The bilateral trade agreement between South Korea and the EU will help revitalise international trade.
The EU has long argued that one of the main ways out of the current economic problems afflicting its Member States is to encourage international trade, and it worked as hard as any of the participants to revive the moribund World Trade Organization (WTO) talks. However, lack of progress over several years with regard to multilateral deals left it with little choice other than to pursue bilateral options, and one of the most important of these is the reciprocal preferential trade agreement with South Korea, which entered into force in July 2011. One year on from that date, this article examines the benefits that were forecast to flow from the Free Trade Agreement (FTA) and looks at the extent to which experience has matched up to expectation.
What did the EU expect to get from the deal?
South Korea’s economy is the EU’s sixth most important trading partner outside Europe, behind the USA, China, Japan, India and Brazil. Most significantly, EU exporters of industrial and agricultural goods to South Korea will no longer pay tariffs, meaning that exporters will potentially save €16 billion annually. In addition, the FTA will open up several billion euros worth of new opportunities for EU companies in the services sectors as the Agreement will not only offer commitments on services on a par with those offered by South Korea in its draft FTA with the USA, but also go beyond those in sectors of specific EU interest. These include securing full market access for EU’s shipping firms and enabling access for EU providers of international express delivery services to the Korean market.
Under the FTA, South Korea will generally recognise European certificates and test results. Therefore, no duplicative tests or certification will be required, tackling non-tariff barriers (NTBs) in the electronics, pharmaceutical and medical devices sectors. Another important EU sector – car manufacturing – will gain from a combination of elimination of South Korean duties and NTBs. The 8% tariff on EU cars exported to South Korea will be removed, which means that, for every car worth €25,000 exported to South Korea, €2000 in duties will be saved. Of even greater significance is the ambitious NTB package under which South Korea accepts equivalence of international or EU standards for all its significant technical regulations.
The FTA includes a comprehensive chapter covering provisions on copyright, designs, enforcement and geographical indications (GIs). It also prohibits and sanctions certain practices and transactions involving goods and services which distort competition and trade between the parties. This suggests that anti-competitive practices such as cartels, abusive behaviour by companies with a dominant market position and anti-competitive mergers will not be tolerated by the EU and South Korea, and will be subject to effective enforcement action.
Finally, the Agreement includes an efficient dispute settlement mechanism to ensure the enforceability of commitments taken, as well a mediation mechanism to tackle NTBs. The procedures envisaged under the dispute settlement chapter foresee arbitration ruling within 120 days, much faster than anything available through the WTO.
One year on
The importance of the deal with South Korea is that it is the first of a new generation of FTAs intended to go further than ever before with regard to lifting trade barriers and making it easier for European and foreign companies to do business together. The reaction of EU Trade Commissioner Karel De Gucht to the first few months of the Agreement suggests that the Commission is happy with the way things are going so far. Because of lower import tariffs for European products at the Korean border, he said that EU firms had made estimated cash savings of €350 million in duties after just nine months.
The full benefits are not apparent at this early stage, he explained, as the FTA envisaged eliminating tariffs for industrial and agricultural goods in a progressive, step-by-step approach. By 1 July 2016, the majority (98.7%) of import duties in trade value for both industrial and agricultural goods will be eliminated, but it will not be until July 2031 that all (well, 99.9%) of EU-South Korea bilateral trade will be duty-free. It will, the Commissioner suggests, be 5 or 10 years before the trade benefits of the agreement can be assessed with certainty. To get at least a preliminary view of the success or otherwise of the FTA, the Commission has compared EU trade figures with Korea over nine months – from the entry into force in July 2011 until March 2012 – with an average of the figures from the same months over the previous four years, to reflect the fluctuation in trade due to the economic crisis.
Impact on exports
This showed that EU exports to South Korea increased by €6.7 billion, or 35%. Exports to other countries also grew during this timeframe (by 25%) but the greater level of increase of exports to Korea indicates, in the Commission’s view, that the early tariff eliminations are already having some effect.
- Exports of products where the tariff was eliminated on 1 July 2011 (eg wine, some chemical products, textiles and clothing, iron and steel products, machinery and appliances, representing 34% of EU exports to South Korea) increased by €2.7 billion (46%)
- For products that were only partially liberalised on 1 July 2011 (eg cars and agricultural products, representing 44% of EU’s exports to Korea), the increase is €3 billion (36%)
- For products where there was no change to the tariff (eg some agricultural products, representing 18% of EU exports) the increase is €1 billion (23%)
Among the real success stories were pork – exports up by almost 120%, which equates to new trade worth almost €200 million – and leather bags and luggage, up by over 90%, representing €150 million in extra trade.
What’s next?
With similar deals pending with the USA, India, Canada, Japan and Singapore, a lot depends on the pioneering Korea deal being a success. So far, at least, the outlook looks to be cautiously optimistic.
