Originally Published 2011-08-01 00:00:00 Published on Aug 01, 2011
The recent South Korea-EU FTA (or the KOREU FTA) is more of a steal for the Koreans than the Europeans. While it will have a 0.08 per cent impact on the European economy, it will have a 0.84 per cent impact on the Korean economy.
South Korea on a FTA spree
While the South Koreans are rapidly aligning themselves with the global market by building comprehensive economic partnerships with different countries, for the European Union (EU), with its economy on the brink of a disaster, free trade agreements (FTA) are more of a must than a want. The recent South Korea-EU FTA (or the KOREU FTA), not surprisingly, is more of a steal for the Koreans than the Europeans. While it will have a 0.08 per cent impact on the European economy, it will have a 0.84 per cent impact on the Korean economy. It took the two sides almost four years to get the agreement in effect as negotiations started in 2007 and the policy came into effect on 1 July 2011. According to analysts, the KOREU FTA will have a small but positive impact on both the economies. The EU is currently South Korea’s second largest export destination, while South Korea is EU’s ninth largest trading partner. Although EU-Korean trade grew at an annual average of 7.5 per cent during 2004-2008, it experienced a major slump in 2009 due to the global financial crisis.

In 2010, however, trade picked up once again and the total goods exported by EU to South Korea stood at €28 billion (29.5 per cent increase in comparison with 2009), while import from Korea was €38.7 billion (20 per cent increase in comparison with 2009). In the service sector, European exports to Korea were €6 billion (2009), while South Korean export in services to EU were €3.9 billion. With regards to Foreign Direct Investment (FDI), EU’s investment flows to South Korea in 2009 were €0.5 billion, its outward investment stocks were €28.9 billion, while South Korean investment flows to EU were €1 billion, and its outward stocks to EU were €9.9 billion. Both the EU and Korea will show positive and significant effects on bilateral exports and imports. Given these statistics, there are various indicators that show that Korea stands to gain more from it than its European counterparts.

First, despite being an important step to increase bilateral trade and investment for both the economies, welfare gains will be more significant and positive for South Korea (1.12 per cent) than the EU. The terms of trade improvement, capital accumulation due to increased investment, as well as increase in varieties of goods and services available to consumers due to the Agreement will play an important role in hiking welfare gains for the Koreans. In contrast, welfare gains for the EU are much less, and stand at 0.02 per cent. Smaller economic size of South Korea and its protectionist policies contribute towards benefitting more in terms of welfare gains.

Second, though this Agreement will help EU to improve its Balance of Trade (BoT) vis-à-vis Korea by about €10.1 billion (a significant achievement given that the trade deficit for EU was as high as €13.8 billion), it has little production effects for EU. The only positive impact will be found in meat, dairy, beverages, tobacco and other foods products, as well as transport services (sea and air). It might witness a reduction in production in sectors such as textiles, leather, clothing as well as cars. In fact, production for the EU might expand more without the Agreement rather than after its implementation. South Korea on the other hand will perform better as its production capacity is set to increase in major sectors such as textiles, automobile, leather, clothing, and transport equipment. High non-tariff barriers (NTB) of South Korea play an important role in making it a larger beneficiary of the KOREU FTA. These effectual differences for the EU and South Korea are primarily due to the cut in NTBs that leads to high-level trade effects.

Third, though small, the impact of the Agreement on another important macro variable i.e. employment, is also skewed in favour of Korea. According to various analyses, Korea will witness a sector based employment bulge with its textile sector in the forefront. Although it may see lay offs in the manufacturing industry i.e. machinery and electronic equipment, as well as services such as insurance and business, Korea is expected to benefit more than EU. There will be almost negligible employment effects for the EU.

The above review of the KOREU FTA reflects that while the EU needs such a comprehensive economic treaty to provide a boost to its trade and industrial production, South Korea is making tremendous strides in the economic sector and building strategic relationship with various countries. Apart from the FTA with EU, South Korea has also signed comprehensive economic agreements with the United States (KORUS) and India. Therefore, having already developed comprehensive economic agreements with the giant economies of the world (barring China), South Korea is playing its cards very smartly in the current global economic scenario, and is expected to gain a lot in the long run. Having overtaken Japan in its trade with India, South Korea has given a further boost to its relations with New Delhi by playing host to India’s President Ms Ptatibha Patil who  visited Seoul very  recently. Her visit was marked by the signing of several agreements the most important being a cooperation agreement in the civil nuclear field. At a time when Japan’s civilian nuclear policy is badly embroiled in internal controversies thanks to the Fukushima reactor crisis as well as Prime Minister Kan Naoto’s backtracking on the nuclear issue, the present agreement between  South Korea and India has given the former a clear advantage over Japan.

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