European trade commissioner Peter Mandelson launched the Global Europe framework in October 2006 to reinvigorate Europe’s bilateral economic relations with the major growth markets of China, the Association of South-east Asian Nations (ASEAN), India and South Korea. In May 2007, free trade agreement (FTA) negotiations with South Korea were launched. During July 16-20, 2007, a second round of negotiations took place, and opinions on the ground there now seem overwhelmingly positive.

For Kim Eun-Hee, the owner of a language education institute in South Korea, a South Korea-EU (SK-EU) FTA would be a positive move. The FTA could be of benefit to a planned expansion of her business into England and France.

Already driving her enthusiasm around the narrow streets of Busan in the form of an imported BMW, she anticipates that the deal will lead to a “significant advantage”. She says: “More and more students want to study in Europe instead of America. I hope an FTA will make it easier to expand my business to cater for these students.”

The easing of regulatory burdens between South Korea and Europe will make expansion into Europe easier. Ms Kim says that her decision to expand into Europe rather than the US was based primarily on market potential but after South Korea signed an FTA with the US she reconsidered her plans. The SK-EU FTA made her decision on Europe easier.

Trade potential

In 2006, South Korea’s total merchandise trade with the EU was valued at $79.4bn. Feasibility studies estimate that in a comprehensive agreement, South Korean exports to the EU could rise by 36% and imports from the EU could rise by 48%.

There will also be significant benefits in terms of investment. First, the EU will be able to eliminate the competitive edge secured by US investors as a result of the Korea-US FTA (KORUS-FTA) that was submitted to the Korean National Assembly in September 2007 – even if it only means greater recognition of European regulatory standards.

Reducing restrictions

The European wish list includes greater access to the Korean investment market, including provisions for non-discrimination, national treatment, transparency and investment protection, as well as greater certainty for investment-related capital flow transfers.

The EU will also seek removal of sectoral investment restrictions in the energy, shipping and banking sectors, as well as removal of the 49% cap on foreign ownership in the telecoms sector. Reciprocity, the magic word in any FTA, will result in similar benefits for South Korean investors in Europe.

Apart from addressing the competitive edge secured by the US, the SK-EU FTA could also give the EU an advantage over Australia, New Zealand and any other state that is yet to obtain South Korean agreement to start FTA negotiations. Australia and South Korea have started a joint study into an FTA and other countries have signalled their interest.

FTAs have another benefit that resonates in Ms Kim’s decision: they promote trade. The daily media diatribes on the pros and cons as well as the vigorous government campaigns to support their policies result in a substantial boost to trade promotion efforts.

Business interests aside, Ms Kim says that an FTA will help South Korean consumers considerably, making European imports that much cheaper – including her next purchase of an imported BMW.

Looking to Australia

For Sanghun Ji, a Korean-Australian also working in South Korea’s language education sector, the SK-EU FTA represents an opportunity that in his words will be “positive – in a round about way”.

“The promise of an FTA and potentially more enticing bilateral investment conditions between Korea and Europe makes people question my plans to expand into Australia. They say ‘Why Australia? We already have FTAs with America and Europe, why Australia?’” he says.

Trade diversion is the negative side of any bilateral trade agreement. Economic efficiency can be reduced as companies seek partnerships based on favourable regulatory conditions rather than efficiency. Australia, which has a national-interest test on foreign investment, eased conditions for US investors after the passage of the Australia-US FTA. However, Australia is yet to begin FTA negotiations with South Korea that could result in similarly favourable bilateral investment conditions.

As Mr Ji notes, there is already much talk about how Australia will lose out as a result of South Korea’s FTAs with the US and EU, particularly in agriculture, but there is little notion of how investment will be affected. “Investment is the backbone of trade. If you want to grow the trade relationship, you have to start with investment.”

Trade diversion is part of a much wider concern regarding bilateral trade agreements. At the centre of this concern is the question of whether bilateral trade agreements are weakening the multilateral trading system.

Yet Mr Ji does not oppose the SK-EU FTA. He recognises that, ultimately, the agreement will help his plans for business expansion. “The Europeans want an FTA because the Americans have one – now the Australians want one too. It’s only a matter of time.”

Competitive liberalisation, which occurs when successive FTAs encourage and set standards for trade and investment liberalisation, may result in the SK-EU FTA also benefiting Australia. When it comes to negotiating an FTA between Australia and South Korea, the hard negotiating work may already have been done by the US and the EU.

The SK-EU FTA is benefiting from the Korea-US (KORUS) FTA in a similar way. It has enjoyed much more favourable public opinion than the KORUS FTA, largely because anti-trade sentiment has been exhausted. On the opening day of SK-EU FTA negotiations, the local media reported the presence of about 20 “peaceful demonstrators”. In contrast, at the second round of KORUS FTA negotiations in July 2006, (the first round was held in South Korea) about 25,000 demonstrators marched to the venue.

If public sentiment in South Korea continues on its current trajectory, the SK-EU FTA could prove to be a stunning success story for the Global Europe framework. If Ms Kim and Mr Ji prove to be an accurate measure, it could also prove to be a success story for individuals on the ground.

IN FOCUS:

EU AGREEMENTS

The SK-EU FTA represents a significant shift away from multilateralism. At the launch of negotiations with South Korea on May 7, 2007, trade commissioner Peter Mandelson stated that the FTA would complement the Doha Round and did not represent an alternative.

However, the World Trade Organization had already taken a different view. In its February 2007 Trade Policy Review, it stated that the EU’s pursuit of FTAs would divert interest from the multilateral trading system.

This is hard to dispute given the EU’s influence on the global trading system. The EU accounts for more than 30% of global gross domestic product. In 2005, it accounted for 17.5% of world merchandise exports, 18.08% of world merchandise imports, 27.45% of world services exports and 24.28% of world services imports. Even a slight deviation from the multilateral system is enhanced by the EU’s substantial size and its potential for further growth.