United States International Trade Commission

Investigation No. 332-523

USITC Publication 4220

March 2011

U.S.-Korea Free 

Trade Agreement: 

Passenger Vehicle 

Sector Update 
Address all communications to 

Secretary to the Commission 

United States International Trade Commission 

Washington, DC 20436

U.S. International Trade Commission

Karen Laney

Acting Director of Operations

Michael Anderson

Acting Director, Office of Industries

COMMISSIONERS 

 

Deanna Tanner Okun, Chairman 

Irving A. Williamson, Vice Chairman 

Charlotte R. Lane 

Daniel R. Pearson 

Shara L. Aranoff 

Dean A. Pinkert
U.S. International Trade Commission

Washington, DC 20436 

www.usitc.gov

Publication 4220 March 2011

U.S.-Korea Free Trade Agreement: 

Passenger Vehicle Sector Update 

Investigation No. 332-523
This report was prepared principally by the Office of Industries 

Project Leader 

Brian Allen 

brian.allen@usitc.gov

Office of Industries 

David Coffin, Deborah McNay, and Linda White 

Office of Economics

Michael Ferrantino, Danielle Trachtenberg, and Marinos Tsigas 

Content Reviewers 

Nannette Christ and John Giamalva 

Administrative Support 

Phyllis Boone, Brenda Carroll, and Monica Reed 

Under the direction of 

Dennis Rapkins, Chief 

Chemicals and Textiles Division 
i

CONTENTS 

Page

Executive Summary................................................................................................ iii

Introduction..................................................................................................................... 1

Effect of Changes to U.S.-Korea FTA on the 

Passenger Vehicle Sector................................................................................... 1

 Assessment......................................................................................................................... 1 

 U.S. exports........................................................................................................................ 2 

 Simulation results........................................................................................................ 4 

 Korean passenger vehicle market................................................................................ 6 

 Changes to the 2007 FTA provisions in the accompanying agreement ...................... 7 

 U.S. imports ....................................................................................................................... 10 

 Changes in the U.S. passenger vehicle industry.......................................................... 10 

 Effects of tariff removal .............................................................................................. 12 

 Safeguards ................................................................................................................... 13 

Bibliography.................................................................................................................... 15

Appendixes 

A. Request letter............................................................................................................................ A-1 

B. Federal Register notice ............................................................................................................ B-1 

C. Legal text of the agreement and Agreed Minutes accompanying the U.S.-Korea Free 

 Trade Agreement................................................................................................................... C-1 

D. Summary of positions of interested parties .............................................................................. D-1

E. Description of possible nontariff measures analysis and simulation of the absence 

 of NTMs................................................................................................................................ E-1 

Box 

1. Potential price and quantity effects of Korean NTMs on imports of certain U.S. 

 passenger cars...................................................................................................................... 5 

Figure 

1. Korean imports of passenger vehicles, by trading partner, 2006–10 ....................................... 7 
ii

CONTENTS–Continued

Page

Tables 

1. Changes to FTA provisions related to U.S. exports of passenger vehicles to Korea......... 3 

2. Korea: Passenger vehicle market, by source; U.S. producer imports; and imports 

 from the United States, in units, 2006–10..................................................................... 6 

3. Changes to FTA provisions related to U.S. imports of Korean passenger vehicles .......... 11 

4. U.S. passenger vehicle market and sales by Korean producers, in units, 2006–10 ........... 12 

E-1. Specification of sensitivity analysis: Range of parameters in Korean final demand 

 for passenger cars.......................................................................................................... E-6 

E-2. Simulated effects for Korean imports of U.S. passenger cars from the removal of 

 the 7.5 percent price gap that could be attributed to Korean NTMs under 

 different values for selected parameters in Korean final demand................................. E-6 
iii

Executive Summary 

On February 10, 2011, the United States and the Republic of Korea (Korea) exchanged 

the legal texts reflecting the agreement they concluded on December 3, 2010, to modify 

certain provisions of the 2007 U.S.-Korea Free Trade Agreement (FTA) regarding the 

passenger vehicle sector. 1

 These texts (hereinafter referred to as the “accompanying 

agreement”), as noted in the letter requesting this report, are to provide additional market 

access for U.S. exports to Korea, in particular by addressing nontariff measures (NTMs) 

affecting U.S. exports. This report updates the Commission’s 2007 assessment of the 

likely impact of the FTA on the U.S. passenger vehicle sector. The report focuses on the 

impact of the accompanying agreement and provides additional analysis of the effects of 

the reduction or removal of NTMs. 

U.S. exports of passenger vehicles to Korea would likely rise significantly in the long 

term under the provisions of the 2007 FTA as modified by the accompanying agreement. 

The probable increase in U.S. exports results primarily from three factors: (1) the 

immediate reduction (from 8 percent to 4 percent) and eventual elimination of Korean 

tariffs on passenger cars during the first five years of the FTA’s implementation, (2) a 

substantial increase in the number of U.S. passenger vehicle exports to Korea that would 

be deemed compliant with Korean safety standards, and (3) changes to the qualification 

requirements for Korean imports of U.S. passenger vehicles to meet Korean 

environmental standards. Any increase in U.S. exports of passenger vehicles to Korea is 

likely to be tempered by the longer phase-in period under the accompanying agreement 

for the elimination of Korean tariffs, as compared with the 2007 FTA, and may be 

affected by Korean market preferences. In this report, the Commission’s economic 

simulation estimates that removal of Korean NTMs that affect U.S. exports of passenger 

cars could lead to an increase in U.S. exports of $48–66 million (41–56 percent). 

The Commission’s 2007 report included the results of its economic simulations of the 

effects on the broader motor vehicles and parts sector of implementing the 2007 FTA. 

The changes in the tariff staging in the accompanying agreement do not affect the results 

of the economic simulation because the Commission’s simulation applies only to the full 

implementation of the FTA. Although the trade effects that are estimated by such 

simulations tend to be reasonably stable in terms of percentage changes, the estimated 

effects in terms of changes in dollar value can be sensitive to annual changes in trade 

flows. Therefore, differences between the 2007 estimated effects and the effects 

estimated in the current update are not the result of changes in the FTA’s passenger 

vehicle tariff provisions, but rather stem from changes to the economic environment (e.g., 

the recent economic downturn) and declines in trade flows in 2009 (the absolute volume 

of trade in motor vehicles and parts between the United States and Korea was 30 percent 

lower in 2009 than in 2007). 

Using 2009 data, the Commission’s economic simulation of the broader motor vehicles 

and parts sector estimates that implementing the 2007 FTA would likely lead to an 

increase in U.S. sector exports to Korea of $194 million (a 54 percent increase); this 

estimated percentage increase is similar to the 2007 Commission estimate (46–59 

percent), whereas the estimated dollar-value increase in this update is lower, reflecting 

the economic downturn and reduced trade flows of 2009. 

 1

 The signed texts consist of (1) an exchange of letters containing new commitments for the motor 

vehicle sector, (2) Agreed Minutes on regulations pertaining to motor vehicle fuel economy and greenhouse 

gas emissions, and (3) Agreed Minutes on intracompany transferee (L-1) visas. 
iv

U.S. tariffs on imports of Korean passenger vehicles also will eventually be eliminated 

under the FTA. The effect of the FTA on U.S. imports of these goods will likely be less 

pronounced in terms of percentage increase in the short term than in the case of Korean 

imports of U.S. passenger vehicles. There are three reasons for the difference: (1) the 

U.S. tariff elimination for passenger cars will be implemented only in the fifth year of the 

FTA’s implementation, with no reduction in the interim; (2) current U.S. tariffs on 

passenger vehicles are already lower (2.5 percent) than Korean tariffs (8 percent) on these 

goods; and (3) passenger car production by Korean manufacturers in the United States 

may increase as a result of capacity expansion. The Commission’s economic simulation 

estimates that U.S. imports from Korea of products in the broader motor vehicles and 

parts sector would likely rise by $907 million (11 percent) following implementation of 

the 2007 FTA, including removal of U.S. passenger vehicle tariffs; this estimated 

percentage increase is similar to the 2007 Commission estimate (9–12 percent), whereas 

the estimated increase in dollar value in this update is lower, again reflecting the 

economic downturn and reduced trade flows of 2009. 
1

Introduction 

This report, requested by the U.S. House of Representatives Committee on Ways and 

Means (Committee) in a letter dated January 27, 2011,1

 updates a 2007 U.S. International 

Trade Commission (Commission) assessment regarding the likely impact of the U.S.-

Korea Free Trade Agreement (FTA) on the U.S. passenger vehicle sector. 2 The 

Committee requested that the Commission update its 2007 assessment of those FTA 

provisions affecting the passenger vehicle sector, to reflect any changes affecting only 

that sector as detailed in the accompanying agreement to the 2007 FTA, dated February 

10, 2011 (hereinafter referred to as “the accompanying agreement”).3

 The Committee 

also asked that the Commission include an economic simulation of the effects of nontariff 

measures (NTMs) affecting the passenger vehicle sector in its report. The Committee 

requested that the Commission provide its report by March 15, 2011. 

The Commission’s 2007 assessment of the likely impact of the FTA on the U.S. 

passenger vehicle sector was part of a comprehensive report that the Commission 

transmitted to the President and the Congress in September 2007. Following a public 

hearing and receipt of information from multiple sources, that report assessed the likely 

impact of the 2007 FTA on the U.S. economy as a whole, on specific industry sectors, 

and on U.S. consumers.4

The information and data in the present report were gathered primarily from public 

sources, submitted written comments, and interviews.5

 The Commission did not hold a 

public hearing for the receipt of information because of the short time frame requested by 

the Committee for the report’s delivery. The report includes published data and 

information available through February 2011. 

