After two years of negotiations, Catherine Ashton, the European commissioner for trade and Kim Jong-hoon, Korean Trade Minister, have today initialled a free trade agreement (FTA). The deal eliminates tariffs on 96 percent of EU goods and 99 percent of South Korean exports as well as non-tariff barriers including regulations and standards in automotive, pharmaceutical and consumer electronics industries.
The conclusion of the free trade agreement, originally scheduled for March, has been postponed, several times, by the European Commission, amid strong opposition of several Member States and automotive industry. Many Member States were concerned of the consequences of liberalising EU trade with South Korea whereas the UK as well as Sweden wanted to conclude the agreement as soon as possible.
Last March, the EU chief negotiator, Ignacio Garcia Bercero and the South Korean Lee Hye-Min have agreed to eliminate or phase out tariffs on 96% of EU goods and 99% of Korean goods. As regards cars, the most controversial issue, the elimination of tariffs will be extended to five years for certain types of vehicles. Tariffs on cars with an engine size of more than 2.5 litres would be scrapped within three years whilst tariffs for less powerful cars would be scrapped within five years.
The European Commission and South Korea have failed to agree controversial issues such as Korean rules of origin for products and duty drawback. Taking into account that its manufacturers import many parts from China and from other places, South Korea wants to continue to allow its exporters to sell under the label ‘Made in Korea’ products. Both sides must agree what percentage of a finished product must be made in South Korea. Whereas Seoul wanted to keep flexible rules and a threshold of 50% the European Commission has proposed a threshold of 40%, at the end they agreed 45%.
Under the duty drawback system, the Seoul government is allowed to compensate the customs duties paid by Korean exporters when they import industrial parts from neighbouring countries such as China. South Korea wants the EU permission to refund import tariffs to companies that use imported materials to make products for exports. According to South Korea such system is allowed by the World Trade Organisation however, the EU is against such provision since it would favour South Korean exporters. Moreover, duty drawback was not allowed under the free trade agreements with Mexico and Chile. The EU fears that if such provision is included in this FTA it will set a bad precedent for its ongoing negotiations with India and the ASEAN countries. Last June, Catherine Ashton and South Korean Trade Minister Kim Jong-hoon negotiated a new compromise which includes a “safeguard clause” which would apply to duty drawbacks in the automotive industry aiming at protecting car makers from a significant increase of import of Korean car partially outsourced in countries such as China. However, the ACEA has deemed the new compromise as “unacceptable.” They said that “the current proposals give an unfair advantage to Korean industries and set a dangerous precedent for FTAs between the EU and other major trading partners.” Whereas, according to the Commission “the impact on the competitive situation of European enterprises is negligible considering the low level of foreign content in South Korean products, in particular for vehicles."
On 10 July, during a 133 Committee meeting, the EU Member States and the European Commission discussed the final compromise package. The compromise was not rejected but the EU Member States have not endorsed it yet. Several Member States asked for more time to analyze the agreement’s details. Italy, in particular, was concerned that the safeguard clause proposed by the Commission would not protect European car manufacturers.
In the meantime, ACEA has called on the EU Member States not to ratify the current deal.
Moreover, the college of the European Commission was also split over the free trade agreement. On 22 July, during the last College meeting, several Commissioners requested an in-depth political debate before the initialing of the text. Whereas José Manuel Barroso and EU Trade Commissioner Catherine Ashton wanted to initial the agreement in September, Commissioner Lazlo Kovacs, responsible for Taxation and Customs Union, the Transport Commissioner, Antonio Tajani and the Culture Commissioner, Jan Figel, had raised some issues over the draft agreement. Lazlo Kovacs has particularly opposed to the duty drawbacks schemed included in the deal.
José Manuel Barroso and Catherine Ashton have so far bypassed the opposition of the abovementioned commissioners by avoiding a debate within the College of Commissioners. On 7 October, they indeed debated the FTA with South Korea but they decided to go ahead with the deal.
The Commission has therefore initialled the Free Trade Agreement with South Korea in October, as planned. The agreement still has to be formally endorsed by the General Affairs Council before being signed by the EU Presidency and the Commission, which is likely to happen early next year. Then, the European Parliament has to be consulted.
