European Union – South Korea FTA

After eight formal rounds of talks, on October 6, 2010, the twenty-eight-member European Union (EU) and the Republic of Korea (ROK, hereafter South Korea) signed a bilateral free trade agreement that went into effect on July 1, 2011. Being among the largest traders in the world, the EU and South Korea are important economic partners for each other in terms of both trade and investment. South Korea is the EU’s eighth largest trading partner and the EU, on the other hand, is South Korea’s second trading partner after China.[1] The EU-South Korea FTA reflects the EU and South Korean trade strategies to use FTAs to strengthen economic ties outside their home regions. It aims to boost goods and services exports especially from the EU to South Korea by eliminating relatively high South Korean import duties and other barriers to trade in industries from autos and pharmaceuticals to consumer electronics and textiles and apparel. By this Agreement, it is also intended to increase foreign direct investment flows between the two partners. The EU-South Korea FTA is a comprehensive pact that covers the broad range of economic activities in the EU-South Korean bilateral economic relationship. As the EU’s first “new generation”[2] FTA, and South Korea’s largest FTA in terms of market size, the EU-South Korea FTA has a great significance for both countries. In this sense, this paper aims to analyze what trade and FTA policies of both sides have made the Agreement possible to be born.

An overview of the EU-South Korea FTA

Relations between the EU and South Korea have been developing since 1960s based on a market economy and on democratic values. Diplomatic relations between the EU (then the European Economic Community, EEC) and South Korea were first established in July 1963. Entering into the 1990s, the close cooperative relationship advanced with a rapid increase in trade and economic exchanges such as the Framework Agreement and Joint Declaration on Political Dialogue of 1996 under which a formal system for regular economic and political cooperation have been established. This was followed by the conclusion of bilateral agreements like the Agreement on Cooperation and Mutual Administrative Assistance in Customs Matters of 1997, and the Framework Agreement on Trade and Cooperation of 2001. The relationship between the EU and Korea strengthened and intensified further in the 2000s, especially in economic terms, as trade and investment between them increased remarkably. Based on the positive outcome of continuous collaboration, both sides officially started negotiations for an FTA on May 6, 2007 on the purpose of further encouraging trade and investment exchanges. Following eight rounds of negotiations, on October 6, 2010, the EU- South Korea FTA was signed during the EU-ROK Summit in Brussels.

Composed of fifteen chapters together with special sector specific annexes covering automotive products, pharmaceuticals, chemicals, and consumer electronics, the EU-South Korea FTA establishes rules and procedures in trade in goods and services and addresses trade-related activities appertaining to competition rules, intellectual property rights, labor rights and environment protection.[3] It eliminates import duties on nearly all products, and it liberalized services trade to a great degree. The EU-South Korea FTA is also a pioneering in tackling non-tariff barriers, and to promote a future dialogue on industrial regulation.

From the European Union’s perspective: EU’s trade policy

The Treaty of Rome establishing the European Economic Community has been signed in 1957 with the aim of establishing a customs union to facilitate greater trade and investment amongst member states and to strengthen their bargaining power with other states. In line with this, the Community member states implemented the Common Commercial Policy by adopting a unilateral trade policy, and delegating authority to the European Commission to negotiate their external trade relations.

The EU has been a pioneer in negotiating preferential trade arrangements. Being one of the most comprehensive PTAs itself, the EU uses PTAs to maintain trade relations with neighboring countries as well as their former colonies among developing countries, and also as a transition mechanism in trade relations with countries to accede to the EU. Taking competitive industries of emerging countries such as India, Brazil and China into consideration, in the mid-2000s, EU business circles and external trade surroundings put increasing pressure on the EU to pursue bilateral FTAs. It was argued that “wisely constructed and ambitious bilateral agreements with carefully chosen partners could create new trade and improve the competitiveness of EU companies in key foreign markets experiencing high growth.”[4] In this regard, incorporating new objectives in external trade policy, the European Commission announced a new trade policy in October 2006, known as “Global Europe.” The strategy seeks to set out how the EU can build a more comprehensive, integrated and forward-looking external trade policy in a rapidly changing global economy, and in this way, to contribute to the EU’s competitiveness in foreign markets.[5] After realizing in the Doha Round that it is difficult to make progress in more complex issues such as competition policy, government procurement, regulatory issues and stronger intellectual property rights enforcement in multilateral system, negotiating FTAs with like-minded countries instead was regarded as a good option.[6] In this vein, the FTAs should be comprehensive in scope, promote liberalization of substantially all trade and be compatible with bilateral relations and the WTO in order to boost exports and investment of the member states.[7]

For selecting FTA partners, the Global Europe strategy sets down key economic criteria: Market potential (economic size and growth), level of protection against EU exports (tariffs and non-tariff barriers, NTBs), and potential partners’ FTA negotiations with EU competitors (potential discriminatory impact on European firms).[8] Considering these principles, the EU’s Global Europe strategy aimed for ambitious and high-level FTAs, aiming at the highest possible degree of trade liberalization, including liberalization of services and investment. Moreover, seeking deeper integration, the new FTAs would explicitly focus on tackling NTBs and contain strong trade facilitation provisions, intellectual property rights and competition.

