Korea-EU FTA yet to live up to hype
Consumers see few discounts in made-in-Europe products
By Kim Tae-gyu
The free trade agreement (FTA) between Korea and the European Union became effective on July 1, 2011 to great fanfare and much hype about increased mutual benefits.
One year later, the initial optimism might now be considered as hasty and overblown because transactions between the two signatories are on a downward trajectory, the very opposite of initial expectations.
Of course, there have been unexpected factors such as the recent debt crisis in the eurozone. A concern is that if the bilateral deal generated any notable positive effects, even although they might not be outstanding, they are being offset by the economic slump in Europe.
Some critics doubt whether the pact had any positive impact on Korea Inc. where trade volume is almost equivalent to national output.
This is a big issue for Asia’s fourth-largest economy, which stakes its future on hammering out as many FTAs as possible with negotiations currently underway with its top trade partner, China.
The export-driven economy has sealed 10 FTAs including the latest one with Colombia early last week and eight of these are now in effect so that tariffs were eliminated or trimmed in trading with a total of 45 countries worldwide.
The Ministry of Trade is in talks with several other countries including Canada, Mexico, Australia and New Zealand.
The Korea-EU FTA was not the first such trade pact for Seoul, which signed an agreement with Chile that became effective in April 2004.
However, the agreement with EU was the country’s first contract with a major advanced economy so that both protagonists and antagonists have kept a close eye on it over the past year.
The Lee Myung-bak administration has tried to oversell the effect of the trade deal by painting rosy pictures about its future but the reality has proven to be very grim.
During the latter half of last year, Korea’s outbound shipments to the EU amounted to $25.11 billion, down 7.9 percent from a year before, while imports jumped 19.9 percent.
Things aggravated over the first five months of 2012 as the exports dipped by 15.2 percent on a year-on-year basis so that the country saw its exports to the EU plunge by a double digit rate since last July.
In particular, Korea’s conventional flagship revenue generator of shipbuilding suffered the biggest plunge of more than 45 percent during the 11 month period.
Yet, the administration contends that there are more factors to be examined than meet the naked eye.
``We should factor in the European debt crisis, which leads to weak purchasing power there without regard to the FTA. In addition, the anemic performance of shipbuilding is due to the 2008 crisis,’’ Ministry of Strategy and Finance official Kim Sung-chul said.
``Because of the long lead times in the shipbuilding businesses, which typically are around three years, our shipyards languished of late because they were hit hard by weak orders in late 2008 and early 2009 in the aftermath of the global financial crisis.’’
He claimed that excluding shipbuilders, which accounted for upside of 15 percent of Korea’s exports to Europe, the nation fared quite well despite the difficult situation.
``In the segments that benefited from decreased tariffs such as automobiles and petrochemical products, our exports to Europe have rocketed 20 percent since last July,’’ Kim said.
``In fact, the positive effects of the Korea-EU FTA have to a large extent offset otherwise much worse trade performances between the two. Furthermore, the EU substantially increased its investment here.’’
Some obviously chalked up windfalls thanks in no small part to the free trade deal including Hyundai Motor Group, one of the world’s foremost automakers composed of two major units, Hyundai Motor and Kia Motors.
The Seoul-based conglomerate exported a total of 187,782 vehicles from last July through to this May, up 82.8 percent from a year before, at a time when the European automobile markets were stuck in a stalemate.
The carmakers savored great advantages from reduced tariffs _ those for small cars with engines less than 1,500cc went down from 10 percent to 8.3 percent while those for bigger ones were cut further from 10 percent to 7 percent.
However, professor Lee Phil-sang at Korea University said that the nation should not jump to the conclusion that the FTA was good for it.
``First of all, the period is simply too short to present conclusions about whether the free trade agreement has worked positively to boost trade and the economy,’’ he said.
``Still, the double-digit decline in exports is way too steep in consideration of the fact that the country racked up such mediocre performances during a period when Europe actually cranked up its imports.’’
According to the Korea International Trade Association (KITA), the EU jacked up its imports by up to 6 percent between last July and this March from the previous year.
KITA said that the data might be misleading because a big chunk of the rise in the imports of Europe was attributable to the strengthening values of raw materials including gas and petroleum.
``We learned that Russia and Saudi Arabia elevated their exports to Europe by big margins thanks to appreciating raw materials _ gas for the former and crude oil for the latter,’’ said a KITA official who asked not to be named.
``Hence, Europe’s strong imports have nothing to do with economic recovery and Korea is by no means in a position to exploit the opportunities because it lacks natural resources.’’
Still, critics take issue with the fact that a 15-percent decline is way too much _ they think that Korea Inc. is feared to become less of a big gun and more of a loose cannon in Europe and that the FTA is seemingly not so helpful.
Putting aside the lingering controversies on the FTA’s effects on exports, the government claims that it was also good for end consumers thanks to the discounted prices of made-in-Europe products.
The Ministry of Strategy and Finance said that out of nine products surveyed since last July, prices of six went down such as electric irons offered by European appliance manufacturers.
However, the announcements are contradictory to those of consumer rights civic groups that prices of much European merchandise remained flat and those of some even went up.
Such items came under criticism and included luxury products, whiskies, beers, electric toothbrushes and automobiles to pick a few.
Without regard to the debate, people appear to hardly expect big things from the FTA.
The Korea Chamber of Commerce (KOCHAM) unveiled of late its survey showing that the FTA between Korea and the EU failed to make a dent in the life of everybody.
The chamber surveyed 500 adults across the country to learn that more than 90 percent of respondents did not expect to see the effects of the trade deal in under than two years.
Almost 40 percent of them projected that the FTA would affect their daily lives in almost five years.