S.Korea and EU sign FTA

Posted on : 2010-10-07 13:55 KST Modified on : 2010-10-07 13:55 KST
The FTA is expected to allow the EU escape its 13.8 billion Euro trade deficit with S.Korea
 left
left

By Hwangbo Yon and Jung Eun-joo 

 

South Korea and the EU formally signed a Free Trade Agreement (FTA) in Brussels on Oct. 5. The signing comes one year and three months after the declaration last month of a breakthrough, and both sides agreed to soon send the agreement to their respective parliaments to receive consent, after which the treaty would go into effect on July 1 of next year.

When the agreement goes into effect, European tariffs will be removed on major South Korean exports like cars (10 percent), TVs and video equipment (14 percent), and textiles and shoes (12 to 17 percent maximum), leading the government to predict large increases in exports. The EU is hoping for greater access to South Korean markets for alcoholic beverages, dairy goods, pharmaceuticals, precision equipment, luxury cars and agricultural goods.

However, the South Korean government’s selection of a date when the FTA goes into effect has been the subject of controversy. As a result, significant tensions and difficulties are expected during the domestic opinion gathering process, including deliberations at the National Assembly. Moreover, the government has yet to put forward concrete measures for sectors of concern, such as the agricultural sector.

According to economic analysis jointly released Wednesday by ten national policy institutes, including the Korea Institute for International Economic Policy (KIEP), Korea Development Institute (KDI) and Korea Institute for Industrial Economics and Trade (KIET), compared to a situation without the FTA, South Korea’s GDP would grow now an average of 0.56 percent a year for a maximum of 5.62 percent over the next decade. Economic benefits are expected to top $32 billion, 3.8 percent of GNP, with 253 thousand jobs created.

With the removal of trade barriers between South Korea and the EU, South Korea’s trade surplus will increase by an average of $361 million per annum over the next 15 years. This figure is based on the prediction that Korean exports to and imports from the EU would increase by $2.53 billion and $2.17 billion, respectively.

The sector that is feared will experience the biggest losses is livestock. Over the next 15 years, the expected drop in agricultural production is 177.6 billion Won per year, 93 percent of which is in the livestock sector. The fishing industry is also expected to take a significant hit, while the health care industry is expected to suffer an addition yearly average of $194 million in trade deficits.

On the other hand, the research institutes predicted that the automobile industry, for which the burden of tariffs will gradually be lifted, will experience an average yearly increase of $1.41 billion in exports, leading to a $1.19 billion increase in the industry’s trade surplus.

To the contrary, the electronics industry, the major trade products of which have already been made tariff-free, is expected to suffer an average yearly increase of $360 million in trade deficits, while the textiles industry, which like cars suffered from high tariffs, is expected to see a average yearly increase of $750 million in its trade surplus.

Vice-director Jeong Yeo-chan of the Korea Institute for International Economic Policy (KIEP) stated, “The economic analysis reflects the actual results of the agreement and the boost in production resulting from the technological innovation, deepening competition and systemic advances brought about by the FTA.”

However, Lee Hae-yeong, professor of international relations at Hanshin, raised the possibility that these numbers might be inflated.

“The addition of production increases to the increase in GDP amounts to a double adjustment to boost the figure,” said Lee.

According to a report on ten benefits the FTA would give Europe, announced recently by European Commission, exports to South Korea from the EU’s 27 member nations would increase 82.6 percent due to the removal of tariff and non-tariff barriers resulting from the agreement, while imports would increase just 38.4 percent. Accordingly, the report predicted the agreement would produce a maximum average yearly surplus of 10.1 billion Euros ($10 billion) in EU trade with South Korea.

This means that thanks to a 33 to 41 billion Euro boost in EU exports to South Korea and a 22.9 to 34.4 billion Euro increase in imports from Korea, the EU will be able to escape its trade deficit with South Korea. In 2008, the EU recorded a 13.8 billion Euro trade deficit with Korea.

To begin, the EU report praised the economic benefits to be gained by the removal of tariff barriers. When the FTA goes into effect, 91 percent of South Korean tariffs, which at an average of 12.2 percent is much higher than the EU average of 5.6 percent, would disappear, with the report predicting this would give the EU 1.6 billion Euros in benefits every year. On the other hand, it predicted South Korea’s economic benefit from the lowered tariffs would be only 1.1 billion Euros per annum on average.

In the automobile industry, the EU has hung great hopes on the lowering of non-tariff barriers, in addition to the removal of the 8 percent tariff on imported cars in the South Korean market. According to the text of the agreement, European cars that pass European safety standards can be sold in South Korea without further tests.

The EU would also see benefits in environmental regulations. Regarding on-board diagnostics for exhaust, the agreement calls for adoption of the Euro 6 standard, to be adopted in the EU in 2014. The EU report pointed out that unless the FTA goes into effect, European cars would be excluded from the South Korean market as they would not satisfy South Korean environmental regulations. The report predicted, however, that South Korean cars would make a big push into the European market, with the EU experiencing a 5 billion Euro deficit in automobile trade with South Korea. Besides that, the European Commission regarded the service sector as a negotiating success, with a level of opening markets roughly equal to that of South Korea’s FTA with the United States.

The EU report predicted South Korea’s GDP would experience a yearly average growth of 0.84 percent thanks to the FTA, while the EU’s would increase 0.08 percent.

  

Please direct questions or comments to [englishhani@hani.co.kr]

 

Most viewed articles