On 16 September the Council of the European Union authorised the signature and provisional application of a Free Trade Agreement between the European Union and the Republic of Korea. The FTA is the most ambitious ever negotiated by the EU and it is the first trade deal of its kind with an Asian counterpart. The FTA will be signed on 6 October and it is set to apply provisionally as of 1 July 2011 - a slight delay on the original timetable as a concession to Italian concerns for their automobile sector. Billed as the most important trade deal since NAFTA, the FTA is expected to double EU trade with Korea in the medium term providing a significant boost to jobs and growth. In practical terms, the agreement requires the two parties to eliminate 98.7 per cent of duties in trade value for both industry and agriculture within five years, and to eliminate remaining tariffs almost completely over longer periods.
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The most ambitious EU trade agreement ever
In a ground breaking move, on 16 September the Council of the European Union authorised the signature and provisional application of a Free Trade Agreement between the European Union (EU) and the Republic of Korea.
The trade agreement is the most ambitious ever negotiated by the EU with a third country and it is the first trade deal of its kind with an Asian counterpart. The Council spokesman announcing the breakthrough characterised the deal as the “first of a new generation” of FTAs envisaged as part of the “Global Europe” initiative.
In light of objections from Italy, the Council agreed to delay the provisional application of the EU-Korea FTA to 1 July 2011 – it was originally anticipated that provisional application of the agreement would be timed for the beginning of 2011. The official date for signature of the FTA has been set for 6th October, in the framework of the upcoming ASEM 8 summit.
The agreement reached in the Council marks a significant step toward the definitive implementation of the FTA. Nevertheless ultimate entry into force of the FTA depends on the adoption of two additional legislative instruments both of which are currently being debated within the EU:
- The Proposal for a Council decision concluding the FTA.
- The Proposal for a Regulation implementing the bilateral safeguard clause of the FTA.
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The EU is currently negotiating trade agreements with a number of Asian partners. In addition to the deal with South Korea, negotiations are ongoing with India and Singapore and the door is open to pursue agreements with other partners in the Association of South-East Asian Nations (ASEAN) – the EU agreed to launch FTA negotiations with Vietnam in March and on 10 September the EU Foreign Affairs Council agreed to launch such negotiations with Malaysia.
The EU elaborated on the policy objective underpinning these new generation FTAs in its “Global Europe” document noting that “in terms of content [these] new competitiveness-driven FTAs would need to be comprehensive and ambitious in coverage, aiming at the highest possible degree of trade liberalisation including far-reaching liberalisation of services and investment”. In particular, to have a positive impact the FTAs must “go beyond WTO disciplines”.
In similar vein, and after several years of administrative cooperation, the EU and China have now decided to negotiate an ambitious agreement intended to ensure the protection of European geographical indications in China and of Chinese geographical indications in the EU. The decision to start negotiations was taken on 10 September by the EU Foreign Affairs Council.
With regard to the EU-Korea FTA specifically, following the completion of negotiations on 15 October 2009, the EU issued three different proposals necessary for the full adoption of the FTA:
- The proposal for a Council decision on the signature and provisional application of the EU-Korea FTA (adopted on 16 September).
- The proposal for a Council decision on the conclusion of the EU-Korea FTA.
- The proposal for a Regulation of the European Parliament and the Council implementing the bilateral safeguard clause of the EU-Korea FTA (the Bilateral Safeguard Regulation – see further below for details).
While the first of these instruments has now been agreed, the last two proposals are still subject to discussion within the EU legislative bodies.
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Key elements of the FTA for Korean companies
The agreement, which consists of some 15 Chapters, three protocols, several annexes and appendices, a number of understandings and a joint declaration, will bring significant economic benefits to both parties. Of specific interest to Korean companies are the following:
- Under the FTA, the EU will eliminate around €1.1 billion in duties. This will bring obvious benefits to Korean businesses exporting to Europe and create substantial new trade in goods and services.
