Korean exports, stuck because of trade issues…Direct/indirect impact inevitable

Korean exports, stuck because of trade issues...

Direct/indirect impact inevitable

U.S. excludes Korean automobiles from subsidy payments

Mid-to-long term impact from European Chips Act

Ruling on illegal subsidies to Korean steel also to have impact

Global trade issues have made Korean exports remain stuck. Although this is not new, the problem is that trade protectionism is intensifying with time. On the third week of April (April 16-22), a series of news were delivered, including that 1) the U.S. had excluded Korean automobile companies from being subject to EV subsidy payments as per the Inflation Reduction Act; that 2) the European Chips Act’s three party agreement had been reached; and that 3) U.S. Department of Commerce had made a preliminary ruling on imposing countervailing tariffs on Korea-made steel.

●Hyundai Motors and Kia Motors excluded from receiving U.S. subsidies 

On April 17, in accordance with the detailed guidelines of the Inflation Reduction Act, the U.S. government announced the models regarding the 16 EVs (including 22 lower models) subject to a payment of up to USD 7,500 in subsidies. Previously, if an automobile met the condition of being assembled in North America, it would be eligible for subsidies, but this year, there are stricter battery-related conditions that must be met, which has resulted in less EV models that can receive benefits.

The EVs announced on this day by the U.S. Department of Treasury as eligible for subsidy payment include Tesla Model 3 and Model Y; Chevrolet Bolt and Equinox; and Ford E-Transit and Mustang, etc. Only vehicles of U.S. manufacturers were on the list. The electric vehicles of South Korea’s Hyundai Motors and Kia Motors were not included on the list because they did not meet the requirements. In the case of GV70 of Hyundai Motors, which is being assembled in the Alabama Factory, it received subsidies before announcement of the detailed conditions, but was excluded in the recent case.

Nissan, which was qualified for subsidies due to operation of factories in North America, was excluded from the recent list, as well as some U.S.-made EVs that could not meet stricter battery conditions, resulting in a general reduction of the number of models that would benefit, from the previous number that exceeded 40. The IRA stipulates in legal provisions that subsidies of up to USD 7,500 would be paid in the form of tax credits to EVs ultimately assembled in North America.

Notably, according to the detailed guidelines announced at the end of March, even in the case of EVs that were finally assembled in North America, in the case of this year, 1) when using 50% of battery parts with ones manufactured and assembled in North America, USD 3,750 would be paid as subsidies, while 2) when using 40% of critical minerals with those mined and processed in the U.S. or FTA partners, USD 3,750 would be paid. However, the impact could be minimized in the case of commercial sales such as leasing, which is subject to tax credits regardless of conditions, as well as through price cuts. Actually, the share of sales of Hyundai Motors and Kia Motors’ environmentally-friendly commercial vehicles within the U.S. rose from 5% in the first quarter of last year, to 28% in the first quarter of this year.

●Impact on automobile exports inevitable

Immediately after the news were delivered that Hyundai Motors and Kia Motors were excluded from the list of targets for U.S. subsidies, Korea’s Ministry of Trade, Industry and Energy issued a message that these measures were not completely disadvantageous to Korea. “The companies manufacturing finished cars that were announced on the list of those eligible for tax credits to EVs as per the IRA were only U.S. companies,” it stated. “This is because Hyundai Motors, Nissan, Volkswagen, Volvo, Audi, BMW and others that were recipients of tax credits previously were excluded this time.”

However, the key is not held by Korea’s Ministry of Trade, Industry and Energy, but by U.S. consumers. “Which car would you choose ？ a subsidized one or a non-subsidized one?” The foreign press revealed answers to this question.

Bloomberg Professional Services recently introduced the example of Andrew Scott (age 37), a lawyer working in Chicago, reporting that U.S. consumers are changing their minds about automobile purchasing. Scott considered purchasing a new car, and had in mind Hyundai Motors’ EV, Ioniq 5 SUV. However, he changed his mind, and is almost definitely going to purchase a plug-in hybrid, because of the fact that the aforementioned Hyundai model was excluded from the list of those eligible for subsidy payment of up to USD 7,500.

Mentioning Ioniq 5, Scott said, “If it is not on the list [of models qualifying for subsidies], I will not buy it…Buying a car that gives subsidies changes my purchasing power, and enables me to buy a more expensive car.”

Bloomberg warned that EV manufacturers including Hyundai Motors excluded from the list of EVs subject to subsidy payments by the Biden Administration will be greatly impacted. Bloomberg reported that there was nothing surprising about the fact that Hyundai Motors’ EV model was disregarded, and that more consumers like Scott would change their plans for purchasing new cars pursuant to this measure to pay out subsidies.

