Is South Korea set to lose from its FTA with the EU?

Kim Jong-Hoon, Member of the South Korean National Assembly, José Manuel Barroso, President of the EC and Kim Chang-beom, Head of the Mission of South Korea to the EU (in the foreground, from left to right), participated in the public lecture to commemorate 50 years of EU/South Korea diplomatic relations. (EC Audiovisual Services).

The recent announcement (issued at the highest level by three presidents; Barack Obama, Herman Van Rompuy, Manuel Barroso), that the European Union and the United States were ready to start negotiations, aiming at the conclusion of a far-reaching Free Trade Agreement (FTA), sounded the alarm to other EU’s major trading partners and more so in South Korea. Seoul and Brussels have signed such a new generation FTA, which came in force on 1 July 2011. South Korea is the only Asian country the EU has concluded an FTA.

South Korea’s economy is the EU’s sixth most important trading partner outside Europe (behind the US, China, Japan, India and Brazil) and tenth overall. The EU is among South Korea’s top four largest export destinations together with China, Japan and USA.

When the EU-US initiative was announced a number of South Korean economists and researchers estimated that a possible conclusion of an AFT between the two world largest trading partners will harm their trade relations with South Korea and China. On top of that only a few days earlier, the South Korea statistical service published the 2012 foreign trade data from the country’s customs, showing that the FTA already in force between this major Asian economy and the European Union, has led to the first bilateral trade surplus in favour of the EU after 15 years.

Whatever the reasons for this negative turn in South Korea’s trade with the EU, it reminded everybody the criticism the FTA has provoked at the time of its conclusion. A number of analysts had strongly criticised it. However, if one analyses the causes of the South Korean trade balance deficit with the EU in 2012, it seems that the FTA has not much to do with it. The basic reason for this development was the fact that due to the crisis in Europe, South Korean exports to a number of EU countries of major items like ships and telecommunications devices and equipment dropped by 30%. At the same time, it must not be underestimated the fact that major Korean firms like the automotive companies KIA and Hyundai along with the electronics giant Samsung increased their production base in the EU.

The EU-South Korea FTA

In any case, this bilateral FTA has greatly helped EU exports to South Korea. The European Commission has published an account on the results of the first 9 months of the application of this FTA. The basic findings are quoted here below:

“…in the first 9 months of implementation EU exports to South Korea increased by €6.7 billion or 35% compared to the same period since 2007. EU exports to other countries also grew during this timeframe (by 25%) but the level of increase of exports to Korea (35%) indicates that the early tariff eliminations are already having some effect.

Exports of products where the tariff was eliminated on 1 July 2011 (such as 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 or 46%.

For products that were only partially liberalised on 1 July 2011 (such as cars and agricultural products, representing 44% of EU’s exports to Korea), the increase is €3 billion or 36%.

For products where there was no change to the tariff (such as some agricultural products, representing 18% of EU exports) the increase is €1 billion or 23%.

This means that exports of the products affected by Korea’s tariff liberalisation in the agreement grew €1.7 billion more than they would have done otherwise.

Exports of some specific products have grown faster than the average, for example:

*Exports of pork are up by almost 120%, which translates into new trade of almost € 200 million.

* Leather bags and luggage exports increased by over 90%, worth € 150 million of extra trade.

*EU’s Machinery used for manufacturing of semiconductors proved to be very successful and it imports to Korea went up by 75% and represented € 650 million in additional exports.

*EU cars exports increased by over 70% a percentage which translates into € 670 million in new car sales in Korea”.

It is obvious that the FTA between the EU and the South Korea has greatly helped the EU products to penetrate further in this country’s markets. The problem is, however, in what way this FTA will be affected by a possible one between the EU and the US. Incidentally, Korea will not be the only country to have an interest on that.  The question is, if the EU-US negotiators will pay attention to the observations of the other nations?

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