- The FTA will also tackle non-tariff barriers (NTBs) across all sectors but in particular as regards the automotive, consumer electronics, pharmaceuticals and chemicals sectors. Under the agreement, Korea will be bound to consider as equivalent with Korean standards many European standards and recognise the validity of European certification processes and test results.
- The FTA will bring transparency and predictability to regulatory matters dealing with the protection of intellectual property; it will bring improved market access in the government procurement field and a new approach to trade and sustainable development issues.
- Efficient dispute settlement rules will be set up as part of the package to ensure the enforceability of commitments – modelled on WTO mechanisms but with faster time-lines (a panel ruling within 150 days). In addition there will be a non-binding mediation mechanism.
- The FTA offers protection in the form of a bilateral safeguard mechanism. This allows for the possibility of increasing the rates of customs duty to the lesser of the Most Favoured Nation (MFN) rate or a “base rate” specified in a schedule to the FTA, when as a result of the FTA, imports take place in such increased quantities and under such conditions as to cause or threaten to cause serious injury to domestic producers. These measures may be imposed for up to four years.
- With regard to rules of origin, these have been simplified and made more business friendly. Nonetheless, more strict rules will apply in sensitive sectors such as for example cars. In other sectors – notably textiles, agricultural and fisheries – the EU standard rules of origin are maintained with only a small number of derogations.
- On duty drawback, the EU and Korea maintain the right to refund duties on imports of parts, in accordance with WTO rules. However, in case of a significant increase of sourcing from countries that have not concluded an FTA with Korea, i.e., where MFN duties still apply, a special clause allows for a cap on the refundable duties at a level of five per cent. It has recently been agreed that rules concerning the application of this provision in the EU will be included in the EU’s Bilateral Safeguard Regulation.
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Sectors most affected
South Korea is one of the most important trading partners of the EU (the EU’s eighth largest) and the EU has become South-Korea’s second largest export destination after China.
The sectors in Korea that stand to gain the most from the FTA are the following:
- Electrical machinery and motor vehicles: These sectors account for the most significant proportion of EU imports from South Korea. In overall terms, these sectors will therefore benefit most from trade liberalisation. In addition, these sectors enjoy significant import protection (i.e., ex-ante European trade barriers are higher than the Korean equivalents) and the removal of tariffs will accordingly have a greater impact. In particular, the motor vehicle sector in Korea will be a major beneficiary of the FTA and the agreement can be expected to enhance the export potential of Korean cars significantly. Tariff elimination will be translated into considerable price reductions which will boost the competitiveness of and demand for Korean cars.
- Textile industry: Similarly, the FTA will increase the competitiveness of Korean textiles companies on the European market. In point of fact, the elimination of tariffs in the area of textiles will see a shift in competitiveness on the EU market in favour of Korean textiles producers at the expense of Chinese and Taiwanese products.
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State of play as regards implementation of the FTA by the EU
Following the agreement on 16 September on the signature and provisional application of the FTA reached by EU Member States, the Council will now refer its Proposal for a Council decision on the conclusion of the EU-Korea FTA to the European Parliament (EP) for its consent. That said, the adoption of this instrument is largely in the hands of the Council as the EP has a very little room to manoeuvre at this stage.
The Council is also currently holding so-called “trialogue” meetings with the EP and the Commission with a view to informally agreeing amendments to the Bilateral Safeguard Regulation that would be acceptable to the three EU institutions. The aim of these trialogue meetings is to avoid a second reading of the Bilateral Safeguard Regulation by securing a compromise between the EP and the Council.
Currently the most controversial issues relate to (a) the EP’s right to request the initiation of an investigation which might lead to the application of a bilateral safeguard measure; and (b) the proposed EP amendment to the original Commission proposal which would allow for the possibility of a regional safeguard measure (ie, a measure that would not apply throughout the EU).
Nonetheless, an informal agreement was reached on 30 August as regards amending the Bilateral Safeguard Regulation so as to:
- Grant the EU industry power to request the initiation of a bilateral safeguard investigation.
