Europe Auto Makers Seek to Revise Korea Trade Deal

European auto makers have begun a lobbying effort aimed at revising a free-trade agreement that has led to a substantial increase in imports of Korean-made vehicles.

A new trade agreement between the European Union and South Korea went into effect in July, eliminating an up to 10% tariff in two steps. Vehicle imports from Korea rose 67% to 341,633 in the nine months through March and are on track to reach about 200,000 cars in the 12 months since the accord went into effect, according to the South Korea Customs Office.

That increase would be roughly equivalent to the output of one assembly plant for one year. Meanwhile, exports of European-made cars to Korea rose just 7% to 57,569 in that period.

South Korea’s trade ministry on Thursday declined immediate comment on the auto makers’ concerns. An official at the Korea Automobile Manufacturers Association, which represents the nation’s auto makers, said the increased imports were due to the high quality, improved brand awareness and price advantage of Korean autos.

The surge in imports of Korean-made vehicles comes at a time of trouble for many European auto makers. With the Continent’s economy wracked by a financial crisis, auto sales are on track to decline in 2012 for a fifth consecutive year. The slump has left aAuto makers including Fiat SpA, F.MI -1.01%Renault SA RNO.FR +0.83%and the European operations of Ford Motor Co. F -1.62%and General Motors Co. GM -2.44%are mired with excess production capacity as well as losses or declining profits.

Several auto company executives met last week in Brussels to discuss the trade agreement with Korea and how they should respond to the import increase. “The meetings led to some positive developments on nontariff barriers in the automotive sector,” said Helene Banner, an EU spokeswoman. It was the inaugural annual gathering to review the agreement and try to make adjustments as needed.

On its own, Ford has been making private pleas to the leaders of different EU nations, including the new prime minister of Spain, Mariano Rajoy, a company spokesman said.

“I believe that we should reinvestigate” the trade agreement, Ford’s European head, Stephen Odell, said in a telephone interview. “I don’t think we can accept that it is water under the bridge.”

Mr. Odell said the European auto industry has the capacity to produce 20 million to 22 million vehicles a year in Western European plants, but sales will only reach about 14 million cars this year.

“That’s pretty tough to make an adequate return. That is made more difficult when you have an unbalanced free-trade agreement already in place,” Mr. Odell said.

Many auto makers would like to close plants but face opposition from governments and unions because of job losses. European labor laws also make it expensive and time-consuming to lay off workers.

Ford, which has an 8.5% share of the European market, reported a $149 million loss in Europe for the first quarter. GM is expected to show a loss in Europe when it reports its first-quarter earnings on Thursday. In the fourth quarter of 2011, GM’s European operations lost $600 million.

GM makes cars in European factories and imports vehicles to Europe from its Korean unit, mainly for its Chevrolet brand, which is growing rapidly in Europe.

“The company intends to maintain its historical manufacturing philosophy of building vehicles in the markets in which it sells,” said Greg Martin, a GM spokesman. “As such, GM hopes the EU-South Korea FTA promotes free trade between both regions, which are vitally important to GM’s global business.”

Sergio Marchionne, who serves as chief executive of both Chrysler Group LLC and its majority owner, Italy’s Fiat, said the influx of Korean-made cars puts additional pressure on European auto makers while they grapple with their overcapacity problems and the difficulties of streamlining.

“This issue of free-trade agreements needs to be looked at very, very carefully,” Mr. Marchionne said last week.

 The U.S. also recently put in place a free-trade agreement with Korea, but it includes a “snap-back” provision that allows the countries to reimpose tariffs if the flow of exports becomes too one-sided.

Ford’s Mr. Odell said he would like the European Union work to add a snap-back clause with its agreement with Korea. If that can’t be done, European governments should “not stand in the way of those companies needing to restructure to meet demand and should consider facilitating it.”

Auto makers also plan to push the EU and national governments to write a snap-back provision into trade deals now being negotiated with India and Japan.

Adding trade agreements with India and Japan without a snap-back clause would “exacerbate a pretty difficult situation in Europe,” Mr. Odell said.

South Korea’s Hyundai Motor Co., has seen its sales skyrocket in Europe while most auto makers have recorded plummeting sales. Hyundai reported sales growth of 12.5% in the first quarter, according to the European Automobile Manufacturers’ Association. While the overall region is down 7.3%. GM, saw sales fall, but its Chevrolet brand—made up mostly of Korean-made cars—rose 11.3%. Kia Motors Co., also based in South Korea, was up 24.6%.

Source: The Wall Street Journal


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