Global Policy Forum

EU, South Korea Free Trade Pact Enters into Force

EU’s free trade agreement with South Korea came into effect on July 1, 2011, and EU Trade Commissioner De Gucht has called it “the most ambitious trade deal ever conducted by the EU”. The agreement is the EU’s first trade pact with an Asian country and will largely eliminate tariffs between South Korea and its European counterparts. It is expected to raise EU exports by 19 billion Euros each year. However, while the deal does emphasize the signatories’ commitment to labor and environmental standards, concerns have begun to arise about the real potential for sustainable development under the pact. Japanese and German automotive companies are worried about maintaining competitiveness with cheaper South Korean automotives, and South Korea will be opened to the increased influence of transnational corporations.

International Centre for Trade and Sustainable Development
July 6, 2011

The EU’s free trade agreement (FTA) with South Korea officially came into force on 1 July, making it the 27-member bloc’s first deal with an Asian country; it also marks the largest trade pact negotiated by Brussels. The agreement, which was signed this past October (see Bridges Weekly, 13 October 2010), is expected to have major trade ramifications for both sides.

Trade between the two parties was estimated at €66 billion last year. The European Commission noted that EU exports could rise by approximately €19 billion with the deal, citing a study published by the Copenhagen Economics firm.

Ignacio Garcia Bercero, the EU’s chief negotiator, praised the agreement, noting that it “is very much the model of the type of trade agreement that we would very much wish to conclude with other countries in Asia.” India and Singapore are among several countries discussing similar trade agreements with the EU.

Under the agreement, tariffs will be eliminated or phased out on 96 percent of EU goods and nearly 99 percent of South Korean goods within three years. Within five years, duties on most industrial goods will be abolished.

The EU will benefit from a reduction in trade barriers to plastics, chemicals, and wines and spirits. The EU services industry will also experience a significant boost, as the trade deal will abolish regulations that restrict hotels, accounting services, and legal services from opening offices in South Korea.

The deal also includes provisions on intellectual property rights, serving as a complement to the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. Notably, geographical indications - which denote a product’s geographical origin as an indication of its quality - on both European and South Korean products will be protected; all agricultural indications will have the same levels of protection, according to the trade pact.

The agreement reaffirms commitments from both sides on sustainable development, with strong provisions on labour and environmental standards. Both parties have stated a commitment to the implementation of the International Labour Organization Conventions (ILO) that they have respectively ratified, along with their commitments toward the effective implementation of multilateral environmental agreements that each are party to.

“This Free Trade Agreement is the most ambitious trade deal ever concluded by the EU and should become a game-changer for our trade relations with Asia,” said EU Trade Commissioner Karel De Gucht.

The EU Trade Commission reports that the FTA will save EU exporters €850 million in tariff payments in the first year.

Automobile industry to be affected strongly on both sides

The international automotive industry is especially likely to experience significant impacts from the agreement. Over the next five years, South Korea’s eight percent tariff on imports of automobiles and auto parts from the EU will be abolished in steps; prices for European automobiles are expected to drop as a result.

South Korean Trade Minister Kim Jong-hoon stated that, although South Korean car companies will face a more competitive local market, the trade deal will allow them to make inroads into the much larger European market.

Auto manufacturers from Japan and Germany have expressed considerable anxiety about the agreement. South Korean automobiles are currently about 15 percent cheaper than the equivalent Japanese models, according to Japanese industry experts quoted in Japan’s Daily Yomiuri newspaper. The cut in tariffs on automobiles coming from South Korea could put like products from Japan at a disadvantage.

In 2010, South Korean auto manufacturer Hyundai Kia Automotive Group sold 38,100 more units in Europe than Japan’s Toyota Motor Corporation. Taniguchi Naoya, Chairman of Toyota’s British unit, noted that with the enactment of the trade agreement, “the gap in competition now exceeds anything we can overcome by our own efforts.” Similar sentiments were expressed by Verband der Automobilindustre, the interest group representing Germany’s automotive industry.

Implications for US

The US started negotiations with South Korea on a trade pact in April 2007, a month before Brussels and Seoul started their own negotiations. While the US-South Korea deal was signed in June of that same year, it has yet to be ratified by the US Congress. The past month has seen Democrats and Republicans wrangling over whether or not to attach a reauthorisation of the Trade Adjustment Assistance (TAA) extension to one of the deals; the TAA is a programme that provides benefits to US workers displaced by foreign competition. More on the US-South Korea deal can be seen in our earlier article in this issue, “US FTAs Reach Congressional Committees, Only to Face Political Limbo over Worker Aid.”

Choi Seok-young, Seoul’s top negotiator for free trade pacts, told the Associated Press that the early enactment of the EU-South Korea deal could pose problems for Washington: “US competitors in the Korean market and EU market would face comparatively disadvantaged positions from [July 1] onward.” For more on the US-Korea FTA, along with the US’ trade pacts with Colombia and Panama, see our earlier story in this issue.

ICTSD reporting; “EU sees S. Korea trade pact as model for Asia,” Agence France-Press, 19 June 2011; “South Korea-EU FTA takes effect,” ASSOCIATED PRESS, 2 July 2011; “S. Korea-EU FTA Threatens Japan,” DAILY YOMIURI, 4 July 2011; “Wissmann kritisiert Freihandel mit Südkorea,” HANDELSBLATT, 3 July 2011; “EU, South Korea launch trade pact,” WALL STREET JOURNAL, 1 July 2011; “SKorea-EU free trade agreement takes effect as Seoul-Washington deal remains unratified,” WASHINGTON POST, 1 July 2011; “S. Korea aims to up EU market share to 3 pct: official,” YONHAP NEWS AGENCY, 4 July 2011.


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