●Settlement of European Chips Act… Mid to long term effect on Korea

On April 18, the European Commission announced that the “three party agreement” of the European Chips Act had been settled. This three party agreement was a political agreement among the three parties of the European Council and European Parliament regarding the European Chips Act first proposed in February of last year by the European Commission.  

The European Chips Act contains the plan to promote the regional semiconductor industry through subsidies and investment totaling EUR 43 billion. By 2030, EU’s market share in global semiconductor production is aimed to increase from the previous 9% to 20%.

First, they will pursue the Chips for Europe Initiative by injecting EUR 3.3 billion for strengthening technological competence and stimulate innovation in the area of semiconductors. Next, they will provide a basis for payment of subsidies for production facilities (integrated production facilities and open-type foundries) that can contribute to stabilizing the EU regional semiconductor supply chain. Finally, a system will be adopted for monitoring and crisis response in regard to the EU semiconductor supply chain.

Although we must check the contents of the finalized Act that are posted in the official gazette upon European Council and European Parliament approval, currently, there are no production facilities of Korean semiconductor companies such as Samsung Electronics in the EU, and according to industry analysis there will not be a direct immediate impact on Korean entities.

However, from a long term perspective, if the semiconductor manufacturing competence of the EU were to be strengthened, the export market of Korean semiconductors would only shrink, which would intensify global competition.

“Whether it be the U.S. or Europe, the key is to ultimately provide subsidies in order to nurture semiconductor companies and expand intra-regional production…There aren’t many companies in Europe that can make semiconductors. This would eventually mean that they are beckoning companies like TSMC or Samsung Electronics to come to Europe,” remarked an expert in the industry.

The European Chips Act follows the U.S. Chips Act, and its ultimate purpose is to expand its domestic/regional semiconductor supply chain through subsidies.  

The U.S. has budgeted a total of USD 52.7 billion for 5 years through the Chips Act which took effect last year, in order to encourage U.S. investment in semiconductor companies, such as semiconductor production subsidies (USD 39 billion) and R&D support (USD 13.2 billion). From March 31, the U.S. Department of Commerce has been receiving applications from companies that wish to build a high-tech semiconductor factory, while for the remaining post-processing facilities such as packaging, etc., applications can be made until June 26.

On the other hand, previously on March 16, the European Commission announced the first draft of the Critical Raw Materials Act (“CRMA”). The aim was to improve the weakness of the regional supply chain for critical raw materials necessary for carbon neutrality, digital conversion, and strategic industries such as space and defense.

By 2030, they plan to expand the intra-regional production capacity of mining to 10%, refining to 40%, and recycling to 15% over EU’s annual volume of demand for critical raw materials. At the same time, they plan to diversify the supply source, so that the dependence of imports of critical raw materials from an extra-regional country does not exceed 65%.               

However, in this draft, the European Commission emphasizes repeatedly that the sustainability conditions be adhered to upon production of raw materials, such as environment and labor conditions. In the future legislation process, the possibility of adopting intra-regional industrial protection measures aimed at social and environmental impact would have to be heeded. 

This rule is expected to have the greatest impact on companies that use 5 out of the 16 types of critical raw materials such as lithium and nickel, and which manufacture EV battery cells and materials/parts that have a high share of exports to the EU.

●“Korea’s low industrial electricity fees are subsidies for steel”

Korea’s Ministry of Trade, Industry and Energy said that the U.S. Department of Commerce had made a preliminary ruling on countervailing tariffs, stating that “the Korean government was actually giving subsidies to the steel industry through low industrial electricity fees.”

According to the Ministry of Trade, Industry and Energy, the U.S. Department of Commerce announced the results of a preliminary ruling at the end of February, and that countervailing tariffs of 0.5% would be imposed on Hyundai Steel’s thick plates.  

Countervailing tariffs are levied on products with lowered prices that are imported and could have a negative effect on the domestic industry, as their prices drop through the receipt of subsidies from the exporting country. Each year, the U.S. Department of Commerce considers countervailing tariffs on Korea-made steel products through annual evaluations.

To date, countervailing tariffs have been imposed for steel-related products, but this is the first time that a statement has been made on industrial electricity fees.

However, this recent announcement is still a preliminary one. It will take a couple of months for the final ruling. “Although it is a ruling of the preliminary stage, we plan to continue communicating with the industry and respond to minimize damage to Korean companies.”  

(Provided by Korea Trade News)