The European Union has reached its biggest ever free trade agreement (FTA) with a third country, South Korea, paving the way for a potentially massive rise in exports in a deal that has ired auto manufacturers on both sides. The deal, worth up to 19 billion euros according to some estimates, was initialled by EU Trade Commissioner Catherine Ashton and Korean Trade Minister Kim Jong-hoon. It seeks to remove most tariffs and non-tariff barriers between the two economies. The FTA will now have be ratified by all of the EU’s 27 national governments and by the European Parliament before it can come into force, possibly in 2010. Ashton said she was confident that the ratification process would succeed, noting that Italy - home to carmaker Fiat - had recently dropped its opposition to the deal. The EU is now hoping to reach similar deals with India and other Asian countries. Requested by many European businesses - but opposed by the continent’s car industry - negotiations took eight rounds of talks and two years to be completed.
“This agreement is particularly important in the current economic climate, helping to fight the economic downturn and create new jobs,” Ashton said. “The benefits will be enormous,” the commissioner added. The deal quickly eliminates 1.6 billion euros in Korean import duties and 1.1 billion euros in EU import duties. This should benefit both businesses and consumers, since it should make products cheaper. The deal also tackles non-tariff barriers to trade on a variety of products and services. For instance, typical EU foods such as Italian Prosciutto di Parma, French Champagne and Greek Feta cheese will receive added protection in South Korea.  And many European standards on manufactured products will also be treated as equivalent by Korea, thus eliminating red tape.
One of the most controversial aspects of the FTA concerns the automotive sector. EU and Korean car makers currently hold a similar share in each others’ market of around three percent. But the EU market is much larger, meaning there are 10 times more Korean cars in Europe than European cars in South Korea. In order to allay European fears that they may be swamped by cheaper Asian cars, the FTA contains a so-called safeguard clause, allowing duties to be re-introduced in case of a sudden surge in imports.
However, the clause has not prevented European car manufacturers, and some in South Korea, from reacting negatively to the deal. “The proposed ‘safeguard clause’ does not put a safety net in place as it only enters into force after five years from the start of the FTA and, in its current form, will be very difficult to implement,” the European Automobile Manufacturers’ Association (ACEA) said in a statement.
“The Korean negotiators have not only obtained unrestricted access to a market of over 500 million people, the European Commission has in addition allowed South Korea to subsidise exports from its key industries to the EU. This constitutes unfair competition and will lead to economic distortion,” said ACEA Secretary General Ivan Hodac, who called on EU governments not to ratify the FTA.  ACEA defends the interests of Europe’s major car makers, from BMW to Volvo. Meanwhile, South Korean carmakers also do not appear to be enthusiastic about the trade agreement as they stand to lose control of their home market if the deal becomes effective. If Seoul removes an eight percent duty on European vehicles within the next three years, the competitiveness of EU carmakers is set to increase. In recent years, foreigners have proven that the South Korean market is no longer the sole domain of local carmakers like Hyundai Motor Co or Kia Motors Corp.