The Council remains divided over the issue of concluding a free trade agreement (FTA) with South Korea. The college of the European Commission is also split on the issue.

The EU is South Korea's second largest trading partner. The European Commission has been negotiating the free trade agreement for the last two years. 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 are concerned of the consequences of liberalising EU trade with South Korea.

The European Automobile Manufacturers’ Association (ACEA) is against the FTA therefore it has been lobbying German, France, Italy and Spain Governments. The UK as well as Sweden want to conclude the agreement as soon as possible. Member States such as Germany, Italy and Spain are concerned that the progressive elimination of EU tariff on cars (10%) would entail a huge influx of Korean exports into the EU market, with little gain in exchange.

On 6 and 7 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. The EU has rejected South Korea's proposal for the immediate abolition of tariffs on small cars. 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 had initially planned to conclude the FTA during their negotiation round that took place on 23 and 24 March in Seoul. However, this round was not the last one. They failed to agree on 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 wants to keep flexible rules and a threshold of 50% the European Commission has proposed a threshold of 40%.

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.

The European Commission and South Korea were hoping to announce the conclusion of the free trade agreement during the G20 summit in order to send a signal against protectionist tendencies on the global stage. Although the G20 leaders have pledged to reject protectionism, the EU and South Korea failed to conclude the free-trade agreement during a ministerial meeting held in the margins of the G20 summit.

The Republic of Korea-EU Summit was held on 23 May, in Seoul. The summit was initially scheduled for last November, but was postponed because of the lack of progress of the FTA talks. South Korea’s trade Minister Kim Jong-Hoon and Catherine Ashton met on the sidelines of the summit. They tried to narrow their differences on the two remaining controversial issues: duty drawbacks and rules of origin but no agreement was reached.

The summit took place just ahead of the European Parliament elections, taking into account the economic crisis, Member States such as Germany, Italy and France had expressed their reluctance to find a compromise on the remaining stumbling blocks before the European Elections. Those Member States were unwilling to accept a compromise as they are concerned over further market openings at a time of economic crisis.

In a Joint Press Statement, the summit leaders, South Korea President Lee Myung-bak and Václav Klaus, President of the Czech Republic, pledged to conclude rapidly the controversial free trade negotiations however they not even have agreed on a timetable and a deadline for the FTA’s conclusion.

Now, that the European Elections are over, the European Commission is pushing for the conclusion of the Free Trade Agreement with South Korea. The European Commission and the Swedish EU presidency are under pressure to remove the remaining outstanding issues by the summer as they fear that the German general election in September and the new Commission could delay the conclusion of the agreement.

On 26 June, Catherine Ashton and South Korean Trade Minister Kim Jong-hoon met in Paris for another attempt to conclude the agreement. They have negotiated a new compromise in order to solve the issue of duty drawbacks. The new compromise 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 is, particularly, concerned that the safeguard clause proposed by the Commission would not protect European car manufacturers.

Moreover, the college of the European Commission is 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 want 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.

In the meantime, the agreement is being translated into legal terms.

The Commission is expecting to initial the Free Trade Agreement with South Korea in the Autumn. However, the signing of the agreement is unlikely to happen this year. Then, the FTA has to be endorsed by the Council and the European Parliament has to be consulted. However, if the Lisbon Treaty enters into force the Parliament will have assent power.