An FTA between EU-US to hurt South Korea

José Manuel Barroso, President of the EC on the right, and Kim Jong-Hoon, Member of the South Korean National Assembly, participated in the public lecture to commemorate 50 years of EU/South Korea diplomatic relations, (21/02/2013). EC Audiovisual Services).

José Manuel Barroso, President of the EC on the right, and Kim Chang-beom Head of the Mission of South Korea to the EU, participated in the public lecture to commemorate 50 years of EU/South Korea diplomatic relations, (21/02/2013). (EC Audiovisual Services).

Ten days ago, Brussels and Washington issued a joint statement signed by three Presidents, namely the US leader Barack Obama, the European Council President Herman Van Rompuy and European Commission President José Manuel Barroso. With it, the EU and the US announced their decision to conclude a bilateral Free Trade Agreement (FTA) by the end of 2014. The tight time schedule for its conclusion and the fact that this FTA will cover the trade between two partners, who account for half the world’s GDP, triggered the alarms all over the business world.

South Korea was the first country to start thinking about the repercussions on its own affairs of a possible FTA between the EU and the US. The fact is that South Korea is the only country of the world to have concluded and currently applying an FTA with the EU. So, this country had to come up with an early evaluation of this new major development in international trade. Reportedly, this first evaluation is negative. South Korea is also running a free trade agreement with the US. Let’s follow the facts.

EU and S. Korea

Last year, on 1 July 2012, the EU and South Korea marked the one year anniversary of the implementation of their own FTA. The EU-South Korea FTA has been in force since 1 July 2011. As the FTA has lowered import tariffs for European products at the Korean border, it’s estimated that EU firms have already made cash savings of €350 million in duties after just 9 months.

The EU-South Korea FTA is the first of its kind the EU concludes with a third country, after the World Trade Organisation Doha Round collapsed in July 2009. According to a Commission’s assessment, this FTA is unprecedented in terms of the scope and speed of tariff liberalisation and breaks new ground in tackling significant non-tariff barriers across all sectors, including automotive, pharmaceutical and consumer electronics. South Korea and the EU will eliminate 98.7% of duties in trade value within 5 years from the entry into force of the FTA. By the end of the transitional periods, import tariffs will be eliminated on all industrial products, and most agricultural products, with a few exceptions, such as rice. Let’s return however to the side effects from the EU-US possible FTA.

Side effects

South Korean media reported last Friday a statement by Lim Noh-Jong, an analyst at I’M Investment & Securities Co. who said, “South Korea stands to benefit from a situation where there are trade barriers between the U.S. and the EU”. Understandably, if those trade barriers between EU and US are lifted South Korea will suffer a blow. As a result, Lim concluded, “We may lose advantages in the two markets should they sign an FTA.” The same sources also reported Kim Hyung-Joo, a researcher at the LG Economic Research Institute as saying that such a deal between EU and US could also hurt China, which is South Korea’s largest trading partner.

On the official level, Park Jong-Han, a representative of the South Korean Ministry of Foreign Affairs and Trade, also commented negatively by saying that, “South Korea may no longer benefit from preferential tariffs. Local exporters must utilize South Korea’s free trade pact with the two regions to beef up their competitiveness.” Last but not least, it has to be noted that in the first months of South Korea’s trade agreements with the EU and the US the country’s exports to the former shrunk, while they grew towards the latter.

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