Cause and Effect in European Politics and Law

Global Europe = Free Trade. The South Korean Breakthrough

Irena Mihaylova, October 27, 2011

Due to the euro zone crisis, it seems we have forgotten that European strength lies in trade, and that good deals stand at the heart of a successful economy. It would be nice, though, if deficits are replaced by surpluses in Europe, as provided for in the first of its kind EU "global" free trade agreement (FTA) with South Korea (the 13th largest economy in the world and third in Asia), which entered into force in July 2011.

With the ratification of the agreement by the European Council and subsequently by the European Parliament in 2010, the EU outran the US in liberalising its market for that country. The US Congress finally approved the free trade agreement with South Korea on the 13th October this year, while the EU marked the first 100 days of the massive undertaking at an official meeting in Seoul the day before.

The deal with South Korea, in place since the 1st of July this year, is the most ambitious trade deal concluded by the EU – and our first in Asia. It has an unprecedented level of tariff dismantling and some groundbreaking provisions on non-tariff barriers. I hope your businesses are beginning to bear the fruit”, EU Trade Commissioner Karel De Gucht stated in his speech “Going global: EU trade relations with major trading partners” at the Business Europe forum earlier this month.

The figures: 5 years after the entry into force of the FTA 98.7% of bilateral trade duties both for industrial and for agricultural products will be eliminated. By the end of the transitional period only certain agricultural commodities such as garlic will be subjected to tariffs. In 2010, trade between the two parties exceeded 66 billion euros. The EU is expected to reduce its current trade deficit with South Korea, thanks to the lucrative deal and the huge growth potential of the Korean market. For products like chemicals, pharmaceuticals, auto parts, industrial machinery, shoes, medical equipment, metals, iron and steel, leather, wood, ceramics and glass the EU reports a stable profit. In terms of agricultural goods, South Korea is one of the most valuable export markets for European farmers globally, with annual sales of over EUR 1 billion. In services, according to 2009 data, Europe has a surplus of 2.1 billion euros. The EU is the largest foreign investor in South Korea and at the same time the second largest export destination for the Asian country after China.

However, the groundbreaking deal did not come into force without concern from the Europeans. The European auto industry has been particularly tense because of the danger of flooding the market by South Korean automobiles, made of cheap Chinese components. In its face, the free trade agreement has an outspoken rival. The European Parliament defended the industrialists before ratifying the treaty in February 2010 and gained the right to request an inquiry from the Commission for possible adverse consequences infringing on European business. The inquiry could lead to so-called "safeguard measures" to be imposed on imports from South Korea.

Despite the contentious moments between the different parties, the 27 member states, the Commission, the European Parliament and businesses, a compromise was reached. And the fact that European exporters will save 1.6 billion euros annually from not paying customs duties, and about 850 million from day 1 of the deal prevailed over the fear of competition.

At the first meeting of the EU-South Korea Trade Committee, held on 12 October in Seoul, Korean Trade Minister Kim Jong-hoon and EU Trade Commissioner Karel De Gucht noted the success of the initiative and the quick overcoming of obstacles along the way. According to the European Commissioner, "the commitment and pragmatism of both sides" have secured the foundations for a good start of the deal. Both sides agreed to coordinate details in the area of electronics, such as the need for common testing of electronic products; and also for motor vehicles - such as rules for diesel emissions and safety standards on cars, and even for common standards on electric vehicles (e-cars).

It is a fact that Korea is famous around the world with brands like Hyundai, KIA, Daewoo and Samsung, and is also among the leaders of digital revolution. On the other hand, the US and Japan worry that the global agreement can hurt their sales in Europe and Asia. It is much likely that Japanese manufacturers will subsequently lose their shares in the European auto and electronic markets. Europe, in turn, presses hard on the Korean market, and besides machinery and equipment, sells agricultural commodities such as pork, dairy products and last but not least whisky, which will be protected against imitations by the agreement and will cost 20% cheaper for Koreans.

European competition to US pork, however, proved to be a strong argument and the US Congress in turn hurried to ratify the long awaited deal after several years of delay when it was first initiated by President George Bush Jr. South Korea agreed to halve the current rate of 8% tariff on imports of American cars immediately before lifting it four years from the deal. In return, the United States allowed South Korea to extend duties on US pork for another two years.

On 27 October the European Commission will host a high-level conference on the implementation of the EU-South Korea FTA in Brussels. The aim of the seminar is to promote the initiative and to inform businesses about the grand benefits of market liberalisation. Also on the 27th, but this time in Sofia, there will be a business conference organised by the Atlantic Club in Bulgaria and the Embassy of the Republic of Korea on "The Free Trade Agreement between Korea and the EU – growing opportunities for Korea and Bulgaria."