(News Focus) Free trade pact with EU to shake up S. Korean economy

By Park Sang-soo
SEOUL, Sept. 16 (Yonhap) -- A free trade pact with the European Union (EU)
expected to take effect next year will pave the way for South Korea to tap deeper
into the world's single largest economic bloc and help South Korean companies
better compete with foreign rivals there, analysts said.
On Thursday, the EU's Foreign Affairs Council approved the free trade accord with
South Korea and agreed to let the trade pact to take effect on July 1 next year.
Seoul and Brussels are expected to sign the pact at a summit in Brussels on Oct.
6. The pact must be ratified by South Korea's parliament, EU member states and
the European Parliament in order to go into full effect.
"The deal will help boost our exports, especially sales of autos, to the European
market," said Kim Hyung-joo, a researcher at LG Economic Research Institute.
"Additionally, the free trade deal will help shield South Korea from emerging
trade protectionism worldwide," he said.
Overall, the deal is expected to boost bilateral trade between South Korea and
the EU by as much as 20 percent, according to earlier estimates by the state-run
Korea Institute for International Economic Policy (KIEP).
Last year, two-way trade totaled US$78.8 billion with South Korea enjoying a
surplus of $14.38 billion. In 2008, their bilateral trade reached $98.4 billion.
The KIEP said the free trade accord with the world's single largest economic bloc
would help boost S. Korea's exports by $11 billion and its economic growth by
more than 3 percent while creating up to 600,000 jobs over the long haul.
South Korean exports, which contribute more than 70 percent to the nation's
economy, will be one of the major winners, according to experts.
Under the deal, Seoul and Brussels would eliminate or phase out tariffs on 96
percent of EU goods and 99 percent of South Korean goods within three years after
the accord takes effect. They have also agreed to abolish tariffs on most
industrial goods within five years of the deal taking effect.
The accord also permits duty drawback, which allows the tariffs levied on parts
used by a manufacturer to make a product such as a car to be refunded when the
final product is exported.
But the deal includes a provision that caps refundable tariffs should there be
"dramatic changes in foreign outsourcing" within five years of the accord taking
effect.
On the issue of rules of origin, both sides agreed on the level of allowable
foreign contents at 45 percent. In the cases of auto parts and some other
products, the level is set at 50 percent.
Ahn Sun-kwon, an analyst at the Korea Economic Research Institute, said the free
trade deal would help South Korea's auto and electronics companies to expand
their shares in the European market.
For example, Samsung Electronics Co., the world's largest maker of computer
memory chips, will enjoy big gains when the EU cuts its main tariffs on
electronic goods, which are as high as 14 percent, under the deal.
Hyundai Motor Co., the world's fifth-largest automaker that sells one-third of
its vehicles to the European market, will also benefit when the EU phases out a
10 percent tariff within five years.
One of the most sensitive issues has been auto trade. After much wrangling, the
two sides agreed to eliminate tariffs on cars with an engine displacement of over
1.5 liters within three years. Tariffs for smaller cars with an engine
displacement of less than 1.5 liters would be lifted after five years.
South Korea currently imposes an 8 percent import duty on European cars, while
the EU imposes a 10 percent duty on autos from South Korea.
Also, South Korea agreed to lift tariffs for some machinery, textiles and 38
other items after seven years.
Following a similar free trade deal with the U.S., a deal with the EU would help
South Korea to secure firm footing in the EU market, according to Kim Do-hoon, an
analyst at the state-run Korea Institute for Industrial Economics and Trade
(KIET).
"South Korea's image as an 'advanced trading country' will be boosted as well,"
he said.
Analysts also said the deal would help South Korea attract more foreign
investments and make business practices and management more transparent.
The deal would also create new opportunities and markets for Korean goods,
services and workers, while benefiting Korean consumers with more competitive
pricing and better quality of goods and services in the Korean market.
However, some economists and opponents argue the deal would devastate the
livelihoods of South Korean farmers and the poor and worsen the economic
polarization between the haves and have-nots.
Hit by an influx of cheaper EU agricultural goods, about 4 million farmers in
South Korea, already a net importer of food, will be the biggest victims.
According to state-run institutes such as the Korea Rural Economic Institute, the
country's agriculture sector is expected to suffer a loss of as much as 2.3
trillion won if the deal takes effect.
sam@yna.co.kr
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