Effect of Changes to U.S.-Korea FTA on the 

Passenger Vehicle Sector

Assessment 

In the long term, when the FTA has been fully implemented, U.S. exports of passenger 

vehicles to the Republic of Korea (Korea) would likely increase significantly as a result 

of modifications to provisions in the 2007 FTA agreed to in the accompanying 

 1

 For a copy of the letter requesting this report, see appendix A. For a copy of the Federal Register notice 

instituting the investigation to produce this report, see appendix B. 2

 For the purposes of this study, “passenger vehicles” includes cars (classifiable in Harmonized System 

[HS] subheadings 8703.21, 8703.22, 8703.23, 8703.24, 8703.31, 8703.32, 8703.33, and 8703.90) and light 

trucks (HS subheadings 8704.21 and 8704.31). 3

 For a copy of the legal text of the accompanying agreement and related Agreed Minutes, see appendix 

C. For information on the passenger vehicle–related provisions in the FTA that were not changed by the 

accompanying agreement, such as those concerning purchase and ownership taxes, see USITC, U.S.-Korea 

Free Trade Agreement, 2007. 4

 USITC, U.S.-Korea Free Trade Agreement, 2007. 5

 For summaries of the public submissions for this report, see appendix D. 
2

agreement. 6 The specific changes contributing to this expected growth include an 

increase in Korean import limits per U.S. manufacturer for vehicles that meet U.S. safety 

standards, and changes in qualification benchmarks for U.S. vehicles with regard to 

Korean environmental standards.7

 

The elimination of Korean import tariffs on passenger vehicles agreed to under the FTA 

would also contribute substantially to an increase in U.S. exports of passenger vehicles to 

Korea. However, the accompanying agreement applies a two-step phase-in period to the 

tariff elimination; the tariff will fall from 8 percent to 4 percent upon entry into force and 

be reduced to free in the fifth year after implementation of the FTA. The phase-in will 

delay the full impact of the FTA on U.S. exports beyond the short term. 

The accompanying agreement also delays the phase-in period for eliminating U.S. tariffs 

on most imports of Korean passenger vehicles. This change is likely to minimize the 

impact of the FTA on U.S. import levels in the short to medium term. U.S. imports of 

passenger cars from Korea would likely increase upon complete elimination of the 

2.5 percent tariff in the fifth year after the FTA enters into force. However, the impact of 

removal of the 25 percent tariff on light trucks is less clear, because Korea is currently 

not a leading manufacturer or exporter of light trucks. 

U.S. Exports 

The 2007 FTA and the accompanying agreement address certain tariff and tax measures, 

as well as NTMs, that have impacted market access for U.S. exports of passenger 

vehicles to Korea,8

 and prescribe a system for consultation and dispute settlement on 

related issues (table 1). The resulting staged reduction and eventual elimination of tariffs 

on U.S. passenger vehicle exports to Korea, along with changes to policies that 

previously acted as NTMs affecting these exports, could lead to a significant increase in 

U.S. exports, according to the Commission’s economic simulations. Much of the increase 

in the early years of the FTA’s implementation will likely be in passenger cars, as U.S. 

exports of light trucks to Korea were quite small in 2010.9

 This early increase is unlikely 

 6

 For the legal texts examined in this updated assessment, see USTR, “Final United States–Korea FTA 

Texts,” 2007; USTR, “Exchange of Letters between U.S. Trade Representative Kirk and Korean Trade 

Minister Jong-Hoon Kim,” February 10, 2011; USTR, “Agreed Minutes on Regulations,” February 10, 2011. 

On February 10, 2011, the United States and Korea exchanged the legal texts reflecting the agreement 

they concluded on December 3, 2010, to modify certain provisions of the 2007 FTA. The signed texts consist 

of (1) an exchange of letters containing new commitments for the motor vehicle sector, (2) Agreed Minutes 

on regulations pertaining to motor vehicle fuel economy and greenhouse gas emissions, and (3) Agreed 

Minutes on intracompany transferee (L-1) visas. For a copy of the legal text of the accompanying agreement 

and related Agreed Minutes, see appendix C. 7

 Various provisions of the FTA are intended to address some of the NTMs affecting Korea’s market for 

passenger vehicles, including provisions in chapter 2 (“National Treatment and Market Access for Goods”), 

chapter 9 (“Technical Barriers to Trade”), the confirmation letter on specific auto regulatory issues, and 

annex 22-B of the chapter on institutional provisions and dispute settlement, concerning alternative 

procedures for disputes concerning automotive products. Provisions addressing passenger vehicle–related 

NTMs are also a main component of the accompanying agreement dated February 10, 2011. 8

 USITC, U.S.-Korea Free Trade Agreement, 2007, 3-75 to 3-78; industry officials, interview by USITC 

staff, Washington, DC, February 3, 2011; industry officials, interview by USITC staff, Washington, DC, 

February 4, 2011. 9

 The United States exported 135 light trucks to Korea in 2010, which was 0.04 percent of total U.S. light 

truck exports in that year. USITC, DataWeb (accessed March 3, 2011). 
3

TABLE 1 Changes to FTA provisions related to U.S. exports of passenger vehicles to Korea

Provision Original (2007 FTA) New (accompanying agreement) 

Cars (HS subheadings 8703.21, 

8703.22, 8703.23, 8703.24, 8703.31, 

8703.32, 8703.33) 

Immediate tariff reduction from 

8 percent to free 

Immediate tariff reduction from 

8 percent to 4 percent and reduction 

to free in the fifth year on all 

subheadings 

Cars with neither spark or 

compression ignition engines (e.g., 

electric cars) (HS subheading 

8703.90) 

Tariff reduced from 8 percent to free 

in 10 equal annual stages 

Immediate tariff reduction from 

8 percent to 4 percent, then reduction 

by 1 percent annually until free in the 

fifth year 

Safety standards U.S. producers selling fewer than 

6,500 units in Korea exempt from 

Korean standards as long as U.S. 

standards are met 

Limit raised to no more than 25,000 

units per manufacturer 

Environmental standards U.S. producers that sell 10,000 or 

fewer units in Korea would be 

considered compliant with certain 

agreed environmental standards 

During 2012–15, U.S. producers will 

be considered compliant with Korean 

environmental standards if their 

emissions are within 19 percent of 

Korean requirements 

Purchase tax Number of engine-displacement 

categories was lowered, and taxes 

on each category were reduced 

In addition to 2007 FTA provisions, 

agreed to increase transparency in 

the creation of new regulations, 

including a public comment period 

and an implementation period of 

usually not less than 12 months 

Annual vehicle tax Simplified and reduced In addition to 2007 FTA provisions, 

agreed to increase transparency in 

the creation of new regulations, 

including a public comment period 

and an implementation period of 

usually not less than 12 months 

Safeguard measures May be applied one time only, for a 

period of up to two years plus a onetime extension of up to one year, 

during the 10-year transition period 

that runs from the time the FTA enters 

into force. If the period of the measure 

exceeds one year, the importing party 

must liberalize the measure at regular 

intervals. The importing party is 

required to pay compensation, and in 

the absence of agreement on 

compensation, the exporting party 

may suspend concessions having 

trade effects substantially equivalent 

to the safeguard measure. 

May be applied more than once, for a 

period of up to two years plus a onetime extension of up to two years, 

during the transition period that 

begins upon entry into force of the 

FTA and ends on the date that is 10 

years after the end of the tariff 

elimination period (e.g., 15 years for 

passenger cars and 20 years for light 

trucks). There is no requirement to 

liberalize a measure that exceeds one 

year. There is the same 

compensation obligation or right to 

suspend concessions as for other 

products, except that, in the case of a 

measure involving motor vehicles, the 

exporting party may not exercise its 

right to suspend concessions during 

the first 24 months that a safeguard 

measure is in effect. 

Sources: USTR, “Final United States–Korea FTA Texts,” 2007; USTR, “Exchange of Letters between U.S. Trade Representative 

Kirk and Korean Trade Minister Jong-Hoon Kim,” February 10, 2011; and USTR, “Agreed Minutes on Regulations,” 

February 10, 2011. 
4

to include many plug-in, electric, or fuel cell vehicles, as few to no vehicles of this type 

are expected to be exported to Korea in 2011.10 

Simulation Results 

The Commission’s economic simulation11 of the effects on the broader motor vehicles 

and parts sector12 of implementing the 2007 FTA estimates that implementation would 

likely lead to an increase in U.S. sector exports to Korea of $194 million (54 percent); in 

percentage terms, this estimated increase is similar to the 2007 Commission estimate 

(46–59 percent), whereas the estimated increase in terms of dollar value is lower, 

reflecting the economic downturn and reduced trade flows of 2009. 13 A separate 

Commission economic simulation estimates that removal of NTMs affecting U.S. exports 

of passenger cars could lead to an increase in U.S. exports of $48–66 million (an increase 

from approximately $119 million to approximately $167–185 million, or 41–56 percent) 

(box 1). 14 An estimated 50 percent of this increase would be attributable to the 

displacement of imports into Korea from other countries. 

The effect of Korean NTMs in raising the cost of U.S. passenger vehicle exports appears 

to have been significant. During 2008–10, the average price of U.S. small-displacement 

passenger cars 15 imported into Korea was 16.6 percent higher than the price of 

comparable U.S. exports worldwide. This price gap is similar to the price gap of 

20 percent found in the 2007 assessment.16 Imports of U.S. large-displacement passenger 

cars, 17 which were not examined in the 2007 assessment, showed a price gap of 

1.2 percent. The figures resulting from the Commission’s economic simulation of the 

effects of removing NTMs on exports of U.S. passenger cars to Korea are likely an upper 

bound estimate, as it is possible that implementation of the FTA would not completely 

eliminate the price gap. In addition, factors that could not be addressed by the economic 

simulation may affect this estimate.18

Korean consumer preferences, for example, could lessen the impact of NTM (and tariff) 

removal on U.S. passenger vehicle exports to Korea. The Korean market has long been 

 10 Jung, “Chevrolet Volt to Set EV Pace in Korea,” October 22, 2010. 

11 The quantitative analysis in this section regarding the tariff provisions of the FTA is based on Global 

Trade Analysis Project (GTAP) sector 38, Motor Vehicles and Parts. The information presented in this 

section regarding the effects of Korean NTMs is based on the Commission’s economic simulation as detailed 

in box 1. 12 The qualitative analysis herein focuses on the subset of passenger cars and light trucks, or passenger 

vehicles. Other GTAP sector 38 products include automotive parts and engines, commercial trucks, buses, 

specialty vehicles, and certain containers and trailers. 13 These estimates are based on incorporating 2009 trade data into the economic simulation used for the 

2007 Commission study. Use of the updated data accounts for any difference between the 2007 and current 

results. See USITC, U.S.-Korea Free Trade Agreement, 2007, 2-8. Total trade between the United States and 

Korea in motor vehicles and parts was $12.0 billion in 2007 and $8.5 billion in 2009. 14 For an explanation of the economic simulation results, see appendix E. The estimates of the impact of 

the tariff removal and the removal of the NTMs use separate economic simulations and assumptions and 

should not be combined in this form to construct a single estimate. 15 Small-displacement passenger cars have an engine displacement of 1,500–3,000 cubic centimeters (cc) 

(e.g., the Dodge Caliber). 16 USITC, U.S.-Korea Free Trade Agreement, 2007, 3-77. 17 Large-displacement passenger cars have an engine displacement of greater than 3,000 cc (e.g., the Ford 

Taurus). 18 See appendix E for further discussion of the limitations of the economic simulations. 
5

BOX 1 Potential price and quantity effects of Korean NTMs on imports of certain U.S. passenger cars 

U.S. producers seeking to export passenger cars to Korea have identified nontariff measures (NTMs) that may have 

impeded their access to the Korean market. These measures include burdensome standards, testing, and certification 

requirements; special taxes; and an opaque regulatory environment. They may restrict the quantity of U.S. passenger 

car imports into the Korean market, raise the price of these imports, or both. 