Based on the criteria the Global Europe strategy proposed and the fact that it had negotiated an agreement with the U.S. that is the main competitor of the EU, South Korea was identified by the European Commission identified as a priority country for an FTA.[9] Thusly, the EU-South Korea FTA is the first of the new generation of FTAs under the Global Europe initiative. Compared to previous EU FTAs in force, the agreement is unprecedented both in its scope and in the speed at which trade barriers are removed. The majority of customs duties on goods were removed at the entry into force of the agreement and by 1 July 2016, practically all EU customs duties on industrial goods would be removed. This corresponds to almost 99% of all duties paid by Korea exporters before the entry into force of the agreement.[10]

Aside the economic issues such as trade and investment, economic policy dialogue and business cooperation, the EU also considers political issues as well as environmental issues while concluding the FTA with South Korea. More specifically, from the political point of view, Korea is considered as a key partner for important issues ranging from security in terms of countering the proliferation of weapons of mass destruction, combating illicit trade in small arms and light weapons and combating terrorism, as well as for environmental issues such as climate change and chemical policy.

From South Korea’s perspective: South Korea’s trade policy

Referred to as one of the Asian Tigers with its steady economic growth and impressive growth in GDP per capita, South Korea has been developed remarkably in the economic sphere as from 1960s as a developmental state where the state played significant role in macroeconomic planning, but also developed strategies for private sector development. Korea was incorporated into the global economy by joining GATT in 1967, and set the multilateral GATT/WTO system as a basis for reinforcing policies initiated in the 1980s, related to opening markets, deregulation and trade liberalization. Having become the ninth country in the world in December 2011 which has achieved the trade volume of 1 trillion US dollars, Korea has established itself as one of the leading international trading partners partially due to its export led economic growth.[11] In the last two decades, trade has grown from 50% of GDP to 90% of GDP, which is much higher than other countries and regions such as China, EU, Japan and the US.[12] Not only from an economic perspective but also from a political perspective, Korea is enhancing its international position regarding its membership in international inter-governmental organizations and its number of international treaties. Recently, South Korea puts its focus not only on multilateral trade policies but on FTAs. This is because it is recognized that FTAs can be a critical policy instrument for “upgrading the nation’s economic system in general and pursuing qualitative growth in the Korean economy.”[13] FTAs can boost industrial and national competitiveness, and South Korean through FTAs can achieve a more efficient trade system. South Korea recognized the significance of comprehensive, high-quality FTAs as a strategy for market expansion and boosting export, as well as increased efficiency and competitiveness in industrial structures.[14] As an economy heavily dependent on goods export and imported energy and resources, South Korea regarded FTA as one of the most effective means to secure its overseas markets.

As a global trend, the number of FTAs is increasing every day. In the Korean case, ongoing competitive pressure from Japanese firms, increased competition from Chinese enterprises, and the rapid ageing of the South Korean workforce have heightened the sense of urgency about boosting national competitiveness, and FTAs were seen as necessary for advancing South Korea’s economic well-being.[15] That is being the case, South Korea has put the top priority on concluding FTAs with countries that its competitors are negotiating with, and has made a great effort to reach as many FTAs as possible.

In this sense, in September 2003, the South Korean government announced an FTA roadmap setting down four principles of the government’s FTA policy: Multiple-track FTAs, advanced and comprehensive FTAs, transparent procedures in FTA preparation, and diplomatic consideration in FTA policy.[16] The roadmap also announced trade partners to be considered for FTAs on the basis of concrete economic criteria such as economic feasibility and large and advanced economies. It organized prospective FTA partners into two groups: Short term (negotiation within two years), and medium term (negotiation in more than three years).[17]

In the meantime, trade and investment with European countries increased rapidly. In 2007, the EU became the second-largest trade partner for Korea after China. Negotiating an FTA with the EU was included in Korea’s FTA roadmap announced in September 2003. The EU was included in the list of medium-term prospective FTAs, along with the USA and China. This was because “the impact of FTAs with large trade partners such as the EU would be much more significant than FTAs with small countries.”[18] The EU-South Korea FTA is the largest FTA in terms of market size that South Korea has entered into.

Conclusion

The EU-South Korea FTA reflects the larger trade strategies that both parties have been pursuing. Prior to the mid-2000s, both the EU and South Korea were reluctant to enter into bilateral FTAs. The EU was mostly conducting trade through regional preferential trade arrangements with its neighbor countries and former colonies whereas Korea was preferring to handle its trade through the WTO.[19] Nevertheless, over the last decade, both parties have not only been negotiating FTAs, but have done so at an accelerated pace. The EU-South Korea FTA is a remarkable result of both parties’ trade policies, as for the EU, it is the first of the new generation FTAs under the Global Europe strategy, and for South Korea, it is the largest FTA in terms of market size that it has entered into. Aiming to liberalize and facilitate trade in goods and services in conformity with Article XXIV of the GATT and Article V of the GATS, the Agreement seeks to establish a free trade area for goods and services between two parties while setting up related rules at the same time. In this sense, creating a more stable economic framework as well as a deeper integration between them, the EU-South Korea FTA has been beneficial to both parties, and it is of great significance in that it embodies the spirit of the renewed trade policies of both the European Union and South Korea.

