2021 marks the tenth anniversary of the entry into force of the free trade agreement (FTA) between the European Union (EU) and the Republic of Korea (ROK). The EU-ROK FTA was historic in many regards; it was the EU’s first FTA in Asia and South Korea’s first with one of the Big Three economic powers (ahead of the US and China). In addition to being the second largest FTA in history at the time of signing, the EU-ROK FTA was also the first in a series of so-called new generation FTAs that the EU would later sign with other global partners, including Canada and Japan. The following policy brief evaluates the last decade of this ground-breaking FTA, from its historical origins and impact on bilateral trade, as well as to areas of dispute and deeper significance for South Korea and the EU. It concludes with a brief outlook on the future prospects of trade relations between the EU and South Korea.
Overall, the last ten years of the EU-ROK FTA have proven to be beneficial for both partners. From a trade standpoint, there have clearly been gains for the EU and South Korea, as evidenced by the increased volume of trade and level of integration. Trade disputes, however, have cropped up between the two partners, primarily in the areas of labour standards and sanitary and phytosanitary (SPS) measures. The first decade of freer bilateral trade also brought clear benefits to both parties beyond the narrow issue of bilateral trade creation and deepening. For South Korea, the FTA with the EU helped it achieve its status as an FTA hub nation while signaling its commitment toward bilateral trade liberalisation. For the EU, the FTA with South Korea kickstarted its FTA engagement in Asia and its leadership in a new model of FTAs fit for the 21st century.
Negotiations for the EU-ROK FTA began in 2007 against the backdrop of the World Trade Organization (WTO)’s deteriorating Doha Round of multilateral trade negotiations, which had aimed to increase multilateral trade by reducing tariffs and other non-tariff barriers. Faced with impasse in the WTO, the EU and South Korea sought alternative means of pursuing trade liberalisation. The signing of bilateral preferential trade arrangements to form free trade areas (as permitted under Article XXIV of the WTO’s General Agreement on Tariffs and Trade) was one such solution.
Following eight rounds of talks, the EU-ROK FTA was eventually signed in 2010 and provisionally applied starting from July 2011. It formally entered into force in 2015 following parliamentary ratification by EU member states and South Korea. The relatively speedy implementation process meant that the EU-ROK FTA entered into force almost a year before the free trade agreement between the US and South Korea, even though the latter had been signed many years earlier in 2007. (FTA negotiations with the US had stalled over issues concerning market access for American beef, as well as Korean fuel and emissions standards for automotive imports.)
Negotiations for the EU-ROK FTA also covered many areas previously untouched by traditional FTAs. It is considered a ‘new generation’ FTA as it includes stronger intellectual property protections and a trade and sustainable development (T&SD) chapter with several legally binding commitments on environmental and labour-related governance. This chapter has become a significant source of contention between the EU and South Korea, as explained further below.
Impact on bilateral trade
The EU-ROK FTA, which eliminated around 99% of tariffs, has had a clear impact on the volume of bilateral trade since its entry into force a decade ago. Total trade between the EU and South Korea increased by almost 50%, from around 60 billion EUR to 90 billion EUR, in the period of 2010-2020. As a result, the EU is South Korea’s third largest partner as of 2020—ahead of even neighbouring Japan. Meanwhile, South Korea has become the EU’s ninth largest trade partner.
This expansion of trade has been led primarily by intra-industry trade, especially in machinery, electronics, chemicals and pharmaceuticals. The latest annual data show machinery and transport equipment accounting for 57% of bilateral flows; the figure for chemicals and related products, the second largest goods category, is 21%. These figures attest to the increased integration of European and South Korean supply chains, which have facilitated deeper technological specialisation and larger economies of scale. A real-world example of this integration can be seen in the assembling of Hyundai and Kia motor vehicles in the Czech Republic and Slovakia, respectively. Hyundai’s manufacturing plant in Nošovice, Czech Republic, for example, recently celebrated its three millionth car production in 2019.
Aside from South Korean car manufacturers, other important beneficiaries of the FTA include European food exporters, who have benefitted from the application of rules on geographical indications in the South Korean market. For instance, exporters of certain well-known European cheeses and wines (such as French Roquefort and Spanish Rioja) are guaranteed recognition and protection of their regionally-specific trademarks in South Korea. A total of 162 EU products have gained such protection since the introduction of the EU-ROK FTA.
The EU-ROK FTA has also impacted the relative flows of trade between the EU and South Korea. In the period of 2010-2020, EU exports to South Korea increased by 70%, while imports grew at a far lower rate of 32%. The last decade of the EU-ROK FTA has thus witnessed a gradual narrowing of the EU’s trade deficit with South Korea, such that the EU has in recent years even recorded trade surpluses with South Korea. Some economists attribute this to the EU’s economic slowdown following the sovereign debt crisis, which dampened European demand for imports. Meanwhile, South Korea underwent a rapid economic recovery and experienced an increase in demand for imports, thereby resulting in the recent trade imbalance (as shown in the graph below):
Issues and disputes
On the whole, the EU-ROK FTA has been a win-win situation for the EU and South Korea. Nevertheless, the last ten years of bilateral free trade have also given rise to some areas of contention. Issues over labour and hygiene standards remain the largest barriers toward further trade integration.
Differing views over labour law standards have been a major friction point. The EU has long considered South Korea’s compliance with the principles of core labour standards, as defined by the International Labour Organization (ILO), to be in need of improvement. For example, the restrictive criteria for qualifying as a trade union in South Korea have resulted in only a few groups being officially recognised as such. Following failed efforts to reach a satisfactory solution on the matter, the EU triggered a dispute settlement procedure. An independent panel of experts ruled in early 2021 that South Korea had not been acting consistently with its T&SD chapter obligations under the FTA. The panel concluded that South Korea should update its labour laws and ratify several fundamental ILO conventions in order to comply with the T&SD chapter.
