An extraordinary informal meeting of EU foreign and trade ministers will take place at the end of the week (on Friday and Saturday), primarily to tackle the controversy, which risks derailing the commercial deal with Korea.
The European Parliament yesterday refused to back the deal and postponed its definitive vote to mid-October “to allow time for an agreement with the Council".
MEPs want stronger safeguard measures for the European automotive sector, which would be significantly affected by increased competition from South Korean manufacturers.
In the text supported by the Parliament, the level of duty on imports from Korea could be increased in case of "serious injury" to EU producers. Such measures would potentially only be applied in the countries affected by more competition, rather than across the entire bloc, MEPs are proposing.
The Asian tiger in numbers
Korean carmakers already have an important share of EU markets and their presence is growing. In the first semester of 2010, Hyundai's car sales in Europe grew by over 10% compared to the same period of the previous year. Korea's other main exporter of cars to Europe, Kia, saw sales growth of almost 13%, according to figures provided by ACEA, the Association of European Car Manufacturers.
European countries only export to Korea 1% of their car production, while Europe represents 25% of overall car exports by the Asian country.
These figures contribute to the widening trade deficit between the Union and the Asian country. In the first five months of 2010, the EU's trade deficit with Korea reached almost five billion euros, mainly a result of machinery imports, according to Eurostat.
ACEA has long denounced "the unfair terms" of the free trade agreement with Korea, especially a 'Duty Drawback' clause which authorises Korean producers to sell to Europe at highly competitive prices cars made with cheap components made in third countries, like China.
Moreover, ACEA predicts a jump in productivity by Korean carmakers, which enjoy significantly lower costs.
This would certainly benefit European consumers and would likely bring down car prices, but it is expected to have an impact on carmakers as well as on the economy at large and the social situation in some EU member states.
Italian concerns
Italy is the most outspoken EU country regarding the threat to its economy posed by the EU agreement with Korea if the existing terms were maintained. Fiat, Italy's biggest carmaker, is a direct competitor of Korean carmakers in the small and cheap vehicle market. In the first semester of 2010, Fiat's car sales in Europe dropped by almost 10%.
"With these terms, Italy is not ruling out the opportunity to use its power to express a general reserve on the agreement, which would work as a veto," an Italian diplomatic source made clear.
The Italian vice-minister in charge of trade, Adolfo Urso, has outlined Italy's concerns several times in conversations with EU Trade Commissioner Karel De Gucht. His spokesperson was not available to comment.
Tomorrow (9 September), diplomats in Brussels will try to sort the controversy, and then ministers should finalise a possible deal over the weekend.
Belgian EU Presidency sources confirm that the main reason for the weekend meeting is to address the Korean issue, but they were optimistic over the final outcome of the negotiations. A Korean delegation might attend in case a definitive agreement is reached.
Delaying the entry into force of the agreement to 2012 rather than 2011 could help improve the deal and might temporarily reassure Italy and other member states "who are less outspoken but would have acted in case Italy didn't".
The Parliament may also be pleased with such a decision.
