European Commission Defends Korean FTA

by Ulrika Lomas, Tax-News.com, Brussels

14 July 2009

The European Commission has defended the current text of the nearly-complete free trade agreement with South Korea in the face of criticism from the European automotive sector, which argues that the deal would leave car makers in the European Union at a competitive disadvantage.

"The EU and South Korea have worked hard over recent months to negotiate a comprehensive free trade agreement that has real economic value and opportunity for both sides,” European Commission Spokesperson for Trade Lutz Guellner. “This deal will create new market opportunities for EU business, including the car sector. European companies in industrial production, agricultural sectors and services are very keen that we conclude these negotiations as soon as possible."

Guellner was responding to a statement issued by the European automobile industry’s trade association, ACEA, ahead of the G8 conference in Italy and a meeting between EU diplomats, which the association reckoned will be “decisive.”

“The current proposals give an unfair competitive advantage to Korean industries and set a harmful precedent for FTAs between the EU and other major trading partners, undermining an important pillar of standing EU trade policy. Such an outcome would affect EU industries far beyond the auto industry alone and pose a severe risk to the manufacturing base of Europe,” said Ivan Hodac, ACEA Secretary General. “This is unacceptable, and even more so in a time when all efforts are aimed at getting through the current economic crisis. There is absolutely no reason to open a European market of over 500 million people on Korean terms.”

Specifically, ACEA’s beef is centred on the agreement’s Duty Drawback clause and Rules of Origin threshold. Under Duty Drawback, the duties paid on parts used for the production of a final product, for example, a car, are refunded when the final product is exported. Both the EU and South Korea currently make use of duty drawback, and exporters currently use it in bilateral trade. According to the Commission, it is therefore not a 'new benefit'. “Any impact on the competitive situation of EU companies from duty drawback is small considering the low level of foreign content in Korean products, especially in the car industry,” the Commission argues.

Under the rules of origin that must be fulfilled to receive duty-free treatment, the EU restricts the levels of permissible foreign content. Brussels says that the EU would only “moderately” increase the levels of permissible foreign content from 40% to 45%. But ACEA counters that the deal would enable South Korean manufacturers to import higher amounts of parts and components from neighbouring countries and permit Korea companies to claim the duties back that they paid on these parts as soon as the full product is exported.

“This proposal effectively opens the door for cheap imports from China and other Asian countries, without giving similar advantages to European industries,” said Hodac.

Guellner’s statement pointed out, however, that the final deal will contain a special clause on duty drawback to address potential future increases of foreign sourcing by South Korean manufacturers. “It would allow a cap on the refundable duties if the trade figures show that there was a notable increase in foreign sourcing by Korean manufacturers,” the statement explained. “This cap would apply permanently.”

ACEA also complains that non-tariff barriers to the South Korean market, such as international vehicle standards in the areas of emissions and safety, will continue to exist despite the agreement, although the Commission says that “solid disciplines” on non-tariff barriers are placed in the text that are “stronger than in any comparable existing free trade deal.”

EU and South Korean car producers have a comparable market share in each others' markets, of around 3%.

The EU and South Korea have reached a tentative free trade deal that would eliminate 97% of tariffs on trade in goods and services between the two territories. However, although negotiators reached a preliminary agreement in March, it emerged that both sides were still in disagreement over the issue of the duty drawback provisions.

Both sides have also agreed to revise the Framework Agreement for Trade and Cooperation, which entered into force in 2001. This aims to encourage broad-based co-operation in fields such as transport, energy, science and technology, industry, environment and culture.

The European Commission says that the FTA would eliminate EUR1.6bn duties annually for EU exporters. Of these EUR1.2bn are duties on industrial goods.

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 EUR65bn in 2008 and has enjoyed an annual average growth rate of 7.5% between 2004 and 2008.

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