European Union and South Korea Sign Free Trade Agreement

13 October 2010

The European Union and South Korea formally signed a free trade agreement (FTA) on 6 October.  The pact, Brussels' first with an Asian country, is scheduled to take effect on 1 July 2011, if ratified by both parties.

The accord becomes the largest external free trade agreement negotiated by the EU, and may eventually emerge as the largest bilateral free trade agreement ever, exceeding even Australia's bilateral agreements with China and the United States.

Substantively, the agreement will liberalise almost all trade and cover a broad spectrum of goods and services.  Specifically, 99 percent of European tariffs and 96 percent of Korean tariffs on imports from the other party will be eliminated over a three-year period.  In addition to import duties on merchandise, the agreement establishes new rules on competition and state aid, intellectual property rights, and public procurement.

The agreement is projected to increase trade for both parties, though some industries on each side stand to gain more than others.  On the European side, makers of chemicals, pharmaceuticals, consumer electronics, alcoholic beverages, and agricultural products are expected to gain the most.  On the Korean side, the biggest gains are expected to go to makers of automobiles, ships, and mobile communications.

Despite these gains, almost an entire year passed between the initialing of the deal last October that marked the end of negotiations and last week's formal signing at the fifth annual EU-Korea summit. Both parties had to address concerns from domestic sectors worried about negative impacts from the deal.  For Europe, complaints by the Italian auto industry, especially Fiat, made Italian Prime Minister Silvio Berlusconi hesitant to back the deal.  Though Korean firms already make many of their cars within Europe, thus circumventing auto tariffs, many auto parts continue to be imported, and thus face duties. Italy was reportedly appeased by a delay in the agreement's date of implementation.  The agreement was originally scheduled to take effect at the beginning of 2011,  instead of in July.

The Korean government also had to address domestic concerns, especially from its famously restive farm sector, which is protected even more heavily than its European equivalent.  Korean dairy farmers, cattlemen and fishermen registered the strongest complaints.  To help these groups compete against European farmers, who will no longer face high tariff barriers, the Korean government will continue temporarily to subsidise the Korean beef and fishing industries.  Totaling 21.1 trillion won ($18.8 billion) in adjustment assistance lasting from 2008 to 2017, the assistance is supposed to keep the cattle and fishing industries competitive.  The assistance fund was first announced to address concerns about US agricultural imports resulting from the still un-ratified US-Korea free trade agreement.

The EU-Korea free trade agreement will also address concerns about labour and environmental concerns.  Specifically, in Chapter 13 of the agreement text, both parties pledge to meet core labour standards set by the International Labor Organization (ILO), and to implement all ILO conventions that exceed these standards as well.  To address environmental concerns, both parties pledge to implement all of their ratified multilateral environmental agreements.  The free trade agreement also lowers barriers to imports of most environmentally friendly goods and services.  Finally, to ensure compliance, both parties will set up "civil society groups" of mixed business, labor, and environmental composition, to meet once a year and review the parties' implementation of the labour and environment provisions.

With the free trade agreement signed, it must now go before both parties for ratification.  For Europe, all 27 member governments, as well as the European Parliament, must ratify the treaty for it to take effect.  Similarly, the Korean parliament must also ratify the treaty.

If both parties ratify the EU-Korea agreement, it may put pressure on the US to ratify the free trade agreement it signed with the United States in 2007.

Last week, on the eve of signing the deal with Korea, the EU began FTA talks with Malaysia (see BRIDGES Weekly, 7 October 2010).

ICTSD reporting; "S.Korea to seek parliamentary OK for EU trade deal," AGENCE FRANCE PRESSE, 7 October 2010; "E.U. to Ratify First Free-Trade Deal With Asian Partner," NEW YORK TIMES, 16 September 2010; "EU Nations Approve Free Trade Pact With South Korea," WALL STREET JOURNAL, 16 September 2010; "EU, South Korea Sign Free-Trade Pact; Bloc Seeks Malaysia Deal," BUSINESS WEEK, 7 October 2010; "Korean boost for Scotch whisky," BBC, 16 September 2010; "China to EU: Tone Down Yuan Criticism," WALL STREET JOURNAL, 7 October 2010; "Carmakers, shipyards to benefit from EU FTA," THE KOREA HERALD, 5 October 2010; "Opposition party vows to review Korea-EU FTA," THE KOREA TIMES, 7 October 2010; "EU and South Korea sign free trade deal," EUROPA, 6 October 2010; "S. Korea and EU sign free-trade pact," CNN, 6 October 2010; "Korea, EU sign FTA, agree to build strategic partnership," KOREA.NET, 7 October 2010.

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