European business to tap Korea en masse

By Kang Seung-woo

The Korean economy is set to turn in tandem with the free trade agreement (FTA) between Korea and the European Union (EU) as it becomes effective on July 1.

A majority of watchers say that the agreement will create a win-win formula for both parties. But some raise concerns that some Korean makers in such areas as vehicles and cosmetics will suffer hitches.

In particular, state-run agencies welcome the free trade pact with great fanfare and rosy outlooks. The Korea Institute for International Economic Policy (KIEP) and the Korea Development Institute (KDI) expects Korea’s real growth domestic product (GDP) to post an average of 0.56 percent per year on pace for up to 5.62 percent over the next decades.

Economic benefits are estimated to top $32 billion, accounting for 3.8 percent of the GDP, as well. Over the long term, the agreement will create about 253,000 jobs ― 220,000 in the service sector and 33,000 in the manufacturing industry ― on the back of increasing exports, according to state think tanks.

Their rationale: the FTA will eventually boost bilateral trade between the two sides by up to 20 percent to generate such positive results thanks to the lower tariffs.

The two sides signed the trade pact last October and Korea’s unicameral Assembly ratified the deal this April, two months after approval from the European Parliament.

In the deal, Seoul and Brussels will eliminate or phase out tariffs on 96 percent of EU goods and 99 percent of Korean goods within the next three years. They have also agreed to abolish tariffs on most industrial goods by 2016.

The EU is the world’s largest economic zone that consists of 27 countries with a population of over 500 million and produced $16.4 trillion worth of goods and services in 2009.

Trade between the 27-member economic bloc and Korea totaled $92.2 billion last year, while the two-way trade reached $78.8 billion in 2009, with Korea enjoying a surplus of $14.38 billion. In 2008, their bilateral trade stood at $98.4 billion.

Other optimists point out that the FTA will bring about not only quantitative benefits but also qualitative ones ― if Korean companies take advantage of the EU market via the FTA, they will be able to boost competitiveness in the globe.

In other words, they expect that the FTA with the EU will upgrade the local economy.

“Some industries that have competitiveness will be able to extend a trade surplus, while acquiring advanced management and knowledge on technology, which will elevate Korea’s economy,” said a Seoul-based economist.

Threats to automakers, farmers

Everything has a flip side and winners take gains at the expense of losers. In this case critics worry that the losers will include local automakers, cosmetic manufacturers and farmers.

Foreign carmakers have been active in marking down prices for their vehicles and automobile parts ahead of the FTA implementation to boost its presence in the local market, captured by Hyundai Motor and its Kia Motors with a combined 78.4 percent market share _ 45.2 percent by Hyundai and 33.2 percent by Kia.

Currently, Korea levies an 8 percent tariff on European passenger cars but under the imminent FTA, the government is required to cut it gradually so that vehicles will enter entirely tax-free by 2016.

The foreign car market in Korea, mainly dominated by European ones, tallied 6.92 percent of the local market last year and the country’s import vehicle market is estimated to undergo an overall expansion, with the market share likely to top the 10 percent mark in the near future.

“As soon as the free trade agreement (FTA) goes into effect in July, the tariffs will begin to go down so European carmakers will be able to cut their prices. Then, chances are that their sales will go up,” said an official of the Korea Automobile Importers and Distributors Association (KAIDA).

Mercedes Benz launched a preemptive campaign with a markdown of 1.3 percent on average, ranging from 500,000 won to 5.4 million won, while BMW is set to slash prices from July.

Volkswagen and Audi will also come up with plans to cut prices soon.

In terms of parts, BMW will lower prices of components by 4 to 5 percent and Mercedes Benz intends to reduce price tags as much as the tariff reduction.

“Based on good brand awareness and respectable qualities such as fuel efficiency, the German carmakers expanded their market share from 50 percent last year to 55 percent so far this year. I think that the figure will rise to 60 percent by the end of 2011 thanks in no small part to the FTA,” said Prof. Kim Pil-soo at Daelim College.

The tariff reduction is also expected to strongly impact the domestic cosmetics industry, as Europe’s top three distribution channels ― Germany’s Douglas and France’s Sephora and Marionnaud ― are likely to advance into Korea. The 6.5 percent tariff levied on imported cosmetics will be completely gone in five years.

“The three companies have carried out market research. Thanks to lowering tariffs, there are high chances for them to enter here,” said an official of a local cosmetics firm.

“Their arrival will highly impact the industry.”

The sector dealing with medicine is likely to see negative effects from the FTA.

According to a report by the Ministry of Strategy and Finance, medical supplies exports to the EU will be outnumbered by the imports from there at $26 million per year over the next five years.

Some economists and opponents say that the free trade pact will make about 4 million farmers in Korea the biggest victims due to an influx of cheaper EU agricultural goods.

The 25 percent customs duty on frozen pork belly will diminish by 2.5 percentage points each year over the next 10 years, while the 36 percent tariff on cheese will be removed over 15 years.

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.