NTM Quantification 

Korean imports of small-displacement passenger carsa

 are substantially lower in quantity than imports of the same 

product into most other economies, relative to the size of the Korean economy. Moreover, the unit value for these 

imports is substantially higher than for most other countries. The existing tariff of 8 percent ad valorem appears to be 

too low by itself to account for the relatively low quantity or the relatively high price of imports. The price difference 

may reflect the effects of Korean NTMs, but it could also be influenced by such factors as market structure, product 

differentiation, and consumer preferences. 

Korean imports of small-displacement passenger cars in 2007–09 represented 0.03 vehicles per million dollars of 

gross domestic product ($ GDP), compared to the median figure for 55 comparable countries of 0.35 vehicles per 

million $ GDP. Korea ranked 53rd out of the 55 countries in imports of these cars relative to the size of its economy, 

with only Japan and India ranking lower. This is the most recent period for which such a broad international 

comparison can be made. Available data for Korea for 2010 show an increase in imports of these cars for that year, to 

0.05 per million $ GDP, but this would still leave Korea ranking 53rd compared to other countries’ imports for 2007–09. 

The Korean average import price (cost-insurance-freight) for small-displacement passenger cars imported from the 

United States for the period January 2008–November 2010 was $18,108 per car. This price is 17.6 percent higher 

than the average U.S. export price (f.o.b.) of similar cars ($15,393) over the same period. Allowing for a 1 percent 

markup for transport costs, the resulting estimated Korean price gap for small-displacement passenger cars from the 

United States is 16.6 percent. The estimated Korean price gap for large-displacement passenger carsb from the 

United States is 1.2 percent. 

Simulated Effects 

The price gap for a combination of small-displacement and large-displacement passenger cars imported from the 

United States is 7.5 percent. This price gap is a trade-weighted average of the price gaps that could be attributed to 

Korean NTMs applied to these passenger cars imported from the United States during January 2008–November 

2010, subject to the caveats stated above. The effects of the removal of the 7.5 percent price gap are estimated with 

economic simulations. These effects are likely upper bound estimates of the probable effects of the FTA’s provisions 

regarding Korean NTMs for U.S. passenger cars. 

These simulations suggest that, in the absence of the 7.5 percent price gap, U.S. exports of passenger cars to Korea 

would rise from an average level of approximately 7,700 units to approximately 10,800−12,000 units, an increase of 

41–56 percent. The value of U.S. exports of passenger cars to Korea would increase from approximately $119 million 

to approximately $167–185 million, also an increase of 41–56 percent. The economic simulations suggest that less 

than 10 percent of the increase in U.S. passenger car exports is attributable to an expansion in the Korean passenger 

car market; approximately 50 percent of the increase would displace imports from other sources, and approximately 

40 percent would displace domestic production. 

For further information on these two topics—specifically, the calculation and interpretation of the quantity and unitvalue information, and the simulated effects of NTM removal—see appendix E. 

Source: USITC staff analysis.

 a Small-displacement passenger cars have an engine displacement of 1,500–3,000 cubic centimeters (cc) and are classifiable in 

HS subheading 8703.23. 

 b Large-displacement passenger cars have an engine displacement of greater than 3,000 cc and are classifiable in HS subheading 

8703.24. 
6

perceived as preferring domestic over imported passenger vehicles, which could make 

Korean consumers less sensitive to changes in price and increased availability of 

imported passenger vehicles.19 In addition, there is a concern that consumers will view 

vehicles that do not meet Korean safety standards as unsafe and avoid purchasing them,20

although U.S. safety standards reportedly are currently “among the most stringent in the 

world.”21 

Some observers claim that the market for imported cars in Korea is already gradually 

improving, as evidenced by imports’ growing market share (table 2).22 In addition, the 

Korean market tends to be more brand conscious than the U.S. market, suggesting that 

Korean consumers may be less responsive to changes in price. 23 This may be an 

advantage for U.S. manufacturers; for example, in January 2011, General Motors 

eliminated the Daewoo brand name in Korea and began to brand GM vehicles in Korea 

as Chevrolets, in response to its Korean customers’ preference for the Chevrolet name.24

TABLE 2 Korea: Passenger vehicle market, by source; U.S. producer imports; and imports from the United States, in 

units, 2006–10

 2006 2007 2008 2009 2010

Total 976,211 1,039,806 1,020,502 1,235,736 1,192,780

 Domestic production 935,681 986,416 958,854 1,174,743 1,102,218

 Market share (percent) 95.9 94.9 94.0 95.0 92.4

 Imports 40,530 53,390 61,648 60,993 90,562

 Market share (percent) 4.2 5.1 6.0 4.9 7.6

Imports of GM, Ford, and Chrysler vehiclesa

 4,556 6,235 6,980 6,140 7,450

 Market share (percent) 0.47 0.60 0.68 0.50 0.62

Total Korean imports from United Statesb 3,435 6,849 7,773 6,642 13,044

 Market share (percent) 0.35 0.66 0.76 0.54 1.09

Sources: GTIS, Global Trade Atlas Database (accessed February 25, 2011); Korean Automobile and Distributors Association, 

Statistics: New Registrations (accessed February 25, 2011). 

Note: Data presented in terms of vehicle registrations with the Korean government. Figures may not sum because of rounding. 

 a

Does not include passenger vehicles produced by GM, Ford, or Chrysler in Korea, or brands that were once owned by Ford or 

GM (e.g., Saab and Volvo), but includes GM, Ford, and Chrysler imports from the United States and other countries. 

 b

Includes passenger vehicles produced in the United States by foreign-based producers, such as Nissan.

Korean Passenger Vehicle Market 

The Korean passenger vehicle market is the 12th largest in the world, with more than one 

million registrations per year.25 This market is unusual because of the extremely low level 

 19 This preference may continue to be influenced by earlier public practices—e.g., government-led “buy 

Korean” campaigns as well as overt bureaucratic pressure, such as automatic tax audits for purchasers of 

foreign vehicles—even though these specific practices have long been ended. Schott, “Negotiating the KoreaUnited States Free Trade Agreement,” June 2006, 9; Public Citizen, written submission to the USITC, 

February 14, 2011, 3. 20 Public Citizen, written submission to the USITC, February 14, 2011, 3. 21 Biegun, testimony before the House Ways and Means Committee, January 25, 2011, 2. 22 Industry official, interview by USITC staff, Washington, DC, February 17, 2011. 23 Industry official, interview by USITC staff, Washington, DC, February 16, 2011. 24 Greimel, “GM to Drop Daewoo Name in Korea, Switch to Chevrolet,” January 20, 2011. 25 EIU, “Data Tool” (accessed February 28, 2011). 
7

of import penetration;26 domestic production accounted for 92–96 percent of Korean 

vehicle registrations from 2006 to 2010 (table 2). During this period, passenger vehicles 

built in the United States accounted for only 11 percent of Korean imports (figure 1), or 

less than 1 percent of the Korean passenger vehicle market. 

European Union

60%

Japan

29%

United States

11%

 Source: GTIS, Global Trade Atlas (accessed February 25, 2011). 

Changes to the 2007 FTA Provisions in the Accompanying 

Agreement 

With respect to tariffs, Korea agreed in the accompanying agreement to immediately 

reduce its passenger car tariff from 8 percent to 4 percent and to reduce the tariff to free 

in the fifth year after implementation. 27 For passenger cars with neither spark nor 

compression ignition engines (e.g., electric and fuel cell vehicles), the tariff will be 

reduced from 8 percent to 4 percent upon entry into force, and then reduced in equal 

annual stages until the tariff is completely eliminated in the fifth year. As noted earlier, 

tariff elimination will likely lower the cost of vehicles imported into the Korean market 

from the United States, which would contribute substantially to an increase in U.S. 

exports of passenger vehicles to Korea.28

With respect to NTMs, the accompanying agreement addresses two significant issues—

Korean safety regulations and emissions requirements—that reportedly impose the 

largest NTM-related costs on U.S. passenger vehicle exports because of the costs of 

research, design, and implementation to meet Korean requirements.29 The United States 

 26 AAPC, written submission to the USITC, February 14, 2011, 1; Public Citizen, written submission to 

the USITC, February 14, 2011, 3. For further discussion on a comparison of import penetration in Korea and 

other markets, see box 1. 27 Korea will immediately eliminate its tariff on light trucks under the 2007 FTA. 28 USITC, U.S.-Korea Free Trade Agreement, 2007, 3-78; industry officials, interview by USITC staff, 

Washington, DC, February 16, 2011; industry officials, interview by USITC staff, Washington, DC, 

February 17, 2011. 29 Industry official, interview by USITC staff, Washington, DC, February 3, 2011. 

