What the EU South Korea Free Trade Agreement Reveals About the State of EU Trade Policy
edited on 13/01/10 The EU South Korea agreement is the most ambitious bilateral trade agreement the EU has agreed to sign up to. But it is likely to be an exception, given that current EU trade policy is rather in dire straits.
I promised a more exhaustive analysis of the EU South Korea trade deal in a previous blog post. Finally, here it is:
The EU South Korea agreement is one of the most ambitious trade liberalizing bilateral agreement the EU has agreed to sign up to. But it is likely to be an exceptional agreement as the EU’s overall trade strategy is dire straits.
In the early months of 2010, the ratification of European Union - South Korea free trade agreement (EU South Korea FTA) finalised in October last year will be a test for the EU’s new trade policy decision-making process. Indeed, it is the European Union’s (EU) first bilateral trade agreement that will undergo the ratification procedures under the new Lisbon Treaty rules: co-ratification by the EU Parliament. Nobody really knows for sure how this ratification will play out, although it is widely believed that the Parliament will not bloc it. The real question is how powerful the EU automobile lobby’s influence in Brussels and in some national capitals – which has fiercely opposed the deal so far – will turn out to be in the system’s new, yet still sketchy, configuration. In the meantime, it is interesting to linger on the substance of the agreement, in order to assess where the EU is heading overall in its trade policy.
If one is to flesh out the core facts about the EU South Korea agreement’s almost 2000 pages, one could say that the following items are on the menu:
- Virtually all tariffs are eliminated, including, from the side of the EU but not of South Korea, most agricultural tariffs. Tariffs will be phased out immediately on entry into force of the agreement, or in reasonable stages. These include a maximum five years for some products the EU considered sensitive such as automobiles, or some agricultural products. South Korea’s sensitive high value-added manufacturing imports such as medical equipment will see their tariffs disarmed in eight years.
- The agreement breaks new ground in the EU’s tradition of FTAs: it provides for some real achievements in services. These go beyond existing commitments in the World Trade Organization’s (WTO) services trade text, the GATS. This is the case for financial services and telecommunications, maritime transport services and e-commerce.
- Furthermore, for the first time in the history of modern-day free trade agreements there are strong and precise clauses on the elimination of some selected non tariff barriers (safety standards and accreditation procedures) in automobiles and electronics. It provides for legally binding commitments to adopt international, - yet EU dominated (UNECE) - standards in electronics (safety standards), self-declaration of conformity, and the elimination of double testing requirements for accreditation; and the adoption of international standards in automobiles.
- The EU also makes some modest yet interesting moves towards a more liberal approach in its traditionally strict rules of origin, by accepting to go to 55% local value added in most manufactures. Of particular interest the EU’s agreement to allow duty drawback (although with the possibility to review the commitment in five years), which it had so far refused to do in any bilateral agreement. Therefore, South Korea may continue to reimburse the import of automobile parts from China, as long as the share of these imports does not increase in the production of products destined to the EU.
- The trade deal reinforces the EU’s drive for greater stringency in international intellectual property right protection. It aligns itself with the US’ trade agreement 70 year copyright protection. An EU “specialty”is the protection of Geographical Indicators (GIs) for agricultural products. With the Korea agreement, the EU has gone beyond the traditional protection of its wine and spirit names, and expanded to other products – beers, meat specialties, cheeses, olive oil, asf. Korea for its part protects teas, rice and spices.
- It was not difficult for the EU to continue on its rather trade restrictive approach on sanitary and phytosanitary (SPS) measures: South Korea also strongly protects its agricultural sector. The text just refers to the existing multilateral WTO text on SPS. Furthermore, the EU cherished “precautionary principle” is also part of the FTA, which weakens the WTO’s injunction to base trade restrictive measures on strong scientific groundings
- The EU also applies its traditional approach by including clauses on competition policy which seek to make its partners align their practices to the EU’s. A novelty however is the obligation on both sides to report transparently to each other their respective distribution of subsidies to their economies (with exceptions in shipbuilding or fisheries, however).
- In the area of safeguards and antidumping, there is not much innovation beyond basic WTO rules. However, the parties have agreed to previously notify each other in case of adoption of safeguard measures.
- The EU South Korea deal, as is traditionally the case in all the EU’s trade agreements, also contains clauses on human rights, labour standards and environmental protection. This text probably the longest list of international conventions on human rights, labour and environmental matters the EU wants its commercial partners to sign up to. It includes for the first time, the Kyoto Protocol. Interestingly, however, the agreement, contrary to virtually all EU FTAs, does not appear to contain the word “democracy”, although it puts human rights high on the agenda.
