Korea, EU FTA to bring unprecedented benefits

The historic free-trade deal that is soon to be officially signed between Korea and the European Union is being lauded by experts as generally a comprehensive and positive deal for both sides.

Disagreements over such issues as trade subsidies and rules of origin had impeded the negotiation process, but experts from Seoul and Brussels believe both sides managed to strike a deal that would overall bring more good than harm.

Negotiations began in May 2007 with the aim of expanding trade, with total volume estimated at $106 billion. Lee Hye-min, Korea`s chief FTA negotiator, told reporters in Seoul yesterday that the accord was "very important" to the EU and cited the possibility of ratification in the first half of next year.

EU national governments backed the final FTA draft at a meeting of their trade experts on Friday in Brussels. The final approval, which is expected to come after the German elections on Sept. 27, will need the backing of governments at the ministerial level, Reuters said.



The Korean stock market responded favorably to the deal, with automobile, information-technology and chemicals-related stocks showing gains.

Stock market analysts cited the gains possible for Korea`s exported-oriented economy by having freer access to 27 economies in the European continent.

The Korea Institute for International Economic Policy, a state-run think tank, projects the deal to increase bilateral trade by as much as 20 percent.

Kim Do-hoon, an analyst at the Korea Institute for Industrial Economics and Trade, said active trade with the European continent would help boost Korea`s image as an "advanced trading nation." This could help induce more foreign direct investment, which has been on the wane in the protracted economic crisis, while taking business practices up to par with advanced nations.

A report released by the Korea Trade-Investment Promotion Agency yesterday stressed that the FTA is expected to bring "big benefits" to the country`s automakers, including auto parts manufacturers, as well as the electronics, textiles and chemical sectors.

More specifically, it highlighted passenger vehicles and other types of automobiles, as well as auto parts, televisions, set-top boxes, polyester textiles, knitwear, fork-lift trucks, and tires as having bright prospects.

KOTRA, however, advised Korean companies not to rely only on tariff-elimination to reap benefits. They voiced the need for seeking ways to cut logistics costs, localize management and marketing strategies and actively promote their brands.

While Korea would have priority access to the world`s largest economic zone, the EU would gain a strong foothold in the rapidly growing Asian region.

Korea was the European Union`s eighth-largest trade partner last year, while the 27-member economic bloc was Korea`s second-largest export market. Korea and EU trade officials have expressed their commitment to liberalizing the market in order to overcome the unprecedented global economic downturn.

Brussels has described the nature of their largest-ever FTA as "very ambitious" with respect to tariffs, services, investments, non-tariff barriers and intellectual property. Korea and the European Union believe the agreement will bring tangible benefits to all sectors of the economy.

Under the agreement, both sides would eliminate tariffs for 97 percent of its manufactured goods within a five-year period. The 10-percent tariff on Korean cars shipped to the EU would be phased out in three to five years, while removing Korea`s 8-percent duty slapped on European cars over the same period.

The EU Commission, the executive arm, said the FTA would remove duties worth 1.6 billion euros for European exporters. Of the total, it said about 1.2 billion euros represent industrial-goods duties. The commission believes the deal would save EU auto companies like Volkswagen AG, Daimler AG and PSA Peugeot Citroen 2,000 euros on every car worth 25,000 euros, Reuters reported.

Concerning rules of origin, which are necessary for duty-free treatment, the EU agreed to raise its restricted level of permissible foreign materials to 45 percent from 40 percent.

Lee said the duty drawback scheme, which can be used by both Korea and the EU, allows for placing a permanent cap on refundable tariffs if there is an "obvious awkward" increase in foreign sourcing by Korean manufacturers. Duty drawback allows the tariffs paid on parts used to manufacture a product, such as a car, to be refunded when the final product is exported.

European automobile association ACEA, however, has criticized the FTA as placing a "severe competitive disadvantage" on European industries. The ACEA argued that the "compromises made by the EU on duty drawback effectively open the door for cheap imports from China and other Asian countries, without giving similar advantages to European industries."

Although wider trade would bring new opportunities and diversify consumers` choices for competitive products and services, some economists have raised concern for Korea`s farming industry. They say that an influx of cheaper, high-quality EU agricultural goods would threaten the competitiveness of Korean goods.

The KIEP predicts the country`s agriculture sector to suffer 300 billion won worth of losses.

(sohjung@heraldm.com)



By Yoo Soh-jung