Korea-EU FTA: No sudden windfall

The Korea-European Union free trade agreement goes into effect on July 1, promising to remove nearly all tariffs within in five years, boost two-way trade and Korea’s profile in the EU and move the Korean economy a step closer to advanced status. 

However, getting the maximum benefits will be challenging. 

The FTA, the first free trade pact the EU has signed in Asia, will give Korean companies price competitiveness and first-mover advantage over Asian neighbors in the European market. 

Thus, Korean exports to the 27-nation EU are expected to rise by an annual average of $2.52 billion for the next several years. To get to that figure and beyond, Korea’s export paradigm will need significant changes. 

First, corporate attitudes and behavior toward the EU market are not geared toward seizing the opportunities the FTA presents. 

Although the EU, the world’s largest economic bloc, is Korea’s second largest export market as of 2010, it is far behind China, Korea’s largest export market. 

Furthermore, the share of exports to the EU and ranking of EU states in Korea’s export markets are falling. This is because Korean companies are more focused on rapidly growing emerging markets. Consequently, Korean goods have less than 3 pecent of the EU market compared to nearly 20 percent and 10 percent by Chinese and U.S. competitors. 

Another obstacle is that Korean goods lack comparative advantages in the EU market. 

The number of Korean goods exported to the EU that scored more than 1 in the Revealed Comparative Advantage Index (96 items) fell from 17 in 2001 to 13 in 2010. That is comparable to Japan (18) but decidedly lower than Korea’s other primary rivals in the European market, China (35) and the U.S. (26). 

Third, Korea’s exports are segregated in Europe. Although Western Europe is the backbone of the EU economy, the share of Korean goods to the region has been in steady decline. 

Again, this contrasts sharply with the U.S. and China. Exports to Western Europe accounted for over 90 percent of their total EU exports. 

Fourth, Korea’s dependence on certain flagship items is excessively high. The top 10 export items account for two-thirds of its entire EU-bound shipments. The concentration is higher than in Korea’s total exports throughout the world (50.7 percent), as well as for exports to the U.S. (59.5 percent) and China (52 percent). This suggests that lowered EU tariffs will have no immediate impact on most Korean companies. 

Considering the slow speed of FTA negotiations between the EU and other Asian countries, Korea will probably be able to enjoy first-mover advantage for at least three years. Also, the EU’s anti-dumping crackdown on Chinese goods will be advantageous for Korean products. But all of this does not mean Korean exporters will have smooth sailing. They will need export licensing and a supply chain that meets EU rules of product origin. More importantly, they need to address product diversification and broader marketing in the EU. Without that, the FTA benefits will not be fully realized. 

Korea’s large exporters should launch aggressive offensives in Western Europe that differentiate their products from competitors. At the same time, Korea needs to find promising industries in new growth engines. Specifically, industrial cooperation with EU firms is worth considering. By incorporating EU green technology with Korean manufacturing technologies, Korean companies can develop green products for export. 

The government should identify promising exports on a per country basis, provide information about public procurement and private brand markets, and strengthen its support of small and medium size enterprises through support programs such as “Korea’s Hidden Champions.” 

June 13, 2011

Source: Korea Joongang Daily