U.S. President Donald Trump signed an executive order on the 26th to impose 25% tariffs on all imported cars from the 3rd of next month. If this happens, the tariff rate for Korean cars will rise from 0% to 25% under the Korea-U.S. Free Trade Agreement. Last year, South Korea exported $34.7 billion worth of cars to the U.S., or 49.1 percent of its total car exports, with the move predicting a 20 percent drop in exports.

GM Korea exports 85 percent of its output to the U.S., which is expected to be the hardest hit. If it loses price competitiveness due to tariffs, it may withdraw from Korea. Hyundai Motor Co. also exports 30% of its domestic production to the United States, focusing on luxury vehicles, so the impact cannot be small. Moreover, the Trump administration said, "A 25% tariff will also be applied to key auto parts, including engines," which is expected to hurt parts makers. It is an unprecedented crisis that could shake the entire ecosystem of the Korean automobile industry.

To respond to the crisis, the government should make all-out efforts to win favorable treatment in the mutual tariff negotiations scheduled to be announced on April 2. As President Trump mentioned that "mutual tariffs will be generous," the tariff rate should be lowered by making the most of it. It should also be emphasized that Hyundai Motor has pledged $21 billion in investment to contribute to the U.S. economy, and it is unreasonable to be subject to a tariff bomb. Automotive parts need to use the Korea-U.S. FTA as leverage. As the Trump administration said it would maintain zero tariffs on parts that comply with the U.S., Mexico and Canada agreements for the time being, the Korea-U.S. FTA should be negotiated to receive similar benefits.

Companies also need to increase U.S. local production to avoid tariffs. Hyundai said it already has facilities capable of producing up to 1.2 million units a year in the U.S. However, if local production is increased, domestic industries can be hollowed out. The government should increase R&D support for the development of high value-added vehicles and consider tax cuts to promote domestic consumption, even if it is to protect the domestic industrial ecosystem. We can protect the Korean economy by protecting the automobile industry.