EU-South Korea trade deal under attack

Five German car manufacturers are under pressure after the European Commission said it is investigating their involvement in a potential cartel.

The imminent entry into force of an EU free trade agreement with South Korea might be delayed, as some countries are demanding the inclusion of new safeguards for European industry, particularly for car manufacturers. The European Parliament yesterday (7 September) postponed a decision over the deal, while Italy is threatening a veto.

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.

Only 1% of European car exports goes to Sotuh Korea, while Europe represents 15% 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 expects a jump in South Korean competitiveness due to the proposed agreement – in particular the provisions on 'Duty drawback' and changes to 'Rules of origin'.

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.

The European Parliament's rapporteur on the dossier, Spanish MEP Pablo Zalba Bidegain (European People's Party) explained that there is still controversy between the EU assembly and the majority of EU member states, and this was why MEPs felt the need to postpone their vote on the final agreement to October, in order "not to close the door" on a first-reading agreement with the Council.

German liberal MEP Michael Theurer (FDP), ALDE shadow rapporteur on the free trade agreement with Korea, said: "We require an effective safeguard clause which covers regional distortions and social and environmental norms which allow us to avoid the inherent duty drawback risks."

 

Bernd Lange from the S&D group said:"The Council now finally has to move, so that we will have sufficient safeguards for the Free Trade Agreement with South Korea to protect European industries and employees from dumping."

"This vote is a strong political signal that improvements to this free trade agreement can and must be made," said Ivan Hodac, secretary-general of European carmakers' association ACEA. "There is no need to rush things through. At the other side of the Atlantic, US officials are equally seeking improvements to the automotive chapter in their FTA with South Korea," he added.

 

  • 10-11 Sept. 2010: EU Informal Foreign Affairs/Trade Council.
  • 18-21 Oct. 2010: Scheduled vote on Safeguard Clause in European Parliament plenary session.
  • 22-25 Nov. 2010: Scheduled final vote on Free Trade Agreement with South Korea in Parliament plenary.
  • 1 Jan. 2011: Planned entry into force of agreement, with possible delay until 1 January 2012. 

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