After more than two years of charting the stormy waters of tariffs and quotas, the European Union, the world’s biggest economy, initialled a free trade agreement (FTA) with Asian heavyweight South Korea here today.
The deal is the world’s most significant FTA since the 1994 North American Free Trade Agreement between the United States, Canada and Mexico. It is expected to expand the €65 billion trade relationship between the EU and South Korea by up to 20 per cent. Under the FTA, import duties and other barriers on 96 per cent of EU goods and 99 per cent of South Korean exports will be scrapped within five years.
According to the European Commission, the 27-member EU trade authority, the agreement will create as much as €32 billion in new trade in goods and services. Korean import duties worth €1.6 billion annually will be eliminated, as will European levies of €1.1 billion. The FTA will phase out the EU’s 10 percent tariff on Korean cars over three to five years and put an end to the 8 percent duty on European auto exports to Korea over the same period.
The agreement also tackles key non-tariff barriers, including regulations and standards in industries such as the automotive, pharmaceutical and consumer electronics sectors. Telecommunications, environmental, legal, financial and shipping services are also liberalised under the agreement.
Following the initialing by European trade commissioner Catherine Ashton and Korean trade minister Kim Jong-hoon, the text of the FTA will now be translated into the EU’s 23 official languages before being presented to the Council of the European Union for approval. It will also need the assent of the South Korean legislature, the National Assembly.
The European Commission says it expects the FTA to come into force in the second half of 2010.
This is the first FTA the EU has initialled with an Asian country, its proposed agreement with the Asean group having broken down over Brussels’ censure of human rights violations in Myanmar. The EU’s other ongoing FTA negotiations in Asia are with India, a process that has already taken two years and shows scant signs of progress.
The speed bumps the EU-Korea FTA ran into and only narrowly steered through will have been closely monitored by Indian negotiators.
European automakers have been firmly opposed to the Korea agreement, engendering strong disagreements amongst EU member-states on the final shape of the accord. The main point of contention had to do with rules of origin that establish the level of permissible foreign content in products, as well as duty drawbacks that allow for the reimbursement of tariffs.
Under the current deal, South Korean manufacturers will be able to purchase 45 percent of car components from low-cost countries like China and India and claim the duties back when these vehicles are shipped to European markets. Given that South Korean and Japanese car manufacturers are increasingly exporting cars out of India, there is therefore a possibility of a similar outcry on behalf of European car makers for a EU-India FTA.
A US-South Korea FTA agreed to in 2007 is still languishing before the US Congress, following pressure from domestic auto lobbies.
A possible additional snag the deal could run into relates to the fact that it might well be the EU’s first such accord to be signed after the Lisbon Treaty - a series of proposed changes to the EU’s rule book - is ratified. Under Europe’s current institutional rules, the European Parliament only needs to be ‘consulted’ on trade issues. However, if the Lisbon treaty becomes effective on January 1, as is expected, the Parliament will then exercise veto power, similar to that of the US Congress.
Experts say it is highly unlikely the European Parliament would reject the EU-Korea agreement, due to the huge political and economic implications at stake. A rejection would be a serious blow to the credibility of the EU as an economic actor.