FIGURE 1 Korean imports of passenger vehicles, by trading partner, 2006–10 
8

and Korea agreed to increase the number of U.S. vehicles produced to U.S. safety 

standards that can be sold in the Korean market, which has different safety standards.30

As a result, “an originating motor vehicle produced by a manufacturer that sold no more 

than 25,000 originating motor vehicles in the territory of Korea during the previous 

calendar year” will be deemed compliant with Korean motor vehicle safety standards if 

the manufacturer certifies that its motor vehicles exported to Korea meet U.S. safety 

standards.31 The previous limit for calendar-year exports was 6,500 units, and at least one 

U.S. producer was concerned that such a limit would keep exports per manufacturer at a 

permanently low level.32 

Upon full implementation of the FTA,33 these changes will reportedly lower the cost of 

entering the Korean market for U.S. firms, as they will be able to export vehicles from 

the United States without incurring the additional research and development (R&D) and 

production costs associated with vehicle modification.34 When a firm’s annual sales in 

Korea approach the 25,000-unit threshold, upon the request of either FTA party, the 

United States and Korea will conduct a review to reconsider that threshold.35

Another important change regarding NTMs provided in the Agreed Minutes of the 

accompanying agreement allows vehicles exported to Korea by companies that sold less 

than 4,500 vehicles in Korea in 2009 to be considered compliant with Korean fuel 

economy and greenhouse gas emissions standards during 2012–15 if they are within 

19 percent of either the Korean fuel economy or greenhouse gas emissions standards 

(table 1).36 There is no limit on the number of passenger vehicles that can qualify to be 

sold in Korea under this provision, which is a change from the 2007 FTA provision. The 

Korean emissions standard limits greenhouse gas emissions to no more than 225 grams 

per mile and requires, in effect, a fleet average fuel efficiency of 40 miles per gallon 

(mpg) by 2015.37 A new U.S. standard requires fleet average fuel efficiency to reach 

 30 Korea’s safety standards are a combination of U.S., European, and unique Korean standards. Cooper et 

al., “The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA),” November 12, 2010; Platzer, 

“Pending U.S. and EU Free Trade Agreements with South Korea,” September 1, 2010. 31 USTR, “Exchange of Letters between U.S. Trade Representative Kirk and Korean Trade Minister 

Jong-Hoon Kim,” February 10, 2011. 32 Biegun, testimony before the USITC, June 20, 2007, 241. 33 According to one source, some of the NTM-related provisions may not be passed by the Korean 

legislature. USW, written submission to the USITC, February 14, 2011, 1–2. 34 Industry official, interview by USITC staff, Washington, DC, February 3, 2011. 35 USTR, “Exchange of Letters between U.S. Trade Representative Kirk and Korean Trade Minister 

Jong-Hoon Kim,” February 10, 2011. 36 USTR, “Agreed Minutes on Regulations,” February 10, 2011. GM, Ford, and Chrysler will qualify for 

this exception, as will certain other motor vehicle manufacturers, while BMW, Honda, Mercedes, Nissan, and 

Toyota will not. For a more complete explanation and list, see Korean Ministry of Environment, 

Environmental Transportation Division, “Confirmation on the Scope of Small-scale Manufacturers 

Concerning the Environmental Regulations for Automotives,” n.d. (accessed March 3, 2011) [in Korean]. For 

an unofficial translation, see http://trade.ec.europa.eu/doclib/docs/2011/january/tradoc_147432.pdf (accessed 

March 3, 2011). 37 Schott, “KORUS FTA 2.0,” December 2010, 2. 
9

35.5 mpg (39 mpg for passenger cars) by 2016.38 With the 19 percent allowance provided 

in the accompanying agreement, U.S. automakers will be able to export U.S.-made 

passenger vehicles to Korea during 2012–15 as they increase their fuel efficiency levels 

to meet the 2016 U.S. standard.39 With the allowance, U.S. producers can target 2016 for 

fuel efficiency improvement in U.S.-made vehicles and export vehicles to Korea without 

incurring additional R&D expenditures to meet Korean emissions requirements during 

2012–15.40 

Designing (or redesigning) U.S. passenger vehicles to meet Korean safety standards and 

emissions requirements would be especially expensive because the near-term costs would 

be spread among the small volume of vehicles currently destined for the Korean market.41

Although estimates of the cost of meeting the requirements are unavailable, one industry 

source estimated that, for example, a local retrofit (no extra R&D or redesign) of a 

vehicle to meet a single Korean safety standard would cost $500 per vehicle.42 Another 

industry source indicated that Korean safety standards and emissions requirements 

increase the cost of exporting to Korea to such a level that only vehicles in less pricesensitive sectors (e.g., luxury vehicles) are able to compete in the Korean market.43 

In addition to reducing the effects of Korean safety standards and emissions requirements 

on U.S. passenger vehicle exports, the accompanying agreement improves the regulatory 

transparency of Korean motor vehicle regulations and taxation. 44 The accompanying 

agreement binds the United States and Korea to treat motor vehicle taxation initiatives 

related to emissions and fuel efficiency as they would any other regulation, with advance 

notice and a public comment period.45 Furthermore, increased regulatory transparency 

and institution of a comment period, combined with a “period usually not less than 

12 months”46 for U.S. automakers to meet new standards, would likely provide U.S. 

automakers time to incorporate design or technological changes needed to meet certain 

new or changed Korean standards without disrupting exports to Korea.47 

 38 For the 2012 model year, the United States will require a fleet average fuel efficiency of 29.7 mpg 

(33.3 mpg for passenger cars and 25.4 mpg for light trucks), which increases each year until it reaches the 

2016 standard of 37.8 mpg for passenger cars and 28.8 mpg for light trucks for a combined corporate average 

fuel efficiency of 34.1 mpg. This standard is aimed at reducing fleet average carbon dioxide to 250 grams per 

mile. The 34.1 mpg standard assumes that some of the reduction in CO2 emissions will come from changes to 

the air conditioning system; if all gains resulted from increased fuel efficiency, the required fleet average 

would be 35.5 mpg (39 mpg for cars). Further increases in the U.S. fleet average fuel efficiency standard 

have not yet been determined. EPA and NHTSA, Light-Duty Vehicle Greenhouse Gas Emissions Standards 

and Corporate Average Fuel Economy Standards; Final Rule, 40 C.F.R. Parts 85, 86, and 600; 49 C.F.R. 

Parts 531, 533, 536, et al. 39 Schott, “KORUS FTA 2.0,” December 2010, 2. 40 Biegun, testimony before the House Ways and Means Committee, January 25, 2011. 

41 Industry official, interview by USITC staff, Washington, DC, February 3, 2011. 42 Industry official, interview by USITC staff, Washington, DC, February 16, 2011. 43 Industry official, interview by USITC staff, Washington, DC, February 3, 2011. 44 In the 2007 FTA, the Korean government agreed to simplify its vehicle purchase tax, which is 

determined by engine displacement size, and reduce the taxes imposed on each category of passenger 

vehicles, with a particular emphasis on reducing the tax rate for vehicles in the largest engine-displacementsize categories, which includes most U.S. exports. USITC, U.S.-Korea Free Trade Agreement, 2007, 3-77. 45 USTR, “Exchange of Letters between U.S. Trade Representative Kirk and Korean Trade Minister 

Jong-Hoon Kim,” February 10, 2011. 46 Ibid. 

47 Industry official, interview by USITC staff, Washington, DC, February 16, 2011; industry official, 

interview by USITC staff, Washington, DC, February 17, 2011. 
10

U.S. Imports 

The 2007 FTA and the accompanying agreement remove U.S. tariffs that may have 

affected market access for U.S. imports of passenger vehicles from Korea. The 

Commission’s economic simulation of implementing the 2007 FTA estimates that U.S. 

imports from Korea of products in the broader motor vehicles and parts sector would rise 

by $907 million (11 percent); this estimated percentage increase is similar to the 

Commission’s 2007 estimate (9–12 percent), whereas the estimated increase in dollar 

value is lower, again reflecting the economic downturn and reduced trade flows of 2009. 

An estimated 44 percent of this increase would likely be attributable to the displacement 

of other countries’ exports to the United States. 48 Because the U.S. import tariff on 

passenger cars will not be completely eliminated until the fifth year of implementation, 

and until year 10 for light trucks, most of the impact on U.S. imports of Korean passenger 

vehicles will likely be experienced in the medium to long term (table 3). Although the 

U.S. tariff on passenger vehicles without an internal combustion engine (e.g., electric and 

fuel cell vehicles) will be reduced immediately upon the FTA’s entry into force and 

completely removed in the fifth year of implementation, the impact will be minimal in 

the near term, as no Korean company currently produces such vehicles commercially. 

Although the Hyundai Group is developing electric and fuel cell vehicles, it has not 

publicly announced any plans to export them to the United States.49

Changes in the U.S. Passenger Vehicle Industry 

The U.S. market for all passenger vehicles declined 30 percent by volume from 2006 to 

2010, to 11.6 million units (table 4), largely because of the recent economic downturn. 

Despite these relatively low sales levels, the United States ranked as the second-largest 

passenger vehicle market in the world in 2010.50 

This decreased demand contributed to the restructuring of GM and Chrysler in 2009,51

which resulted in the shuttering of large amounts of passenger vehicle production 

capacity in North America.52 In 2010, the Hyundai Group, which owns the two Korean 

brands (Hyundai and Kia) that sell passenger cars in the United States, added a new Kia 

production facility in West Point, GA, increasing the Hyundai Group’s production 

capacity in the United States to more than 630,000 units.53

This decreased demand contributed to the restructuring of GM and Chrysler in 2009,54

which resulted in the shuttering of large amounts of passenger vehicle production 

 48 These estimates are based on incorporating 2009 trade data into the economic simulation used for the 

2007 Commission study. Use of the updated data accounts for any difference between the 2007 and current 

results. See USITC, U.S.-Korea Free Trade Agreement, 2007, 2-8. Total trade between the United States and 

Korea in motor vehicles and parts was $12.0 billion in 2007 and $8.5 billion in 2009. 49 Hyundai Motor America, “Hyundai Unveils Tucson ix FCEV,” February 14, 2011; Hyundai Motor 

Company, “Hyundai Unveils Its First Electric Car,” September 9, 2010. 50 EIU, “Data Tool” (accessed February 28, 2011). China was the world’s largest market in 2010. 51 Binder, Ward’s Automotive Yearbook, 2009, 153. 52 Ibid. 

