity at a later date to boost chances for passage of the FTA.

In my judgment, we needed a very different approach.  An approach based on our keen knowledge of how the Korean automotive market has been built on a government directed industrial policy based on maintaining a closed market and driven by our desire to standup for domestic manufacturing.  At the beginning of March, a broad, bi-partisan group of legislators transmitted to the President a specific negotiating position that moved beyond previous negotiating strategies and embarked on a new approach that conditions Korea obtaining additional access to the U.S. market on reciprocal opening of the Korean automotive market.  Each of the Big 3 was solidly behind this innovative approach.

I am afraid that USTR’s knee jerk negative reaction that this proposal was somehow “managed” trade was driven by blind ideology and not the need for an effective trade policy in a globalizing economy.  USTR never suggested a formula of its own to be certain to address what was the true industrial policy – Korean’s closed market.  Perhaps it rejected ideas supported be all three domestic companies because at the end of the day they knew that GM’s majority ownership of a Korean auto company would neutralize its opposition.

By giving away the 2.5% auto tariff and negotiating down the 25% pick-up truck tariff without linking it to concrete results in assuring the end of Korea’s unfair non-tariff barrier structure, USTR has locked in the status quo and worse in Korea.  Korean automakers win $217 million in auto tariff reductions from the FTA while tariff reductions for U.S. automakers amount to just $12 million.  In addition, press reports have already detailed Korean intentions to jumpstart pick-up truck production to take advantage of the bi-lateral phase out of this meaningful tariff.

The U.S.- Korea FTA also sets a horrible precedent for future bilateral trade agreements in the region and especially in the negotiations ongoing in the World Trade Organization.  I am certain that other trading partners will be using the deal that Korea got to secure the same for themselves.  The failure to effectively address Korean non-tariff barriers completely undercuts the already moribund effort in the WTO to meaningfully address barriers and other issues in the entire global trading system that seriously disadvantage American businesses and workers in manufacturing and other sectors.

Thus, I urge you to take great care in assessing the economic impact of the provisions concerning Korean NTBs covering these products.  In particular, you should recall that Korea in previous WTO agreements (such as the Agreement on Technical Barriers to Trade) and in bilateral agreements with the United States already agreed to eliminate discriminatory taxes and other “unnecessary obstacles to trade”.  Any economic assessment of those past agreements already would have taken those commitments into account.  To the extent Korea has once again committed itself to stop imposing non-tariff barriers on U.S. exports, those commitments merely duplicate existing commitments – commitments Korea has failed to honor.  The ITC’s economic assessment should take that history into account.

Congress will have to consider all of these issues after the ITC completes it work.  As we seek to set a new course for U.S. trade policy, this FTA’s complete acquiescence to one-way trade is unacceptable and does not merit the support of Congress.  It must be re-negotiated.

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