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The free trade agreement (FTA) between Korea and the European Union, which took effect on July 1st of this year, appears to have injected an immediate jolt in trade for the economies involved.
The trade volume between Korea and EU nations for the July 1-13 period amounted to $3.1 billion, up 17.4 percent from the same period last year, according to data released by the Korea Customs Service (KCS). Korean exports to the world’s biggest economic bloc reached $1.5 billion, up 19 percent, while imports from the 27 European nations rose 16 percent to $1.6 billion.
The pact is clearly playing an influential role in boosting bilateral trade, the customs agency said. “The FTA is expanding Korea’s trade front further into the EU, although uncertainties remain as many European nations are wrestling with fiscal problems,” a KCS official said.
The KCS said 55 percent of the Korean goods exported to the EU during the period appear to have benefited from lowered tariffs, compared to 13 percent of imported European goods enjoying the same advantages.
The bilateral FTA requires the EU to eliminate 99.4 percent of tariffs on Korean goods imported to the region within the next three years, while Korea has to eliminate 95.8 percent of tariffs on European products during the same period.
Although the implementation of the FTA so far has fared well, analysts say managing product origin will remain crucial for Korean firms as European authorities are concerned that goods from other countries such as China can be increasingly exported, disguised as Korean goods.
The free trade accord, signed in October last year, is the most crucial deal Korea has ever finalized, and is the first of its kind between an East Asian country and the EU. The EU is the second-largest trading partner for Korea after China and it takes in around 20 percent of Korean exports annually. Last year, trade between the 27-member economic bloc and Korea totaled $92.2 billion, up 17 percent from 2009. Korea’s exports to the eurozone reached $53.5 billion last year, with its trade surplus amounting to $14.8 billion.
Impact of EU-Korea FTA positive but small
A free trade agreement (FTA) is widely considered a win-win situation. As regards the impact of the EU Korea FTA on the two partner economies, as Korea has higher trade barriers than the EU, greater gains are expected to accrue to the EU from the FTA.
The FTA created an opportunity for Korean firms to access the largest market in the world without trade barriers. This will be the principal source of welfare gains to the Korean economy, although absolutely unconditional market access is a theoretical concept. This deduction is logical and is premised on the fact that the Korean GDP is close to one-18th in size in comparison to that of the EU. Therefore, the EU market is far more important to Korea than the other way around.
To EU firms, the FTA provides better market access in the Korean markets. It is more meaningful for their exports in the services as well as in processed foods, meat, dairy and agricultural products. Magnitude of EU’s trade with Korea is only 2 percent to 2.5 percent of total extra-EU trade.
As pre-FTA Korea has higher tariffs and NTBs in comparison to the EU, the impact of trade liberalization under the FTA will be relatively higher in Korea. For the most part EU economies will benefit from liberalization in trade in services.
Individual sectoral impact
Individual sectors will have large impact of the FTA in both partner economies. EU exporters in the following industrial sectors would increase as a result of the FTA: Pharmaceuticals, refined chemicals, auto parts, industrial machinery, electronic parts, large auto vehicles, agricultural products and processed foods.
Empirical studies show strong gain for the last named sector in the EU, namely agriculture and processed foods.
Korea is a net exporter of cars to the EU. IBM (in 2008) concluded that the auto industry in Korea will benefit far more from the EU-Korea FTA than companies in the EU. Expectations among Korean automakers regarding these gains are high. The present EU tariff on autos is 10 percent. Abolition of this tariff will reduce the purchase price of an average Korean car by 1,000 euros, making them more competitive in the EU markets.
Also, Koran automakers are preparing for production in the EU. The Czech Republic and Slovakia are two locales that are being considered at present. Assembly and export costs of Korean cars in the EU will be reduced if the 4.5 percent tariff on auto parts exported from Korea to the EU is eliminated, with the FTA coming into force.
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