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Wednesday, May 18, 2011

The EU-South Korea Free Trade Agreement and Its Implications for the United States

William H. Cooper
Specialist in International Trade and Finance

Remy Jurenas
Specialist in Agricultural Policy

Michaela D. Platzer
Specialist in Industrial Organization and Business

Mark E. Manyin
Specialist in Asian Affairs

On October 6, 2010, the 27 member European Union (EU) and South Korea signed a bilateral free trade agreement (FTA). The South Korean National Assembly and the EU Parliament have ratified the agreement. The agreement is expected to go into effect on July 1, 2011. The South Korea-EU FTA (KOREU FTA) is the largest FTA in terms of market size that South Korea has entered into. The KOREU FTA reflects the EU and South Korean trade strategies to use FTAs to strengthen economic ties outside their home regions. It also builds upon the surge in trade and investment flows between South Korea and the EU over the past decade. This agreement has possible implications for U.S. trade with South Korea and congressional action on the proposed U.S.-South Korea FTA (KORUS FTA).

The KOREU FTA is very comprehensive. It would reduce and eliminate tariffs and other trade barriers in manufactured goods, agricultural products and services and would also cover such trade-related activities as government procurement, intellectual property rights, labor rights and environmental issues.

Most studies done on the potential impact of the KOREU FTA estimate that the agreement will have a small but positive effect on the economies of the EU and South Korea as a whole and that the larger relative impact would be on the South Korean economy. The greatest economic impact of the KOREU FTA would be on specific sectors in each economy. EU services providers would be expected to experience gains from the agreement, especially in the areas of retail and wholesale trade, transportation services, financial services, and business services. In terms of trade in goods, EU exporters of pharmaceuticals, auto parts, industrial machinery, electronics parts, and some agricultural goods and processed foods would be expected to gain from the KOREU FTA’s implementation. At the same time, South Korean manufacturers of cars, ships, wireless telecommunications devices, chemical products, and imaging equipment would be expected to increase their exports to the EU market.

The KOREU FTA is similar to the proposed KORUS FTA in many respects. Both agreements are comprehensive and both would eliminate tariffs on most trade in goods soon after they enter into force. However, they differ in other respects. Phase-out periods for tariffs on some manufactured goods differ. In addition, the KOREU FTA does not cover investment protection. Unlike the KORUS FTA, the KOREU FTA would not allow trade sanctions to be applied where violations of the workers’ rights, and environment provisions have been deemed to occur. In addition, the KORUS FTA would cover a broader range of trade in services than would the KOREU FTA. It is not clear whether these differences in the structures of the FTAs would result in appreciable differences in outcomes in terms of economic gains and losses.

U.S. and European firms are close competitors in a number of sectors and industries, particularly autos. Some business representatives argue that enactment of the KOREU FTA before enactment of the KORUS FTA would give European competitors commercial first mover advantages, since EU firms, such as those in the auto industry or the services sector, could gain greater market opportunities in South Korea not afforded to U.S. firms. On the other hand, other factors could also mitigate such advantages. For example, U.S. multinational firms operating in the EU could benefit from the KOREU FTA. Nevertheless, the content and fate of the KOREU FTA could influence the pace and tone of any debate in the United States on the KORUS FTA in the 112
th Congress.

Date of Report: May 3, 2011
Number of Pages: 30
Order Number: R41534
Price: $29.95

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