53 Beene, “Hyundai Ponders 2nd U.S. Plant as Sales Rise,” January 17, 2011; Greimel, “Hyundai May 

Need to Source Elantra from Korea to Meet Demand,” January 28, 2011; industry official, interview by 

USITC staff, Washington, DC, February 28, 2011; Kia Motors Manufacturing Georgia, Inc., 

http://www.kmmgusa.com/our_company.aspx (accessed March 7, 2011). 54 Binder, Ward’s Automotive Yearbook, 2009, 153. 
11

TABLE 3 Changes to FTA provisions related to U.S. imports of Korean passenger vehicles 

Provision Original (2007 FTA) New (accompanying agreement) 

Cars (HS subheadings 8703.21, 

8703.22, 8703.23, 8703.24, 8703.31, 

8703.32, 8703.33) 

Tariff of 2.5 percent immediately 

reduced to free upon entry into force 

for HS subheadings 8703.21, 

8703.22. and 8703.23; tariff of 

2.5 percent on other subheadings 

reduced in three equal annual stages 

until free 

Tariff of 2.5 percent in place for four 

years, then free in fifth year 

Cars with neither spark or 

compression ignition engines (e.g., 

electric cars) (HS subheading 

8703.90) 

Tariff of 2.5 percent reduced to free in 

10 equal annual stages 

Tariff of 2.5 percent reduced to free in 

five equal annual stages 

Light trucks (HS subheadings 

8704.21 and 8704.31) 

Tariff of 25 percent reduced to free in 

10 equal annual stages 

Tariff of 25 percent in place for seven 

years, then reduced to free in three 

equal annual stages 

Safeguard measures May be applied one time only, for a 

period of up to two years plus a onetime extension of up to one year, 

during the 10-year transition period 

that runs from the time the FTA enters 

into force. If the period of the measure 

exceeds one year, the importing party 

must liberalize the measure at regular 

intervals. The importing party is 

required to pay compensation, and in 

the absence of agreement on 

compensation, the exporting party 

may suspend concessions having 

trade effects substantially equivalent 

to the safeguard measure. 

May be applied more than once, for a 

period of up to two years plus a onetime extension of up to two years, 

during the transition period that 

begins upon entry into force of the 

FTA and ends on the date that is 

10 years after the end of the tariff 

elimination period (e.g., 15 years for 

passenger cars and 20 years for light 

trucks). There is no requirement to 

liberalize a measure that exceeds one 

year. There is the same 

compensation obligation or right to 

suspend concessions as for other 

products, except that, in the case of a 

measure involving motor vehicles, the 

exporting party may not exercise its 

right to suspend concessions during 

the first 24 months that a safeguard 

measure is in effect. 

Source: USTR, “Exchange of Letters between U.S. Trade Representative Kirk and Korean Trade Minister Jong-Hoon Kim,” 

February 10, 2011. 
12

TABLE 4 U.S. passenger vehicle market and sales by Korean producers, in units, 2006–10 

 2006 2007 2008 2009 2010

Total sales 16,559,625 16,089,222 13,194,741 10,401,682 11,554,576

 Sales of Korean imports 690,802 643,949 562,947 577,042 561,626

 Market share (percent) 4.2 4.0 4.3 5.5 4.9

Sales of Hyundai Group (Hyundai and Kia) 749,882 772,482 675,139 735,127 894,496

 Market share (percent) 4.5 4.8 5.1 7.1 7.7

 Sales of imports 581,677 534,493 486,788 534,756 512,991

 Market share (percent) 3.5 3.3 3.7 5.1 4.4

 Sales of U.S. production 168,145 237,989 188,351 200,371 381,505

 Market share (percent) 1.0 1.5 1.4 1.9 3.3

Sales of GM Daewoo (imports) 109,125 109,456 76,159 42,286 48,635

 Market share (percent) 0.7 0.7 0.6 0.4 0.4

Sources: Binder, Ward’s Automotive Yearbook, 2008–10; Ward’s Automotive Reports, “Light Vehicle Sales Segmentation,” 

January 17, 2010. 

Note: Totals may not sum due to rounding. 

capacity in North America.55 In 2010, the Hyundai Group, which owns the two Korean 

brands (Hyundai and Kia) that sell passenger cars in the United States, added a new Kia 

production facility in West Point, GA, increasing the Hyundai Group’s production 

capacity in the United States to more than 630,000 units.56

In spite of a smaller U.S. passenger vehicle market, total sales by the Hyundai Group 

increased during 2008–10, with a corresponding increase in market share from 

5.1 percent in 2008 to 7.7 percent in 2010. The Hyundai Group’s market share reportedly 

increased because of the progressively more favorable perception of their vehicles in the 

U.S. market due to improved quality and design changes.57 

Effects of Tariff Removal 

The removal of the 2.5 percent U.S. import tariff on passenger cars in the fifth year of the 

FTA’s implementation would likely result in increased U.S. imports of passenger cars 

from Korea. However, in a development that could partially offset the effect of tariff 

removal, the Hyundai Group may be considering adding a third production facility in the 

United States because it is already producing at capacity at its two existing U.S. 

factories.58 During the 2007 FTA assessment, some concern was expressed that removal 

 55 Ibid. 

56 Beene, “Hyundai Ponders 2nd U.S. Plant as Sales Rise,” January 17, 2011; Greimel, “Hyundai May 

Need to Source Elantra from Korea to Meet Demand,” January 28, 2011; industry official, interview by 

USITC staff, Washington, DC, February 28, 2011; Kia Motors Manufacturing Georgia, Inc., 

http://www.kmmgusa.com/our_company.aspx (accessed March 7, 2011). 57 Economist, “Hyundai’s Surprising Success,” March 5, 2009; Griffith, “Hyundai’s ‘Overnight’ Success 

a 20-Year Project,” March 1, 2010. 58 Characterizations of capacity are current as of early 2011 and are not reflected in the 2010 data. Beene, 

“Hyundai Ponders 2nd U.S. Plant as Sales Rise,” January 17, 2011; Greimel, “Hyundai May Need to Source 

Elantra from Korea to Meet Demand,” January 28, 2011; industry official, interview by USITC staff, 

Washington, DC, February 28, 2011; Kia Motors Manufacturing Georgia, Inc., 

http://www.kmmgusa.com/our_company.aspx (accessed March 7, 2011). 
13

of the tariff would eliminate the incentive to expand production in the United States,59 but 

tariff changes are only one variable in a firm’s decision to build in a foreign location.60 

The effect on U.S. imports of removal of the 25 percent tariff on light trucks is more 

uncertain. Currently, the United States does not import light trucks from Korea, and the 

Hyundai Group (the largest vehicle company in Korea and vehicle exporter to the United 

States) does not currently produce a light truck for sale in the U.S. market.61 However, 

given the 3- to 5-year design cycle for vehicles, it is conceivable that a Korean-owned 

company could produce a light truck for sale in the U.S. market by the time the tariff on 

light trucks is removed fully in 10 years.62 A Korean producer that does not currently 

export to the United States, Ssangyong, produces a light truck called the Actyon Sports 

that it exports to Australia and Europe. Ssangyong is in the process of being purchased by 

India-based Mahindra & Mahindra Ltd.,63 which is seeking approval for the export of its 

own light truck to the United States.64 

Safeguards 

The accompanying agreement modifies the procedures for applying safeguard measures 

to imports of passenger vehicles using the procedures in the trade remedies chapter 

(chapter 10) of the FTA. 65 In contrast to the provisions in chapter 10 that apply to 

safeguard measures in general, in the case of passenger vehicles, the changes allow the 

importing country (1) to apply a measure for a period of up to 10 years after the end of 

the tariff elimination period; (2) to extend a measure for up to two years beyond the end 

of the initial period of the measure; (3) to apply a measure more than once; and (4) to 

apply a measure without having to progressively liberalize it if it extends beyond one 

year. 

The modifications also create an exception to what would otherwise be the right of an 

exporting party to suspend trade concessions on goods having substantially equivalent 

trade effects if the importing party applies a safeguard measure and the parties are unable 

 59 Levin, written submission to the USITC, June 20, 2007; Meyer, “The United States-Korea Free Trade 

Agreement (KORUS FTA),” written submission to the USITC, June 20, 2007. 60 Industry official, interview by USITC staff, Washington, DC, February 28, 2011; Figueiredo, 

Guimaraes, and Woodward, “Asymmetric Information and Location,” 2002, 1–2; Invest in Canada, 

“Automotive,” July 8, 2010; MacCarthy and Atthirawong, “Critical Factors in International Location 

Decisions: A Delphi Study,” 2001, 1–2; Blonigen, “A Review of the Empirical Literature on FDI 

Determinants,” 2005; Helpman, “Trade, FDI, and the Organization of Firms,” 2006; Sturgeon and Van 

Biesebroeck, “Crisis and Protection in the Automotive Industry: A Global Value Chain Perspective,” 

September 2009, 2–3. 61 Binder, Ward’s Automotive Yearbook, 2009, 176–177, 179–180. 62 Industry official, interview by USITC staff, Washington, DC, February 3, 2011. 63 Seo, “Mahindra May Complete Acquiring Ssangyong Controlling Stake in Early 2011,” 

October 13, 2010. 64 Dolan, “Mahindra’s U.S. Truck Waylaid by Distributor Lawsuit,” July 27, 2010. 65 The accompanying agreement modifies the procedures for motor vehicles generally classifiable in HS 

headings 8703 and 8704. Under Article 10.1 of the FTA, a party may apply a safeguard measure if, as a result 

of the reduction or elimination of a duty under the FTA, an originating good of the other party is being 

imported in such increased quantities, in absolute terms or relative to domestic production, and under such 

conditions that the imports of such a good from the other party constitute a substantial cause or threat of 

serious injury to a domestic industry producing a like or directly competitive good. The safeguard measure 

may be in the form of a suspension of the further reduction of the rate of duty on the good provided for under 

the Agreement, or an increase in the rate of duty to a level not to exceed the lesser of the current applied 

most-favored-nation (MFN) rate of duty on the good in effect that the action is taken; and the MFN applied 

rate of duty on the good in effect on the day immediately preceding the date this agreement enters into force.
14

to agree on compensation. In the case of a safeguard measure involving passenger 

vehicles, the exporting country would not be permitted to exercise its right to suspend 

concessions for the first 24 months during which the measure is in effect.66

 66 Consultations on compensation between the importing and exporting parties would nevertheless be 

expected to take place within 30 days after a measure is applied.
15

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APPENDIX A

Request Letter

COMMITTEE ON WAYS AND MEANS 

·D.OC~:· 

NUMBER 

U.S. HOUSE OF REPRESENTATIVES 

WASHINGTON, DC 20515 

~··· 

,_ I 

• ..( ........ 

d-7~3 - .... __ •• l .. _. __ •• ;. .... __ ••• 

January 27, 2011 

-Office of the 

Secretary 

Int'J Trade ComrTlJssion 

Dear Chairman Okun, 

In September 2007, the Commission published its report on the Korea-U.S. (KORUS) 

Free Trade Agreement (FTA) pursuant to section 2104(1) of the Trade Act of 2002 (US.-

Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects, 

Investigation No. TA-2 1 04-24 (USrTC pub. 3949)). 

