By Jennifer M. Freedman and Jonathan Stearns
Oct. 15 (Bloomberg) -- The European Union and South Korea approved the world’s biggest free-trade deal since 1994, bolstering efforts to emerge from the deepest global recession in seven decades.
The agreement, signed today in Brussels, will expand the 76 billion-euro ($114 billion) trade relationship by scrapping import duties and other barriers, making 99 percent of commerce duty-free within five years. The accord, which European automakers oppose, still needs the backing of South Korean lawmakers and EU governments.
The deal struck by EU Trade Commissioner Catherine Ashton and her Korean counterpart, Kim Jong Hoon, boosts Europe’s campaign to sidestep World Trade Organization efforts to open markets. Talks aimed at reaching a global accord have been stalled for eight years as international leaders warn rising protectionism may deepen the world’s economic slump. A 2007 U.S.-Korea trade deal remains stuck in Congress.
“This is a positive sign that, at least in Europe, there’s a commitment to move forward in trade-liberalizing initiatives,” said John Veroneau, a former U.S. deputy trade representative who is now a partner with Covington & Burling LLP in Washington. The deal “will be hopefully a wake-up call to the administration and Congress that while they play Hamlet on whether to push for trade liberalization, the rest of the world is going to move forward.”
Demand Growth
The EU-South Korea accord is the second-biggest free-trade deal ever, eclipsed only by the $1 trillion North American Free Trade Agreement between the U.S., Canada and Mexico that began in 1994.
Companies that may benefit include pharmaceutical producers such as London-based GlaxoSmithKline Plc, chemical makers including BASF SE, based in Ludwigshafen, Germany, consumer- electronics manufacturers like Amsterdam-based Royal Philips Electronics NV and farm exporters. Shipping and the financial and legal services industries also stand to gain.
“This agreement is particularly important in the current economic climate, helping to fight the economic downturn and create new jobs,” Ashton said. “It will create new market opportunities for European companies in services, manufacturing and agriculture.”
India, ASEAN
Final approval of the deal will probably come next year, in part because of bureaucratic hurdles such as translation of the text, she said. As the EU pursues trade talks with India and the 10-member Association of Southeast Asian Nations, Ashton also left open the possibility of future discussions on a free-trade accord with Japan, while saying “no plans” exist for such a step at the moment.
Exports made up about 10 percent of Europe’s gross domestic product in 2008. The agreement with Korea will create as much as 32 billion euros in new trade in goods and services, eliminating Korean import duties worth 1.6 billion euros annually and European levies of 1.1 billion euros, according to the European Commission, the 27-nation EU’s trade authority.
The accord will phase out the EU’s 10 percent tariff on Korean cars over three to five years and end an 8 percent duty on European autos in the same period. It will also reduce Korean red tape on EU automakers by eliminating duplicate safety and environmental tests.
Vehicle makers in Europe have said the deal will give an unfair edge to companies such as Hyundai Motor Co. and Kia Motors Corp. The EU imported about 450,000 Korean cars into its market of 15 million last year while exporting 33,000 autos to Korea, where about 1 million new cars are sold annually.
‘Huge Competitive Advantage’
The accord will “deliver a huge competitive advantage to South Korean manufacturers,” said Ivan Hodac, secretary general of the European Automobile Manufacturers Association, whose members include Volkswagen AG, Europe’s largest carmaker, Bayerische Motoren Werke AG, PSA Peugeot Citroen and Fiat SpA.
Ashton yielded to two specific Korean demands that EU industry in general resisted. One relaxes EU rules of origin to allow more foreign content in some Korean goods, with the ceiling for cars rising to 45 percent from 40 percent. The second, related issue allows Korea to maintain refunds to its manufacturers for duties paid in the country on imported parts of goods exported to the EU.
The Korean government hailed the accord, saying the country’s auto, electronics and textile makers would gain. Industry analysts agreed.
“The agreement will help boost South Korea’s exports as the European Union is the nation’s second-biggest export market,” said Lee Si Wook, a research fellow at the Korea Development Institute in Seoul. It will also enable Korea, Europe’s No. 4 trading partner after the U.S., Japan and China, to obtain more advanced European technology, he said.
The country’s GDP may grow 3.08 percent in the “long term” as a result of the accord, the state-run Korea Institute for International Economic Policy said in a July report. It may also increase employment by 3.58 percent, the institute said.
To contact the reporters on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net; Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net
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