IHS Global Insight Perspective | |
Significance | Following more than two years of negotiation, the European Union and South Korea finally signed an ambitious free-trade agreement yesterday that is said to be worth some US$28 billion. |
Implications | The EU believes this is its largest deal with a third country to date, removing not only tariffs, but also a range of non-tariff obstacles. The full details have yet to be published, but the outline of the agreement is already public. |
Outlook | Aside from its economic promise, the deal is likely to accelerate other countries' efforts to extend their networks of free-trade agreements; South Korea hopes, for instance, that the breakthrough will prompt ratification of its pending deal with the United States. |
Long Negotiations Bear Fruit
The European Union (EU) and South Korea signed a free-trade agreement (FTA) worth some US$28 billion yesterday. According to the EU Trade Commissioner, Baroness Catherine Ashton, this is the largest-ever FTA signed by the 27-member EU with a third country. The deal is set to remove almost all tariffs and a number of non-tariff obstacles (regulations and standards). South Korea has also committed to liberalising its telecommunications, environmental, legal, financial, and shipping sectors. Some 96% of EU tariffs on goods and 99% of South Korea tariffs would be eliminated over a three-year time frame. The EU and South Korea are key trading partners for one-another already; the EU is South Korea's second largest trading partner after China, while South Korea is the EU's fourth largest non-European partner. Their two-way trade stood at over US$90 billion in 2008, and it is anticipated that the deal will see this rise by 20% (according to an estimate by the Korea Institute of International Economic Policy). The European Commission estimates that the FTA will bring EU exporters 19 billion euro in new trade, and South Korean firms some 12 billion euro.
The trade deal brings the lengthy negotiations, that started back in April 2007, to an end, and were only concluded in July 2009 (see South Korea - Europe: 8 October 2009: South Korea and EU Wrap Up Free-Trade Deal Negotiations). The issue of duty drawback emerged as the final hurdle in April 2009, thwarting an effort to finalise the deal at the G20 meeting in London on 2 April. Previously, the negotiations were almost stalled on the issue of industrial tariffs, particularly on South Korean cars. European carmakers are, however, still unhappy with the deal and its potential impact on their sector. Electronics' manufacturers in Europe have also raised concerns that they could be undermined by a flood of cheap imports. The deal still needs to be ratified by the 27 EU member states, their parliaments, and the European Parliament. If the South Korean parliament also ratifies promptly, it is hoped the agreement will come into effect in July 2010. This is the first free-trade agreement struck between the EU and an Asian economy.
South Korea Plays Catch-Up
The EU deal shows how South Korea has been rushing to catch up with its East Asian counterparts on free-trade deals. It got off to a slow start primarily due to strong resistance from South Korea's industrial and agricultural sectors, but now the country boasts deals with Chile, Singapore, as well as the EU. As a producer of high value-added and capital-intensive goods, South Korea has plenty to gain from regional and bilateral trade liberalisation. Market-oriented, pro-business deregulation, and liberalisation policies have been on conservative President Lee Myung-bak's agenda since his election in December 2007, but their implementation encountered setbacks. Despite the government's efforts, deep-seated economic nationalism remains a major operational impediment. After the major political crisis that occurred following the government's decision to resume U.S. beef imports, the administration's power to push towards further trade liberalisation has become increasingly circumscribed. As in Japan, the heavily subsidised rice sector has been the most sensitive issue related to trade liberalisation for South Korea. This has proved a particularly big hurdle for free-trade negotiations with the United States.
Outlook and Implications
The FTA will undoubtedly boost trade between South Korea and EU member countries. The latter need to boost their flagging export industries, while for South Korea the deal promises greater diversification away from dominant regional giant China. The mammoth deal will not have gone unnoticed in other capitals around the world. South Korea will hope in particular that members of the U.S. Congress take note. They have yet to ratify the deal that the previous U.S. administration struck with South Korea in 2008. The new U.S. administration has shown no great enthusiasm for free-trade agreements, but it has signalled that it will push for ratification of the South Korea deal. In the past, President Barack Obama has drawn attention to perceived disadvantages U.S. automakers would face. The spectacle of EU exporters enjoying a competitive advantage in that market should help stir some action in Congress. The deal would be the United States' largest since the 1992 North American Free Trade Agreement (NAFTA). It should be noted that ratification of the U.S. deal is also pending in South Korea, where controversy over the impact on the agricultural sector continues. The South Korean government said earlier this month that it expected parliamentary ratification to occur in early 2010. The EU deal may also help inject some vigour behind South Korea's proposed pacts with Japan and China.
Although the multiplying bilateral free-trade agreements are helping to foster greater commerce in Asia and elsewhere, there are concerns that they erode momentum behind global and regional-level deals. The latter are ultimately preferable, as they mean a more harmonised and straightforward system for businesses to negotiate; such deals also tend to carry even more benefits for all countries, rich and poor. Bilateral deals tend to favour those with more commercial and diplomatic muscle.