As you know, the United States and South Korea recently concluded negotiations that 

will provide additional market access for U.S. auto exports to South Korea, in particular, 

by addressing non-tariff barriers to U.S. exports. Accordingly, pursuant to Section 

332(g) of the Tariff Act of 1930, as amended, and on behalf of the Committee on Ways 

and Means of the House of Representatives, I request that the Commission update its 

assessment of the impact of the motor vehicle-related provisions in the KORUS ITA, 

including the supplemental autos agreement, on the U.S. passenger vehicle sector. The 

Commission should use the most recent data available and should include a modeling 

simulation of the effects of the auto non-tariff barriers in its assessment. 

In preparing its updated assessment, the Commission should consider the text of the 

Agreement, which we understand will be made public by the end of January, as well as 

any other information appropriate and consistent with the Commission's statutory 

mandate. I ask that this assessment be delivered at the earliest possible date, but no later 

than March 15,2011. 

As we intend to make the report available to the public, we request that the Commission 

not include confidential business information in its report. 

Thank you for your continued cooperation and assistance in this matter. 

Sincerely, 

Dave Camp 

Chairman 

A-3

APPENDIX B

Federal Register Notice 

B-3

 Federal Register /Vol. 76, No. 22 /Wednesday, February 2, 2011 /Notices 5825

INTERNATIONAL TRADE

COMMISSION

[Investigation No. 332–523]

U.S.-Korea Free Trade 

Agreement:

Passenger Vehicle Sector Update

AGENCY: United States 

International Trade Commission.

ACTION: Institution of 

investigation and request for written 

statements.

SUMMARY: Following receipt of 

a request dated January 27, 2011, 

from the U.S. House of 

Representatives Committee on

Ways and Means (Committee) 

under section 332(g) of the Tariff 

Act of 1930 (19 U.S.C. 1332(g)), 

the U.S. International Trade 

Commission (Commission) 

instituted investigation No. 332–

523, U.S.-Korea Free Trade

Agreement: Passenger Vehicle 

Sector Update.

DATES: February 14, 2011: 

Deadline for filing written 

statements. March 15, 2011: 

Transmittal of Commission report

to the Committee.

ADDRESSES: All Commission 

offices are located in the United 

States International Trade 

Commission Building, 500 E Street, 

SW., Washington, DC. All written

submissions should be addressed to 

the Secretary, United States 

International Trade Commission, 

500 E Street, SW., Washington, DC 

20436. The public record for this 

investigation may be viewed on the 

Commission’s electronic docket 

(EDIS) at https://edis.usitc.gov/

edis3-internal/app.

FOR FURTHER

INFORMATION CONTACT:

Brian Allen, Co-Project Leader, 

Office of Industries (202–205–3034 

or brian.allen@usitc.gov) or 

Deborah McNay, Co-Project 

Leader, Office of Industries (202–

205–3425 or

deborah.mcnay@usitc.gov) for

information specific to this

investigation. For information on 

the legal aspects of this 

investigation, contact William 

Gearhart of the Commission’s 

Office of the General Counsel (202–

205–3091 or

william.gearhart@usitc.gov). The 

media should contact Margaret 

O’Laughlin, Office of External 

Relations (202–205–1819 or 

margaret.olaughlin@usitc.gov).

Hearing-impaired individuals may

obtain information on this matter by

contacting the Commission’s TDD

terminal at 202–205–1810. General

information concerning the 

Commission may also be obtained 

by accessing its Internet server 

(http://www.usitc.gov).

Persons with mobility impairments 

who will need special assistance in 

gaining access to the Commission 

should contact the Office of the 

Secretary at 202–205–2000.

Background: In April 2007, the U.S.

Trade Representative (USTR) 

requested that the Commission 

prepare a report, as specified in 

section 2104(f) of the Trade

Act of 2002 (19 U.S.C. 3804(f)),

assessing the likely impact of the 

U.S.-Korea Free Trade Agreement 

(FTA) on the U.S. economy as a 

whole and on specific industry 

sectors and the interests of U.S. 

consumers. The Commission 

transmitted its report (U.S.-

Korea Free Trade Agreement: 

Potential Economy-wide and 

Selected Sectoral Effects, inv. No. 

TA–2104–24, USITC

pub. 3949) to the USTR in 

September 2007.

The United States and Korea 

recently concluded negotiations to 

modify the FTA, including certain 

provisions relating to the passenger 

vehicle sector.

In its request letter, the Committee

requested that the Commission, 

under section 332(g) of the Tariff 

Act of 1930, update its 2007 

assessment with respect

to the passenger vehicle sector. The

Committee asked that the 

Commission use the most recent 

data available and include a 

modeling simulation of the

effects of the auto nontariff 

measures in its assessment.

Written Submissions: Because of the

short time frame requested by the

Committee, the Commission will 

not hold a public hearing in 

connection with this investigation. 

However, interested parties are 

invited to submit written statements 

concerning this investigation. All 

written submissions should be 

addressed to the Secretary,

and should be received not later 

than 5:15 p.m., February 14, 2011. 

All written submissions must 

conform with the provisions of 

section 201.8 of the Commission’s 

Rules of Practice and

Procedure (19 CFR 201.8). Section 

201.8 requires that a signed original 

(or a copy so designated) and 

fourteen (14) copies of each 

document be filed. In the event

that confidential treatment of a

document is requested, at least four 

(4) additional copies must be filed, 

in which the confidential 

information must be deleted (see the 

following paragraph for further 

information regarding confidential 

business information). The 

Commission’s rules authorize filing 

submissions with the Secretary by 

facsimile or electronic means only 

to the extent permitted by

section 201.8 of the rules (see 

Handbook on Electronic Filing 

Procedures, http://

www.usitc.gov/docket_services/

documents/

handbook_on_electronic_filing.pdf).

Persons with questions regarding

electronic filing should contact the

Secretary (202–205–2000).

Any submissions that contain

confidential business information 

(CBI) must also conform with the

requirements of section 201.6 of the

Commission’s Rules of Practice and

Procedure (19 CFR 201.6). Section 

201.6 of the rules requires that the 

cover of the document and the 

individual pages be clearly marked 

as to whether they are the 

‘‘confidential’’ or ‘‘nonconfidential’’ version, and that the 

confidential business information be 

clearly identified by means of 

brackets. All written submissions, 

except for confidential business 

information, will be made available 

for inspection by interested parties.

In its request letter, the Committee

stated that it intends to make the

Commission’s report available to 

the public in its entirety, and asked 
B-4

5826 Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Notices

that the Commission not include 

any confidential business 

information in the report that the 

Commission sends to the

Committee. Any confidential 

business information received by 

the Commission in this 

investigation and used in preparing 

this report will not be published in a 

manner that would reveal the 

operations of the firm

supplying the information.

By order of the Commission.

Issued: January 28, 2011.

William R. Bishop,

Hearings and Meetings 

Coordinator.

[FR Doc. 2011–2286 Filed 2–1–11; 

8:45 am]

BILLING CODE P
APPENDIX C

Legal Text of the Agreement and Agreed 

Minutes Accompanying the U.S.-Korea Free 

Trade Agreement

EXECUTIVE OFFICE OF THE PRESIDENT

THE UNITED STATES TRADE REPRESENTATIVE

WASHINGTON. D.C. 2O5O8

February 10,2011

The Honorable Jong-Hoon Kim

Minister for Trade

Seoul, Republic of Korea

Dear Minister Kim:

have the honor to confirm the following understanding reached between the representatives

of the Government of the Republic of Korea and the Government of the United States of America

("the Parties") during the course of discussions regarding issues related to the United States Korea

Free Trade Agreement (KORUS):

Section A: Tariffs

1. Notwithstanding paragraph 2 of Article 2.3 and the United States Schedule to Annex

2-B of the KORUS, the United States shall eliminate duties on certain goods as follows:

(a) For originating goods of heading 8703 subject to staging category "A" or "C",

duties shall remain at the base rate during years one through four. Such goods

shall be duty-free, effective January of year five;

(b) For originating goods of subheading 870390, duties shall be reduced in five

equal annual stages, and such goods shall be duty-free, effective January of

year five; and

(c) For originating goods of heading 8704 subject to staging category "G", duties

shall remain at the base rate during years one through seven. Beginning on

January of year eight, duties on such goods shall be reduced in three equal

annual stages, and such goods shall be duty-free, effective January of year ten.

2. Notwithstanding paragraph of Article 2.3 and Korea's Schedule to Annex 2-B of the

KORUS, Korea shall eliminate duties on certain goods as follows:

(a) For originating goods of heading 8703 subject to staging category "A", duties

shall be reduced to four percent ad valorem on the date the KORUS enters into

force. Duties shall remain at four percent ad valorem during years one through

four, and such goods shall be duty-free, effective January of year five;

(b) For originating goods of subheading 870390, duties shall be reduced to four

percent ad valorem on the date the KORUS enters into force. Beginning on

January of year two, duties shall be reduced in four equal annual stages, and

such goods shall be duty-free, effective January of year five; and

(c) For originating goods of item 0203299000, duties shall be reduced to 16 percent

ad valorem, effective January 1,2012; 12 percent ad valorem, effective

January 1,2013; eight percent ad valorem, effective January 1,2014; four

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APPENDIX D

Summary of Positions of Interested Parties

D-3

Summary of Positions of Interested Parties1 

American Automotive Policy Council (AAPC)2 

In a written submission, the AAPC provided comments on behalf of its member 

companies—Chrysler Group, LLC; Ford Motor Company; and General Motors 

Company—in support of the United States–Korea Free Trade Agreement (FTA). The 

AAPC stated that because of Korea’s long use of tariff and nontariff barriers to protect its 

domestic auto industry from international competition, at least 75 percent of the total U.S. 

trade deficit with Korea is attributable to trade in autos and auto parts. The AAPC noted 

the difficulty of penetrating Korea’s market with the following trade statistics: its 

members “were limited to selling” 1,238 vehicles in a market of 1.4 million vehicles in 

2000; its members sold 7,450 vehicles in a market of 1.5 million vehicles in 2010; and 

Korea had the second-lowest import market share (5.8 percent) for vehicles among 

member countries of the Organisation for Economic Co-operation and Development in 

2010. 