 

[1] “South Korea-EU trade in goods,” Eurostat.

[2] European Commission, “Annual report on the implementation of the EU-Korea Free Trade Agreement,” 2.

[3] Cooper, Jurenas, Platzer, and Manyin, “The EU-South Korea Free Trade Agreement,” 1.

Marx, Wouters, Moon, Rhee, Park, and Yang, “EU-Republic of Korea relations in a changing World,” 1.

[4] Kang, “Korea-EU FTA: Breaking new ground,” 22.

[5] Kim, Lee, Lee, Yang, and Kang, “The EU’s FTA strategies in its new trade policy initiatives,” 3.

[6] Lakatos and Nilsson, “The EU-Korea FTA: Anticipation, Trade Policy Uncertainty and Impact,” 182.

[7] Kang, “Korea-EU FTA: Breaking new ground,” 31.

[8] Cooper, Jurenas, Platzer, and Manyin, “The EU-South Korea Free Trade Agreement,” 5.

Kang, “Korea-EU FTA: Breaking new ground,” 22.

[9] European Commission Directorate-General for Trade, “Global Europe: Competing in the World,” 10-11.

[10] Lakatos and Nilsson, “The EU-Korea FTA: Anticipation, Trade Policy Uncertainty and Impact,” 182.

[11] Stangarone, Korea Crosses the 1 Trillion Threshold in Trade.

[12] Stangarone, Korea Crosses the 1 Trillion Threshold in Trade.

[13] Marx, Wouters, Moon, Rhee, Park, and Yang, “EU-Republic of Korea relations in a changing World,” 12.

[14] Marx, Wouters, Moon, Rhee, Park, and Yang, “EU-Republic of Korea relations in a changing World,” 13.

[15] Garikipati, “Does Korea benefit from FTA with EU?”

[16] Kang, Korea’s current FTA and Issues of FTA strategy, 16.

[17] Kang, “Korea-EU FTA: Breaking new ground,” 21.

[18] Kang, “Korea-EU FTA: Breaking new ground,” 21.

[19] Cooper, Jurenas, Platzer, and Manyin, “The EU-South Korea Free Trade Agreement,” 5.

 

REFERENCES

Cooper, W. & Jurenas, R. & Platzer, M. & Manyin, M. (2011, December 1). The EU-South Korea Free Trade Agreement and its implications for the United States. CRS Report for Congress. Retrieved from https://fas.org/sgp/crs/row/R41534.pdf.

European Commission. (2017). Annual report on the implementation of the EU-Korea Free Trade Agreement. Retrieved from https://www.eumonitor.eu/9353000/1/j4nvke1fm2yd1u0_j9vvik7m1c3gyxp/vkimemxwwewp/v=s7z/f=/com(2017)614_en.pdf.

European Commission Directorate-General for Trade. (2006). Global Europe: Competing in the World. Retrieved from https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2006:0567:FIN:en:PDF.

Eurostat. (2019, March). South Korea-EU-trade in goods. Retrieved from https://ec.europa.eu/eurostat/statistics-explained/index.php/South_Korea-EU_-_trade_in_goods#EU_and_South_Korea_in_world_trade_in_goods.

Garikipati, R. (2015, July 27). Does Korea benefit from FTA with EU? The Korea Herald. Retrieved from http://www.koreaherald.com/view.php?ud=20150727001080.

Kang, M. (2009). Korea’s current FTA and Issues of FTA Strategy. CFE Report, 103.

Kang, Y. (2017). Korea-EU FTA: Breaking new ground. Australia, the European Union and the New Trade Agenda, 19-33.

Kim, H. & Lee, C. & Lee, H. & Yang, H. & Kang, Y. (2017). The EU’s FTA strategies in its new trade policy initiatives. World Economy Brief, 7(19), 1-3.

Lakatos, C. & Nilsson, L. (2017). The EU-Korea FTA: Anticipation, trade policy uncertainty and impact. Review of World Economics, 153(1), 179-198.

Marx, A. & Wouters, J. & Moon, W. & Rhee, Y. & Park, S. & Yang, M. (2013). EU-Republic of Korea relations in a changing world. Leuven Centre for Global Governance Studies. Retrieved from https://ghum.kuleuven.be/ggs/publications/books/rapport-ggs-eu-korea-relations-in-a-changing-world.pdf.

Stangarone, T. (2011, December 14). Korea crosses the 1 trillion threshold in trade. The Peninsula. Retrieved from http://blog.keia.org/2011/12/korea-crosses-1-trillion-threshold-trade/.

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