Interview with Jong-Kyu Lee, research fellow, Samsung Economic Research Institute (SERI)
FTA mitigates impact of crisis
By Sébastien Falletti in Seoul | Friday 29 June 2012
Europe benefits from the landmark free trade agreement (FTA) concluded with Seoul one year ago, says Jong-Kyu Lee, expert at the leading South Korean think tank SERI (Samsung Economic Research Institute). Lee tellsEuropolitics
which sectors have taken the most advantage of the new rules. He also says that the eurozone crisis has had a negative impact on bilateral trade, thereby reducing the impact of the FTA.
Can we already see the impact of the FTA one year on? What are the most tangible results?
Trade between Korea and EU has decreased by 0.9% since the entry into force of the FTA [ie between July 2011 and April 2012], but this is related more to the worsening economic crisis in the eurozone than to the FTA. Without the FTA, bilateral trade would have significantly decreased, way beyond the 0.9%. In other words, the role of the FTA is like propping up a tree branch with a piece of wood. Furthermore, even in the context of the eurozone crisis, foreign direct investment from Europe to Korea has increased since last July. EU countries invested a total of US$3.56 billion in Korea, which means a 60.5% increase between July 2011 and March 2012.
The EU’s trade deficit with Korea has been reduced. Is this due to the FTA?
It seems that the EU benefits from the FTA. EU exports to Korea increased by 15% for ten months (between July 2011 and April 2012). Korean consumers tend to think that the quality of European products is guaranteed through the high standards of the Union’s long-established producers, and this perception has been strengthened by the FTA. Accordingly, they think that they can get high-quality goods from Europe at reasonable prices (although this does not apply to all products: the prices of certain luxury items have not changed much). This is why European-made luxury items have been so popular in recent months.
Which sectors benefited the most on the EU side?
The sectors that benefited the most include crude oil, vehicles, leather bags and measuring instruments. Also, Korea imported Brent crude oil from the UK for the first time thanks to the immediate elimination of a 3% tariff. At the same time, the past ten months have also witnessed an increase in Korea’s imports of ‘no tariff’ items (ie those that do not benefit from the FTA), such as aircraft, naphtha or peripherals.
What were the main benefits on the Korean side?
As expected, the Korean auto industry benefited the most under the FTA. In fact, after the FTA came into effect, vehicle sales to Europe increased by 67%, to 335,320, according to the Korea Customs Office (July 2011-March 2012). However, this is not entirely due to the tariff reduction. Rather, this has to do with quality improvements and enhanced consumer preferences. The rapid introduction of new models and improved customer recognition were crucial factors here. Additionally, exports of other products have increased, such as kerosene, synthetic resins or heavy construction equipment. But exports to the EU of ‘no tariff’ items (which do no benefit from the FTA), like ships, wireless telecommunication devices or semiconductors, etc. have decreased significantly (-12.5%) over the past ten months. This proves that the performance of Korea’s exports would have been worse without the FTA.
Which issues have been the most problematic in terms of implementation?
Just like a highway provides infrastructure for cars, the FTA is only a piece of economic infrastructure that promotes trade between two parties. Therefore, if the benefits brought on by the FTA are not fully utilised, the FTA will be of little use for both sides. In this respect, Korean and EU companies need to analyse the opportunities provided by the FTA and proactively utilise them to the best of their ability. However, in the case of small and medium-sized firms in Korea, it is relatively hard to do this because the process - such as the rules of origin, environmental regulations, technical standards, etc - is too complicated.
Do you think the FTA has lived up to expectations so far?
As discussed, the exports of products that benefited from the FTA have increased enormously, whereas those of ‘no tariff’ goods have not. This is evidence that the FTA has had a positive impact on commerce for both sides of the deal even during the debt crisis in Europe. In the context of low economic growth and financial instability, it seems that the FTA plays an important role in preventing a decline in trade between the two parties.