The AAPC stated that the FTA negotiated and signed in 2007 with Korea was 

“insufficient to gain real market access for autos.” It identified the following areas of 

improvement in the modified automotive provisions in the December 2010 agreement 

that is to accompany the FTA: automotive safety and environmental standards, taxes, 

transparency, car and truck tariff phaseouts, and the inclusion of a special motor vehicle 

safeguard and enforcement mechanism. The AAPC stated that its members’ products will 

be more successful and competitive in the Korean market if the U.S.-Korea FTA is fully 

implemented and enforced as modified. 

Public Citizen3

In a written submission, Public Citizen said that it is a nonprofit public interest 

organization with 150,000 members and supporters that advocates for citizen interests 

before Congress, executive branch agencies, and the courts. Public Citizen’s submission 

does not specifically state support for or opposition to the modifications to the Korea 

FTA that affect passenger vehicles, but it provides its assessment of the Commission’s 

economic simulation exercise for the 2007 Korea FTA study and offers considerations for 

modeling the new supplemental auto agreement. Public Citizen identified and referenced 

studies to support the following key concerns relative to the Commission’s 2007 Korea 

FTA economic simulation exercise, as follows: 

(1) The reliance on the results of a computable general equilibrium (CGE) model 

to develop quantitative predictions of the effect of the Korea FTA on the U.S. 

economy, which they found “disturbing” because past results of CGE-based 

modeling have underestimated the economic effects of FTAs on the U.S. 

economy and resulted in “very poor accuracy.” 

 1

 This appendix reflects only the principal points made by the particular party. The views summarized are 

those of the submitting parties and not the Commission. Commission staff did not undertake to confirm the 

accuracy of, or otherwise correct, the information described. For the full text of written submissions, see 

entries associated with investigation no. 332-523 at the Commission’s Electronic Docket Information System 

(http://edis.usitc.gov/edis3-internal/app). 2

 AAPC, written submission to the USITC, February 14, 2011. 3

 Public Citizen, written submission to the USITC, February 14, 2011. 
D-4

(2) The tendency of CGE models to take tariff changes into account exclusive of 

other less quantifiable factors such as the attraction for multinational corporations 

to shift production to the territory of FTA partners because of the limited options 

for governments to regulate foreign and domestic companies. 

(3) The application of the same Armington elasticity (2.8) to both Korean and 

U.S. auto consumers despite information that Korean and U.S. auto consumers 

view imported cars at different degrees of substitutability for domestic cars. 

 

(4) The use of “coarse categorizations”—little or no adverse effect, significant 

adverse effect, and substantial adverse effect—to describe the quantitative results 

of a partial equilibrium model. Public Citizen suggests using the full numerical 

results in conjunction with the standard categories. 

To model the potential effect of the accompanying agreement, Public Citizen suggested 

that the Commission take into account “less quantifiable mitigating factors” and separate 

completion dates for tariff eliminations and implementation of changes to nontariff 

measures. Public Citizen explains that the changes in the regulatory requirements for U.S. 

autos imported into Korea mandated in the accompanying agreement will likely result in 

a “negligible” increase in U.S. autos exported to Korea because (1) previous Korean 

commitments to reduce barriers to U.S. auto imports did not result in higher Korean 

consumption and (2) the exemption of U.S. autos from Korea’s environmental and safety 

standards may intensify an “already existent perception” by Korean consumers that U.S. 

autos are inferior to their domestic manufactured product in terms of safety and 

environmental safeguards. Also, Public Citizen cautioned against including 

environmental exemptions (scheduled to expire in year 2015) with phased-out tariffs 

(scheduled for year 10 of implementation) when modeling for long-term effect, because 

the environmental exemptions will no longer be in place. 

United Steelworkers (USW)4

In a written submission, the USW said that it represents 850,000 members that produce 

products used in the manufacture of automotive vehicles, including steel, tires, glass, and 

aluminum. The USW stated that after analyzing the original U.S.-Korea FTA in 

conjunction with the recently negotiated provisions, they determined “that the FTA 

would undermine U.S. economic interests” and the USW would oppose its passage. 

The USW expressed concern that the recently negotiated provisions are not “selfexecuting” and that if the United States acts before Korea to pass both the original FTA 

and the recently negotiated provisions, the Korean government may subsequently enact 

only the original agreement without the follow-on amendments. 

The USW stated that, under the rules of origin provisions of the 2007 agreement, the 

methodology for calculating regional value content would allow a producer an average 

content threshold of 35 percent over that producer’s fiscal year for a class of vehicles, 

meaning that Korea could produce a qualifying model vehicle using 100 percent Korean 

originating content for domestic consumption and produce another vehicle of the same 

class using only 5 percent Korean content and 95 percent third-country content for export 

to the United States. The USW expressed concern that this regional-value content 

provision could allow a third country to produce the majority of the components that 

 4

 USW, written submission to the USITC, February 14, 2011. 
D-5

would receive preferential tariff treatment under the U.S.-Korea FTA (after incorporation 

into a qualifying passenger vehicle) even though those components would be subject to 

existing U.S. antidumping and countervailing duties and safeguards. The USW also noted 

that the 2007 rules of origin provisions allow auto producers to choose among three 

different methodologies to calculate percent of content, depending on which is most 

advantageous, and that the producers have the option of switching methodologies at any 

time. The USW recommends that the Commission’s investigation include an analysis as 

to how these methodologies could be used to minimize content from the FTA partner 

countries and maximize content from other countries. 

The USW also expressed concerns about the Kaesong Free Trade Zone (FTZ) in southern 

North Korea. The USW stated that there appears to be no commitment that would limit 

benefits from accruing to the North Koreans for components produced within the 

Kaesong FTZ if such components were to be included in final products exported to the 

United States. Instead, the original U.S.-Korea FTA transfers authority concerning the 

treatment of products for the Kaesong FTZ to a committee scheduled to be created after 

the FTA enters into force. The USW recommends that the Commission take into 

consideration the long-term potential of products or components from Kaesong FTZ 

entering the United States and receiving preferential trade benefits under the U.S.-Korea 

FTA. 

APPENDIX E 

Description of Possible Nontariff Measures 

Analysis and Simulation of the Absence of 

NTMs 

E-3

Description of Possible Nontariff Measures Analysis and 

Simulation of the Absence of NTMs 

The first section in this appendix provides further information on the calculation and 

interpretation of the quantity and unit-value information reported in box 1 of the main 

text of the study. The second section provides further information, including some 

caveats, about the economic model used to simulate the absence of the estimated price 

gap that can be attributed to Korean nontariff measures (NTMs) on imports of U.S. 

passenger cars. 

Use of Indicative Quantitative Information to Assess Possible 

Nontariff Measures Affecting Korean Imports of U.S. Products 

The analysis of NTMs affecting trade begins with the understanding that their effects are 

analogous to tariffs—i.e., NTMs restrict the quantity of imported goods and raise their 

prices. An import tariff raises the price to consumers of an internationally traded product 

and creates a “wedge,” or “gap,” between the price paid by consumers/importers and the 

price received by sellers/exporters of the product. In similar ways, importing-country 

policies that add to the cost of selling the good in their countries also create such a price 

gap.1

 Policies that restrict quantities raise prices as well, because the scarcity induced by 

the quantity restriction causes consumers to pay more. 

In the absence of NTMs, one would expect the import prices for a good of uniform 

specifications and quality to be identical in all countries, varying only by differences in 

transportation costs. Leaving aside transportation costs, if the only trade policy affecting 

import prices were tariffs, one would expect differences across countries in the price of a 

good including any tariffs, known as the landed-duty-paid price, to be roughly equivalent 

to differences in tariff rates. The more widely available, internationally comparable 

measure of import prices is the cost-insurance-freight (c.i.f.) price, which does not 

include tariffs. In an ideal case, in which one country exports an identical good to many 

different countries, differences in c.i.f. import prices should reflect only differences in 

transport costs. However, if there are several varieties for the product in question, then 

different countries might import a different mix of varieties, which could also lead to a 

difference in average c.i.f. import prices.2

This report uses various comparisons of international trade data in assessing the potential 

effects of NTMs in the Korean market. Directly comparing import unit values and import 

quantities for a small number of products of importance to U.S. exporters may help 

 1

 For example, cumbersome customs procedures or regulatory measures such as certification of technical 

standards may raise the cost of imported goods. Higher prices in turn lead to lower quantities of imports 

because the final consumer is less willing to pay the higher price. The analysis presented here is intended to 

address these market effects, not the extent to which such measures may or may not promote domestic policy 

objectives related to health or safety. 2

 Partner-specific export taxes and subsidies also could induce variation in the c.i.f. price. 
E-4

illustrate the impacts of these measures.3 In the presence of NTMs, one would expect 

either that Korean import unit values are noticeably higher than one might expect, that 

quantities imported by Korea are noticeably lower than one would expect, or both. In 

previous work, USITC analysts and others have used a variety of methods to assess the 

effects of NTMs on goods trade.4

 

If products were homogeneous, i.e., all countries imported exactly the same type and 

quality of products within a trade classification, calculating price effects of trade policy 

measures would be straightforward; comparing the import price of a particular country 

that applies NTMs with that of countries known not to apply NTMs (and adjusting for 

transportation cost differences) would provide a reasonable estimate of a price 

differential. However, products within a trade category (e.g., products grouped according 

to a given 6-digit Harmonized System [HS] code) are generally more heterogeneous than 

this. Countries do not import the same mix of products, and a country’s imports within a 

particular category may differ in quality as well from those of another country. 

In developing NTM price gaps for this report, we calculate the percentage by which 

Korea’s unit value of imports from the United States exceeds the U.S. export unit value 

to the world. (This comparison, in effect, assumes that what U.S. exporters sell to Korea 

is comparable to what they sell to the world.) Some of this discrepancy may be 

attributable to shipping costs, but where the import unit value differences are relatively 

large, one may infer that some are due to the capture of rents by various parties involved 

in the international transaction. 

We also perform quantity comparisons in which average Korean import quantities from 

the world, at the HS-6 level, are compared with import quantities of other countries. 

