by M. Ulric Killion

The South Korea news source, JoongAng Ilbo (2009), recently reported that the anticipated ratification of the Korea-EU FTA failed finalization. In April 2009, most observers anticipated the ratification by the South Korean government of the Korea-EU FTA.

The significance of the Korea-EU FTA is that following ratification, the Korea-EU FTA will establish the world’s second-largest free trade agreement (or zone), which is second only to NAFTA. Following ratification, the projections are that the Korea-EU FTA, as the second-largest free trade zone, will be worth more than US$15 trillion in gross domestic product, as it follows behinds NAFTA, which is worth about US$16 trillion. In addition, the EU is the world’s largest single trading bloc, while Korea is the world’s 13th-largest economy.

As many rightly anticipated, the consequence of the Korea-EU FTA creating the second-largest FTA should serve as an external force compelling ratification of the KORUS FTA. Depending on one’s political perspective, it is arguably an external force either compelling the US government, or compelling the South Korea government to ratify the KORUS FTA.

There are different views on the influence of the pending ratification of the Korea-EU FTA and its attendant influence on the pending ratification of the KORUS FTA. As reported in The Dong-a Ilbo, “The conclusion of the agreement is also expected to give momentum in ratifying Korea’s free trade deal with the United States. Jeong In-gyo, an economics professor at Inha University in Incheon, said, ‘If the Korea-EU free trade deal is sealed and its implementation picks up speed, the U.S. government, which has complained about elements of the Korea-U.S. deal, will feel burdened and be forced to reverse course.’”

As earlier as November 2008, there were calls to conclude the Korea-EU FTA as soon as possible. This is because of its potential in pressuring the US government to ratify the KORUS FTA as “it is.” In November 2008, Suh Jin-kyo, Director of trade and investment policy at the Korea Institute for International Economic Policy, said, “Seoul should complete a free trade agreement with the European Union as soon as it can to pressure the U.S. Congress to ratify the KORUS FTA as it is” (Kang).

What South Korea stands to gain from ratification of the KORUS FAT as “it is,” ultimately, is a boost to its gross domestic product. This is because some economists project that following the ratification of the KORUS FTA the South Korean economy will experience a boost from about 3 to 6 percentage points in its gross domestic product.

Following ratification, many in South Korea perceived a potential advantage of a new and unleveled playing field. However, there is the reality that a combination of external forces (i.e., the Korea-EU FTA ratification, a potential boost in GNP by ratifying the KORUS FTA, key strategic alliance considerations, etc.), actually, presenting external influences on the governments of both South Korea and the United States.

As reported by the JoongAng Ilbo (2009), in London, South Korea and the EU failed to finalize their trade, though both side are still trying to save the trade agreement and eventually ratify the agreement.

According to the JoongAng Ilbo (2009), for purpose of narrowing their differences, South Korean Trade Minister Kim Jong-hoon and his EU counterpart Catherine Ashton met and discussed critical issues, such as a so-called duty drawback scheme and rules of origin issues.

Although a final agreements remains pending, both sides announced in late March a tentative free trade accord, and that they would seek to finalize the agreement. According to both sides, or their joint statement, “Ministers focused their discussions on the remaining issues and made further progress.” Further, according to their joint statement, “Ministers also had substantive discussions to evaluate all possible options for a compromise on the issue of duty drawback. Despite these efforts, the gaps on this issue could not be narrowed” (JoongAng Ilbo, 2009).

From the perspective of South Korea, Seoul seeks a provision in the trade agreement that that would allow import tariffs to be returned to companies that use imported materials to make products intended for exports. However, Brussels, although opposing the provision, announced it would favor Korean exporters. A problem for the EU and its trade regime is that the EU does not allow duty drawbacks under its existing free trade accords with other trading partners, such as Mexico and Chile.

Notwithstanding duty drawback issue, South Korea and the EU seem to have effectuated an agreement on other remaining issues. As Kim announced, following his four-hour meeting with Ashton, “On the matter of the duty drawback, it’s kind of a conflict of principle that both sides cling to, rather than a matter of compromise.” In addition, on another key issue, both sides did agree “that a product is considered manufactured by a trading partner if at least 45 percent of the finished item is made there” (JoongAng Ilbo, 2009).

For the purpose of finalizing the South Korea-EU FTA, both sides announced that they will soon meet again.

Sources:

EU, Korea failed to finalize trade pact in London, JoongAng Ilbo, Korea, 4 April 2009.

South Korea/US: FTA jumps major hurdles, faces others, Oxford Analytica, International Herald Tribune, April 2, 2007.

NAFTA Secretariat website. 

Lawmakers Postpone Korea-U.S. FTA Bill, Chosun Ilbo  (Arirang News), March 5, 2009. 

Korea-Singapore Trade Doubles Since 2005 FTA, Chosun Ilbo  (Arirang News), March 2, 2009. 

Dan Griswold, NAFTA at 10: An Economic and Foreign Policy Success, Cato Institute, Free Trade Bulletin, No. 1: December 17, 2002, >> Read full article - PDF version of Free Trade Bulletin No. 1.

Chung Hae-kwan, The Korea-Chile FTA: Significance and Implications, East Asia Review, Vol. 15, No. 1, Spring 2003, pp. 71-86, >> Read full article – PDF version.

Free Trade Agreement between EFTA and South Korea,(European Free Trade Association), European Reports, September 4, 2006.

Renowned professor calls for KORUS FTA renegotiation, The Hankyoreh, March 19, 2009.

Korea-EU FTA to Be Concluded Next Month, Dong-a Ilbo, March 16, 2009.

Kang Hyun-kyung, Proposal Made to Implement FTA With EU Ahead of US, The Korean Times, November 12, 2009.

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