- Include in the Bilateral Safeguard Regulation internal rules concerning the application of Article 14 (drawback of, or exemption from, customs duties) of the FTA Protocol Concerning the Definition of ‘Originating Products’ and Methods of Administrative Co-operation.
A further trialogue meeting is expected to take place before the end of this month which may see movement on the more controversial aspects of the EP’s proposed amendments to the Bilateral Safeguard Regulation.
In any event, on 7 September, the EP informally agreed its amendments to the Proposal for a Regulation implementing the bilateral safeguard clause of the EU-Korea FTA.
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We provide below a brief chronology of the further steps required in the EU’s legislative process for the full adoption of the EU-Korea FTA.
For the purposes of this “checklist” we have assumed a second reading procedure will not need to be opened (this however remains a possibility at this stage).
- On 6 October the EU and Korea will formally sign the FTA in the context of the ASEM 8 summit.
- Through the medium of the trialogue meetings, the Commission, the EP and the Council will seek to reach a compromise as regards outstanding issues concerning the Bilateral Safeguard Regulation.
- The EP will formally vote on its amendments to the Bilateral Safeguard Regulation during the EP plenary session which will take place in the week of 18-21 October.
- The Council decision on the conclusion of the FTA will be adopted once the EP has given its consent. A referral from the Council in this respect is expected to take place shortly. The EP will give its consent by way of a plenary vote currently scheduled for late November 2010 though this will very likely now to be delayed.
- As of 1 July 2011 the EU-Korea FTA will apply on a provisional basis pending the completion of the national ratification procedures of the 27 EU Member States. Those parts of the FTA falling within the competence of the EU Member States will not therefore be provisionally applied (provisions of the FTA relating to the criminal enforcement of IPRs and certain provisions of the Protocol on Cultural Co-Operation).
- The completion of the ratification procedure in each of the 27 EU Member States will determine the definitive application of the EU-Korea FTA.
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Overall implications of the FTA for Korean companies
The EU-Korea FTA requires the parties to eliminate 98.7 per cent of duties in trade value for industry and agriculture within five years – and to eliminate remaining tariffs almost completely over longer periods. In order to tackle non-tariff obstacles to trade, it includes specific provisions for electronics, motor vehicles and vehicle parts, pharmaceuticals, medical devices and chemicals. Trade remedies, technical barriers to trade and sanitary and phytosanitary measures, customs and trade facilitation are also addressed.
The main EU exports to and imports from South-Korea in 2009 were power/non-electrical machinery, office/telecommunication and transport equipment and chemicals. In 2009 EU goods imports from Korea amounted to some EUR 32.0 billion. It is clear that the deal has the potential to result in significant economic benefits for all concerned.
As mentioned above, the Korean sectors which will particularly benefit from the conclusion of the FTA will be the car industry and textile sectors. In particular, the FTA will eliminate the EU’s 10 per cent tariff on imports of Korean cars.
However, should the deal result in a surge of imports in sensitive sectors (including small cars) the bilateral safeguard mechanism allows EU Member States to re-impose custom duties with a view to protecting (albeit on a temporary basis and subject to a requirement to adjust to the new situation) EU domestic production. The chances of duties being reinstated may increase now that an agreement has been reached on the possibility of granting the EU industry power to request a bilateral safeguard investigation.
One area to be monitored going forward is the possibility of the EU allowing for the introduction of a regional safeguard measure (this has been requested by Italy and the EP) which would allow the application of a measure only to a particular region of the EU (ie, to one or more Member States instead of throughout the EU). The EU car sector is very much in favour of such a mechanism.
Finally, with a view to monitoring rates of imports, the EP proposes the introduction of a special monitoring system for car manufacturing and related industries. Korean car makers and textile manufacturers would need to pay particular heed to any such monitoring mechanism if intending to significantly increase exports to the EU.
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