The author is Attorney at Law (Member of the New York Bar), Director/Poland Liaison Office of the Korea Eximbank, 53 Emilii Plater Street, 00–113 Warsaw, Poland.
The Free Trade Agreement (FTA) between the EU and the Republic of Korea has been initialed in Brussels on 15th October 2009.1 If ratified, the agreement will create the world’s second-largest free trade zone worth more than 15.16 trillion dollars in gross domestic product after the North American Free Trade Agreement, which is worth 16.03 trillion dollars.
The EU-Korea FTA is the most comprehensive free trade agreement ever negotiated by the EU. Import duties are eliminated on nearly all products and there is far-reaching liberalization of trade in services covering all modes of supply. It includes provisions on investments both in services and industrial sectors, strong disciplines in important areas such as the protection of intellectual property (including geographical indications), public procurement, competition rules, transparency of regulation and sustainable development.
The agreement comprises of 15 Chapters, several annexes and appendixes, three protocols, four understandings and a joint declaration.
2. EU and Korea’s FTA Polices
The EU and South Korea are important trading partners, South Korea is the EU’s eighth largest trade partner and the EU has become South Korea’s second largest export destination. EU trade with South Korea exceeded 65 billion in 2008 and has enjoyed an annual average growth rate of 7.5% between 2004 and 2008. The EU has been the single largest foreign investor in South Korea since 1962, and accounted for almost 45% of all FDI inflows into Korea in 2006.
The average import tariff rate in the European Union is 4.2% but a higher one is imposed to the most important South Korean exports, such as: automobiles, textiles and electronics. The average import tariff rate imposed by South Korea is 11.2%.
EU companies have significant problems accessing and operating in the South-Korean market due to stringent standards and testing requirements for products and services often creating barriers to trade.
In order to resolve trade problems and existing trade barriers both parties decided to start the negotiations of the EU–Korea FTA negotiations on 6 May 2007.
2.1 EU FTA Policy
The EU announced in 2006 its plan to seek new FTAs with a series of fast-growing economies, mainly in Asia. This was a surprising move on the part of the EU, whose trade efforts had previously been focused on the DDR, on the preferential arrangements with the ACP countries (its former colonies) and on the conclusion of FTAs with its partners in the broader European area, such as the countries of Eastern and Central Europe, the former Yugoslavia and the Mediterranean countries.
This shift towards bilateralism, that ended a de facto moratorium on the launch of new bilateral FTA negotiations in place since 1996, was partly due to the lack of progress in the DDR and also to the sharp changes in the global economic balance. The increasing weight of emerging economies such as China and India had triggered a response from EU competitors like the US and Japan, who actively pursued FTAs with these countries; this in turned forced the EU to also seek enhanced access to these countries so as not to see its exports face discrimination in new markets with enormous potential.2
The EU’s negotiations of FTAs follow closely on the heels of the launch of the strategy to increase competitiveness and further the Lisbon goals described in the document ‘Global Europe: Competing in the World’ (European Commission, 2006), which aims to put EU trade policy at the service of EU competitiveness. This entails accompanying the internal agenda for competitiveness with an external agenda to create opportunities abroad; in other words, liberalise international trade further, opening markets in which European companies can compete, thus providing European industry with new opportunities for growth and development. Alongside the right internal policies, competitiveness depends on greater openness and fairer, more transparent rules in other markets.
The “Global Europe” GE strategy was launched by the European Commission on 4 October 2006 and subsequently endorsed by the Council.3 The launch of the overall strategy was followed by the introduction of a renewed “Market Access Strategy on 18 April 2007. The purpose of the GE strategy is to reinforce the EU’s competitiveness by opening up more markets, creating opportunities for European business, ensuring that the EU gets a “fair share” of the growth of emerging markets. The strategy focuses on goods, services, investment and government procurement liberalization, competition policy, intellectual property rights enforcement, non-tariff barriers (NTBs), i.e. mainly on “beyond the border” measures, obtaining not only market access but also national treatment for European business.
With the launch of ‘Global Europe’, the European Union put an end to its 8 year-old moratorium on Free Trade Agreements (FTAs) which started in 1999 in view of the WTO Ministerial Conference in Seattle which was supposed to mark the start of a new round of multilateral trade negotiations.
Today there are between 300 and 350 FTAs in place or in negotiation worldwide. Of these, around 60 have already been concluded by the EU. The issues addressed through FTAs are notably:
Intellectual Property Rights (IPR): new market access for EU businesses is seriously reduced without appropriate IPR protection in other countries.
Services: an area of European comparative advantage with great potential for growth in EU exports.
Government procurement: deemed an area of significant untapped potential for EU exporters, since EU companies are world leaders in areas that are normally subject to government procurement, such as transport equipment, public works and utilities.
Competition: anticompetitive practices as well as state-aid rules in third countries limit market access as they raise new barriers to trade.
The Global Europe strategy entails a stance on the part of the EU, with a focus on economic potential. Therefore, the key economic criteria for new FTA partners should be market potential (economic size and growth) and the level of protection against EU export interests (tariffs as well as non tariff barriers). The competition matters, too: where EU negotiating partners have signed FTAs with competitors to the EU, the latter seeks full parity at last.