Because one would expect that larger economies import more, the comparisons are made 

in terms of import quantity per million dollars of gross domestic product (GDP).5

 

Price and quantity data were taken from Global Trade Analyzer, a product of GTIS, 

which reports primary-country trade data for a sample of more than 60 countries, a group 

that includes most large traders. Prices are calculated as unit values and averaged for the 

period January 2008–November 2010. Quantity comparisons are averaged for the period 

2007–09. The relative unit for passenger vehicles is number of vehicles. Comparisons of 

 3

 Because prices charged for goods subject to an NTM are likely higher than those that would be 

generated from production and transport costs alone, they may generate benefits, or “rents,” for some entity 

in the supply chain. Depending on where in the supply chain these measures are implemented and on the 

bargaining power of different agents in the supply chain, the higher prices arising from NTMs may be 

observed at points other than at the point of unloading (the c.i.f. price). For example, “behind-the-border” 

restrictions, such as excise taxes, may lead to higher wholesale or retail prices. Comparisons in this study are 

made in terms of c.i.f. prices not only because of the availability of internationally comparable data, but 

because c.i.f. prices are in effect import prices, and the measures in question are usually understood to affect 

the act of importing in some way. NTM price gaps presented in this report are meant to be suggestive rather 

than dispositive. 4

 See USITC, India, 2009; USITC, Global Beef Trade, 2008; Linkins and Arce, “Estimating Tariff 

Equivalents of Non-Tariff Barriers,” 2002 (foundational discussion of estimating price gaps of NTMs); Dean, 

Feinberg, and Ferrantino, “Estimating the Tariff-Equivalent of NTMs,” 2005, 289–310 (econometric methods 

using price data); Ferrantino, “Quantifying the Trade and Economic Effects of Non-Tariff Measures,” 2006 

(broader review including both price and quantity methods by a variety of researchers). 5

 This is equivalent to maintaining the hypothesis that import demand of the representative international 

consumer is unit elastic with respect to income, i.e., that a 1 percent increase in income leads to a 1 percent 

increase in import demand. Exploratory econometrics showed that this is a reasonable assumption for the 

products under consideration in this study and, in most cases, is a conservative assumption. Consequently, 

most of the true income elasticities are likely to be somewhat higher than 1. If these were used in the analysis, 

it would be more likely to find that Korean import quantities appeared unusually low. 
E-5

quantities exclude a few countries whose unit of measure for passenger vehicles is 

kilograms or some other noncomparable unit. This may affect the quality of the 

comparisons and has been noted when applicable. 

The Applied General Equilibrium Simulation Model

The applied general equilibrium (AGE) model that is used to simulate the effects of 

Korean NTMs for U.S. passenger cars is similar to the comparative-static Global Trade 

Analysis Project (GTAP) model that was used to simulate the U.S.-Korea FTA in the 

2007 USITC report regarding the potential economy-wide effects of the FTA.6

 Unlike the 

standard GTAP model, however, the model used in this report tracks demand for U.S. 

products by specific industry and consumers in Korea; in other words, the sourcing of 

imported products is implemented at the industry and consumer level.7

 This feature of the 

model allows a more precise specification of the simulation. Assuming that imported 

passenger cars in Korea are destined for final demand use and that they are not used as 

intermediate inputs, the simulation can focus on Korean demand for U.S. passenger cars 

even though, in the model’s database, passenger cars are aggregated with other products 

in the GTAP sector “MVH,” which represents motor vehicles and parts. The data are 

from GTAP version 7.8

Simulation Specification 

The results reported in box 1 in the main text of the study are from a simulation of the 

results of removing the estimated 7.5 percent price gap for U.S. passenger cars that are 

imported into Korea. No other policy is changed in this simulation. 

The 7.5 percent price gap is a trade-weighted average of the estimated price gaps that 

could be attributed to Korean NTMs, applied to imports of small-displacement 

(HS 8703.23) and large-displacement (HS 8703.24) passenger cars from the United 

States during 2008–10. The estimated price gap for small-displacement passenger cars is 

16.6 percent, and the estimated price gap for large-displacement passenger cars is 

1.2 percent. 

Sensitivity Analysis 

The range of the effect on U.S. passenger car exports to Korea reported in box 1 is from 

the sensitivity analysis regarding demand and trade elasticities for Korean demand for 

passenger cars. The more substitutable U.S. passenger cars are with Korean passenger 

cars, the greater the U.S. export effect is likely to be. Three Korean final demand 

elasticities were selected for sensitivity analysis in this simulation: the own-price final 

demand elasticity for all (domestic and imported) passenger cars in Korea; the Armington 

trade elasticity that determines the sourcing of imported passenger cars (parameter σM in 

the GTAP model) for final demand; and the Armington trade elasticity that determines 

substitution possibilities between domestic and imported passenger cars in Korea 

 6

 For a discussion of the comparative-static GTAP model, see USITC, U.S.-Korea Free Trade Agreement, 

2007, app. F. 7

 The standard GTAP model applies the assumption of national product differentiation. According to this 

assumption, the model tracks the sourcing of imported products for the economy as a whole. Thus, the 

assumption of national product differentiation does not allow the model to track the use of U.S. products by 

specific industries and consumers. 8

 Narayanan and Walmsley, Global Trade, Assistance, and Production, 2008. 
E-6

(parameter σD in the GTAP model, which is computed as σD = σM/2). Table E.1 lists the 

range of elasticity values that were considered in the sensitivity analysis. 

TABLE E.1 Specification of sensitivity analysis: Range of parameters in Korean final demand for passenger cars 

Parameter 

Standard 

GTAP value Low value High value 

Own-price elasticity for passenger cars in Korean 

 final demand –0.42 –0.23 –0.60 

Armington elasticities: σM (σD = σM/2) 5.60 (2.80)* 4.87 (2.435)* 6.33 (3.165)* 

* Source: Hertel et al., How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements? May 2003. 

Simulation Results 

The simulation results for Korean imports of U.S. passenger cars from the removal of the 

7.5 percent price gap are presented in table E.2. No other policy is changed in this 

simulation. 

TABLE E.2 Simulated effects for Korean imports of U.S. passenger cars from the removal of the 7.5 percent price 

gap that could be attributed to Korean NTMs under different values for selected parameters in Korean final demand 

(percent change) 

Own-price elasticity for passenger cars in Armington sourcing elasticity for passenger cars: σM (σD = σM/2) 

Korean final demand Low Standard GTAP High 

Low 40.6603 47.9792 55.6602

Standard GTAP 40.6714 47.9912 55.6731

High 40.6819 48.0025 55.6853

Source: USITC staff simulations. 

All the variation in the simulated effects stems from variations in the Armington trade 

elasticities. The own-price elasticity of overall demand for passenger cars is not 

influential because total imports represent a small share of total demand for passenger 

cars in Korea. 

The simulated results suggest that, in the absence of the estimated 7.5 percent price gap, 

Korean imports of U.S. passenger cars would experience an increase in the range of 

40.66–55.69 percent. 

During 2008–10, the average annual level of Korean imports of U.S. passenger cars was 

approximately 7,700 units. Thus, the percent changes reported in table E.2 suggest that, 

in the absence of the estimated 7.5 percent price gap, Korean imports of U.S. passenger 

cars would have increased from roughly 7,700 units to roughly 10,800−12,000 units; the 

value of U.S. exports of passenger cars to Korea would have increased from roughly 

$119 million to roughly $167–$185 million, also an increase in the range of 40.66–

55.69 percent.9

 As noted above and in box 1 in the main text of the study, Korean NTMs 

applied to U.S. passenger cars likely contribute to this price gap. 

 9

 The simulated percent changes in the volume and value of U.S. passenger car exports to Korea are the 

same because the removal of the 7.5 percent price gap causes the U.S. export price of passenger cars to 

increase only slightly. 
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Measuring the Impacts of Korean NTMs for U.S. Passenger Cars 

and Model Limitations 

The probable effects of Korean NTMs for U.S. passenger cars are estimates of the 

marginal effects of the NTMs, which are summarized by the estimated price gaps, 

holding constant all other exogenous variables, such as changes in technology and 

business practices, changes in consumer preferences, or changes in macroeconomic 

policy or other trade policies. These model results should not be considered as forecasts 

or predictions of future trade flows because many things affect those flows, including 

other economic variables that were not considered in this analysis. 

As stated, changes in U.S. exports of passenger cars to Korea are calculated as percentage 

deviations from the base data and are quite stable with respect to changes in the database. 

That is to say, if the base data referred to a different time period, the marginal percentchange effects of the price gap on U.S. exports of passenger cars to Korea estimated by 

the model likely will still be similar to those presented here, relative to the new database. 

Economic models capture the most important factors for the question under 

consideration. They are limited, however, in their ability to reflect the degree of 

complexity evident in the real world.10 Thus, a number of caveats are necessary regarding 

this modeling framework. One source of bias, found in virtually any quantitative analysis 

of economic data, arises from the process of data aggregation. International trade occurs 

in thousands of different products and services: the United States collects trade data 

under about 17,000 statistical categories and some 10,000-plus tariff rate lines. For most 

general equilibrium analyses, these groupings represent far too much detail to be tractable 

computationally. Furthermore, analysis and comparison of data collected from different 

economies require that data be aggregated into categories that are generally comparable 

from one economy to another; finding or constructing comparable categories can be very 

difficult. 

This aggregation process introduces two general types of bias into a modeling exercise. 

One type involves the calculation of price gaps for aggregated product categories. In this 

study, a trade-weighted average price gap was calculated. The value of trade in a tariff 

line provides the weight for the price gap for that tariff line. This procedure tends to mask 

the importance of those products within the aggregated product categories that have 

particularly high price gaps and that therefore present a greater barrier to imports than 

would be the case if all goods within the aggregation had the same average price gap. As 

a result, the analysis may understate the effect of removing the price gap of a high-pricegap component (in this case, small-displacement passenger cars) of the aggregated 

product categories. Another type of aggregation bias is the likelihood that goods within 

an aggregated product category may not be close substitutes for one another. Imported 

goods of a particular category may be quite dissimilar to an economy’s domestic product 

in that category. When the price of an import falls, for example, the model may indicate a 

certain amount of substitution of that import for the domestic product when, in fact, they 

 10 Examples of real-world complexities that are difficult to reflect in the model include the changing 

relative growth of different economies; politically motivated export-oriented investment; relationships 

between multinational subsidiaries that influence trade patterns; and such things as catastrophic weather or 

violence that are inherently unpredictable (at least in their details). 
E-8

are not close substitutes. In this case, the model would overstate the effect of a given 

average price gap removal.11

Despite these limitations, the simulations performed here can be quite useful in providing 

insights on the effects of Korean NTMs for U.S. exports of passenger cars. The model 

presents a unified framework in which to assess the likely effects of the policy. 

 11 This type of bias is reduced in empirical trade models, such as the GTAP model, that apply the 

Armington assumption, which treats products from different economies as imperfect substitutes. 
E-9

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