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(News Focus) Free trade pact with EU to shake up S. Korean economy

All Headlines 19:01 October 06, 2010

SEOUL, Oct. 6 (Yonhap) -- A free trade pact with the European Union (EU) that will take effect next year will pave the way for South Korea to tap deeper into the world's largest economic bloc and help South Korean companies better compete with foreign rivals there, analysts said.

On Wednesday, South Korea and the EU signed their bilateral free trade pact in Brussels that will go into effect on July 1. The pact must be ratified by South Korea's parliament, EU member states and the European Parliament in order to go into full effect.

"The deal will help boost our exports, especially sales of autos, to the European market," said Kim Hyung-joo, a researcher at LG Economic Research Institute.

"Additionally, the free trade deal will help shield South Korea from emerging trade protectionism worldwide," he said.

Overall, the deal is expected to boost bilateral trade between South Korea and the EU by as much as 20 percent in the long term, according to earlier estimates by the state-run Korea Institute for International Economic Policy (KIEP).

Last year, two-way trade totaled US$78.8 billion with South Korea enjoying a surplus of $14.38 billion. In 2008, their bilateral trade reached $98.4 billion.

The KIEP said the free trade accord with the world's single largest economic bloc would help boost S. Korea's exports by $11 billion and its economic growth by 5.6 percent while creating up to 253,000 jobs over the long haul.

South Korean exports, which contribute more than 70 percent to the nation's economy, will be one of the major winners, according to experts.

Under the deal, Seoul and Brussels would eliminate or phase out tariffs on 96 percent of EU goods and 99 percent of South Korean goods within three years after the accord takes effect. They have also agreed to abolish tariffs on most industrial goods within five years of the deal taking effect.

The accord also permits duty drawback, which allows the tariffs levied on parts used by a manufacturer to make a product such as a car to be refunded when the final product is exported.

But the deal includes a provision that caps refundable tariffs should there be "dramatic changes in foreign outsourcing" within five years of the accord taking effect.

On the issue of rules of origin, both sides agreed on the level of allowable foreign contents at 45 percent. In the cases of auto parts and some other products, the level is set at 50 percent.

Ahn Sun-kwon, an analyst at the Korea Economic Research Institute, said the free trade deal would help South Korea's auto and electronics companies to expand their shares in the European market.

For example, Samsung Electronics Co., the world's largest maker of computer memory chips, will enjoy big gains when the EU cuts its main tariffs on electronic goods, which are currently as high as 14 percent, under the deal.

Hyundai Motor Co., the world's fifth-largest automaker that sells one-third of its vehicles to the European market, will also benefit when the EU phases out a 10 percent tariff within five years.

One of the most sensitive issues has been auto trade. After much wrangling, the two sides agreed to eliminate tariffs on cars with an engine displacement of more than 1.5 liters within three years. Tariffs for smaller cars with an engine displacement of less than 1.5 liters would be lifted after five years.

South Korea currently imposes an 8 percent import duty on European cars, while the EU imposes a 10 percent duty on autos from South Korea.

Also, South Korea agreed to lift tariffs for some machinery, textiles and 38 other items after seven years.

Following a similar free trade deal with the United States, a deal with the EU would help South Korea to secure firm footing in the EU market, according to Kim Do-hoon, an analyst at the state-run Korea Institute for Industrial Economics and Trade (KIET).

"South Korea's image as an 'advanced trading country' will be boosted as well," he said.

Analysts also said the deal would help South Korea attract more foreign investments and make business practices and management more transparent.

The deal would also create new opportunities and markets for Korean goods, services and workers, while benefiting Korean consumers with more competitive pricing and better quality of goods and services in the Korean market.

However, some economists and opponents argue the deal would devastate the livelihoods of South Korean farmers and the poor and worsen the economic polarization between the haves and have-nots.

Hit by an influx of cheaper EU agricultural goods, about 4 million farmers in South Korea, already a net importer of food, will be the biggest victims.

According to state-run institutes such as the Korea Rural Economic Institute, the country's agriculture sector is expected to suffer a loss of as much as 2.3 trillion won if the deal takes effect.


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