For these FTAs to deliver on the EU’s needs, they need to be comprehensive in scope, provide for liberalisation of substantially all trade and go beyond WTO disciplines.
The GE strategy has linkages with internal policies: in order to increase its competitiveness the completion of the internal market and internal liberalization must continue to be pursued creating conditions for larger and more competitive companies to grow that can better compete on the world market. At the same time the EU must be prepared to open up its markets more and surrender competitive sectors (e.g. intensive labor low technology sectors such as clothing and shoe industry) in order to be able to offer market access to third countries in exchange for its own demands. And as two thirds of its imports serve as input to its manufacturing processes; openness of the EU also serves it manufacturing strength and the competitiveness of its exports.4
In Global Europe, the Commission stresses commercial criteria for its new FTAs. These are all about “stronger engagement with major emerging economies and regions; and a sharper focus on barriers to trade behind the border.” FTAs should strengthen EU competitiveness. The commitment to the WTO and a successful Doha round is restated, but renewed priority is given to bilateral and region-to-region negotiations to achieve market-access objectives. This is in line with official statements of EU trade policy going back to the 1990s, but it represents a shift from EU trade-policy priorities when Pascal Lamy was the trade commissioner. Before Global Europe, the EU focused on the WTO at the expense of new FTAs. But when the Doha round has gone to nowhere, and other leading players have concentrated on concluding FTAs, EU had to follow.
Global Europe’s aim was to have strong, comprehensive, “WTO-plus” FTAs. Tariffs and quantitative restrictions should be eliminated. This should mean at least 90–9 per cent of tariff lines and trade volumes in order to comply safely with the “substantially-all-trade” criterion in Article XXIV GATT. The FTAs should provide for “far-reaching” liberalization of services and investment. Services provisions should presumably be compatible with the “substantial-sectoral-coverage” criterion in Article V GATS. A model EU investment agreement, developed in coordination with EU member-states, should be envisaged. The FTAs should contain provisions going beyond WTO disciplines on competition, government procurement, intellectual property rights (IPR) and trade facilitation. There should be also provisions on labor and environmental standards. Rules of origin (ROO) should be simplified. In other words, there should be strong regulatory disciplines and regulatory cooperation, especially to tackle non-tariff barriers. This should involve improved transparency obligations, mutual recognition agreements, and conformity with international standards, regulatory dialogues and technical assistance.5
In the Global Europe trade policy strategy of 2006 South Korea was designated a priority FTA partner. Global Europe argued that a comprehensive and ambitious FTA with South Korea that aimed at the highest possible degree of trade liberalization including far-reaching liberalization of services and investment was clearly in the interests of both sides.
On 23–24 April 2007 the EU Council adopted mandates for a new series of FTA negotiations: with Central America, the Andes Community, South Korea, India and ASEAN.6
The current status of trade relations between the EU and Korea are governed by their respective WTO commitments and also The Framework Agreement on Trade and Co-operation between the EU and South Korea entered into force on 1 April 2001. It aims at fostering growth of two-way trade and investment and encourages broad-based co-operation in fields such as transport, energy, science and technology, industry, environment and culture.
The Agreement foresees annual Joint Co-operation Committee meetings. In April 2007, the Council of the EU called for an updating of the Framework Agreement as part of a wider strengthening of relations. Negotiations on this began in June 2008.
The framework agreement outlines a trade cooperation where both parties grant each other MFN (most-favored nation) status, and agree to work towards the elimination of non-tariff barriers in particular. The agreement also covers trade issues, such as market access for industrial, agricultural and fisheries products and services in general, but especially financial and telecommunication services. However, despite this agreement many trade issues were raised through the Commission and WTO disputes settlement mechanism and are repeatedly mentioned by the industry and the EU Chamber of Commerce in Korea, what proves that the framework agreement and status quo, is not the satisfying option.
Another agreement that is at present regulating the bilateral relations is Agreement on Cooperation and Mutual Administrative Assistance in Customs Matters, which has been in force since 1997.7 Additionally, the EU has established a permanent forum for consultation, sharing experience and views on competition policy, as well as sharing non-confidential information on competition law enforcement with South Korea. The EU and South Korea have recently negotiated a more specific cooperation agreement concerning the application of their competition laws to anti-competitive activities.
A Qualitative Analysis of a Potential Free Trade Agreement between the EU and South Korea, elaborated for the European Commission in 2007, found out that: “At a minimum, simple FTA with tariff elimination in goods is necessary but in no way sufficient step. A “deep” FTA with Korea that successfully eliminates not only the tariff barriers but also non-tariff barriers, as well as securing investment and services liberalization, is the best option to maximize the economic benefits for the EU.”8
The EU’s motivation to pursue an FTA with Korea was not only based on purely economic interests. Korea is by far the EU’s best FTA prospect in Asia. Korea, next to Singapore, is the most credible FTA player in Asia. It has very high levels of agricultural protection and correspondingly defensive negotiating positions. But it has been more serious and forthcoming than Japan, China, ASEAN countries and India on non-agricultural issues in FTA negotiations. That is why Korea successfully concluded FTA negotiations with the toughest demandeur around, the USA.