Since joining the ILO in 1991, South Korea has still not ratified four out of eight of the organisation’s conventions. They relate to (1) the freedom of association, (2) the right to organise and collective bargaining, (3) the prohibition of forced labour and (4) the abolition of forced labour. South Korea’s defense up until the ruling was that the phrasing in the relevant chapters of the FTA was not clear enough to be considered legally binding.
Disagreements over SPS measures have also played a contentious role in the last ten years of the EU-ROK FTA. For instance, some observers expected South Korea’s ban on EU beef imports, which had been imposed in 2001 in reaction to an outbreak of mad cow disease, to be dropped after the implementation of the FTA. However, disputes over beef continued for many years thereafter. EU beef exports to Korea only resumed in the second half of 2019—almost two decades after the initial ban. In response, South Korea demanded that the EU permit imports of samgyetang, or ginseng chicken soup, which were blocked due to concerns over hygiene standards. South Korean President Moon Jae-in even raised the issue in the latest EU-ROK leaders’ meeting in 2020 in an attempt to resolve the issue.
Significance for South Korea
For South Korea, signing an FTA with the EU was an important step toward establishing itself as a major FTA hub nation in East Asia. In mainstream economic thinking, FTA hub nations (i.e., nations that sign FTAs with multiple key markets) are expected to gain economically for two main reasons. First, as the ‘hub’ in a hub-and-spoke arrangement, it possesses preferential access in each ‘spoke’ market. Second, the hub nation is more attractive for foreign direct investment due to its privileged position as the only market with preferential access to others in the hub-and-spoke network.
This economic logic explains why South Korea negotiated FTAs simultaneously with the US and EU, and soon after implemented an FTA with China in 2015. Indeed, South Korea is now one of the few countries to have FTAs with the EU, US and China, thereby establishing itself as a vital linchpin in the global trade arena. South Korea’s recent decision to join the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement signed by 15 nations in the Asia-Pacific, has further cemented its strategic trading position. As a result, many small- and medium-sized EU exporters have decided to form their first Asian business collaborations in South Korea in the hope of gaining backdoor access to other emerging markets in the region.
The EU-ROK FTA also marked South Korea’s entrance into the ‘FTA game’. Prior to its agreement with the EU, South Korea’s only FTA was the one it signed with Chile in 2003. In other words, South Korea was a latecomer to the global trend of FTAs and was seeking to catch up. By signing an FTA with the EU, South Korea was able to bolster its middle power influence in the growing area of bilateral trade liberalisation. South Korea now has a total of 15 FTAs in effect (with major economic players such as India and ASEAN) and it has ongoing negotiations with others including Russia and the Mercosur trade bloc. Ultimately, South Korea’s FTA liberalisation has helped strengthen its export-oriented industrialisation development strategy.
Significance for the EU
For the EU, the FTA with South Korea heralded a new era of FTA engagement with Asia. Prior to the EU-ROK FTA, the EU was the only major power not fully engaged in signing FTAs with Asian countries. This all changed with the signing of an FTA with South Korea. Not only did the EU succeed in implementing an FTA with South Korea before the US, the EU then went on to sign further ambitious trade agreements with other Asian countries. The Economic Partnership Agreement with Japan and the EU-Vietnam Free Trade Agreement, which entered into force in 2019 and 2020 respectively, are notable examples of the EU’s newfound FTA engagement strategy in Asia.
The EU-ROK FTA also signalled the EU’s commitment toward a new and deeper model of bilateral trade agreements. Indeed, the EU-ROK FTA was “the first deep and comprehensive FTA negotiated by the EU”, as described by Cecilia Malmström, the former EU Commissioner for Trade. Such ‘new generation’ FTAs aimed to establish level playing fields between trading partners by focusing on ‘twenty first-century issues’, such as sustainable development, antitrust policies, intellectual property rights, as well as regulatory and labour standards.
The EU-ROK FTA included provisions in the above areas, which were typically left untouched by traditional FTAs. It includes, for example, the T&SD chapter, with provisions on implementing ILO conventions, monitoring sustainability impacts and establishing institutional mechanisms to ensure the chapter’s implementation. These provisions include specifically, for instance, the creation of an independent Panel of Experts on trade, labour and the environment to examine complaints and provide recommendations, as exemplified recently by the ILO-related panel ruling.
By integrating these standards in a ‘deep’ FTA with South Korea, the EU was able to burnish its credentials as a regulatory superpower. The new era of next generation FTAs, as inaugurated by the EU-ROK FTA, has become another area in which the EU exerts its global influence. This ‘Brussels effect’, as termed by Columbia law professor Anu Bradford, allows the EU to effectively externalise its laws and stringent standards in jurisdictions across the world. The latest ruling on South Korea’s labour laws by the EU-ROK FTA’s panel of experts aptly demonstrates the EU’s ability to raise standards worldwide and shape the global business environment.
For the second decade of the EU-ROK FTA to be as successful as the first in creating and integrating bilateral trade, both parties should focus on tackling the outstanding disputes related to labour and hygiene standards. Such issues could be resolved by strengthening the enforcement mechanisms within the T&SD chapter and clarifying its legal implications. Any renegotiation or modernisation of the FTA should also include provisions on new trade-related areas, such as e-commerce, green technologies and cross-border data flows, which occupy a place of importance in the current global economic landscape. Incorporating such changes within an upgraded FTA would undoubtedly help consolidate the economic pillar of the valuable partnership between the EU and South Korea.
Author: Samuel Wejchert, Junior Researcher, EIAS
Photo credits: European Commission