- The final and most substantial break-through in the EU South Korea agreement is the adoption of a judicial dispute settlement mechanism modeled on bilateral legal arbitration procedures the United States includes in its free trade agreements.. This applies to trade in goods only. And there are of course exclusions: SPS, antidumping, services. Non tariff measures in automobiles for their part can be subject to an accelerated procedure. Even the social and environmental clauses are subject to a potential panel dispute, but here the rulings are not legally binding. Yet they certainly signal a hardening of the EU’s approach in this field.
So, what to make of all this?
The first interesting lesson one can learn from the EU South Korea deal is that the EU’s FTAs are “americanising”: the EU is becoming more commercially assertive. The deals resemble increasingly templates provided by the United States’ own “gold standard” free trade agreements based on NAFTA. But one could say, in a Brussels that boasts many French-style restaurants amenable to back-room deals, the filet is “américain”, but the sauce is “à l’européenne”.
The US American “meat” regards the ambitious approach in tariffs, in services, IPRs, and dispute settlement. The EU South Korea deal also leaves out many other economic policy areas usually included in EU FTAs. It so slims the agreement down to somewhat less numerous topics, but more legally binding clauses: the EU’s focus is commercial above all, and less mixed up with developmental and other political or economic cooperation goals that tend to accompany the EU’s FTAs with developing and emerging markets.
The European “sauce” for its part concerns the more ambitious approach in non tariff measures, namely standards, which is something the US, which tends to be content with simply referring to the rather weak WTO TBT (technical barriers to trade) Agreement, doesn’t usually have. The focus on GIs also a typically European policy. So is the “precautionary principle” in setting standards and assessing whether imports of foreign goods comply with them. Finally, although the new Lisbon Treaty gives the EU Commission the right to negotiate on foreign direct investment (FDI), this area was not covered in the EU South Korea. US American FTAs do cover FDI liberalization [although there are basic rules on "establishment"] and in particular investment protection. Only a future FTA signed by the EU might contain such clauses.
Yet, in following the US’s footpath, the EU clearly reveals that it is making its task easy. Despite it being the biggest trading entity in the world responsible for one fifth of world trade, and despite the fact that trade its most powerful external policy, the EU has not been a major trend-setter in the more recent, new-generation, bilateral trade deals generally. It does not tend to have the same clout and commercial success as its main rival on the FTA front, the United States. If the EU signed in the late 1990s free trade agreements with Chile and Mexico, and launched talks with South Korea and ASEAN it is because the United States had begun the process. Whereas the structure and design of the bilateral agreement has tended to differ quite substantially between the US and the EU, this, too has now started to change. The EU CARIFORUM Economic Partnership Agreement (a trade agreement that forms part of the EU’s policy towards Asia-Pacific-Caribbean countries) signed in late 2008, and the EU South Korea agreement resemble increasingly the agreements these countries have signed with the US. The EU basically demanded negotiations on the basis of the preexisting agreements of these countries with the US, and adapted some of the clauses to its own needs, special interests, and negotiating constraints.
Although, if ratified, the EU South Korea would send a positive signal to a recession-ridden world tempted by protectionism, one can certainly not expect the deal to be a fresh new start for EU trade policy. It is even rather a fig leaf on the failure of the EU’s recent international market access strategy. The EU’s approach has two core elements:
- firstly, to drop the EU’s onus on multilateral trade negotiations in the Doha Round and to shift to signing ambitious bilateral trade deals to secure better market access in the world for its industries and services sector;
- secondly, to focus on Asia, which has lucrative markets for the EU which still maintain high levels of tariff, but in particular non tariff protection in manufacturing and services.
The EU has aimed to sign a full-fledged agreement with South Korea, India, and the 10-country grouping ASEAN (which has just announced a big trade deal with China). It was also to sign a Partnership and Cooperation Agreement with a strong commercial component with China. Only the EU South Korea deal has been finalized, three years after the EU strategy – dubbed “Global Europe” - was officially launched. Relations with China have hit rock-bottom. Bilateral talks with India have led nowhere. And EU-ASEAN proved very quickly a chimera. Now the EU Commission has come up with launching negotiations with an eager Singapore, and so signaled it will discuss with individual ASEAN members. EU-South Korea has been easier because of the Korea’s strong motivation to achieve a commercially significant deal. Furthermore, except in the automobile sector, there is hardly any significant or at least politically sensitive import-competition that would make the EU as recalcitrant towards China’s imports, or would be towards Indian services or ASEAN low-skilled manufacturing exports.
In fact, the EU is currently much too defensive in international markets – it resents the rise of Asian, and in particular Chinese exports. The labour and services markets and key industries of major member states (Southern Europe, France and to some extent Germany) have not yet been adapted to 21st Century economic realities. This reinforces protectionist sentiment. Furthermore, the EU’s systematic linkage of social and environmental clauses to trade negotiations and its drive to export its regulations is likely to alienate its increasingly powerful and self-confident emerging market partners.