A free-trade agreement the European Commission inked with South Korea last week is heavily weighted towards the Asian country, despite numerous protests from European automakers and their representative body, ACEA, and will have major implications for the European auto industry, IHS Global Insight auto analyst Paul Newton said.
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“The FTA clearly favours South Korean imports, which are dominated by the automotive sector, and fails to open up the South Korean market in return, which has the lowest import penetration of any developed country in the world,” Newton wrote in a note to clients.
“In its current form, the FTA, which still has to be ratified by the European parliament, could not only seriously skew the European market in favour of South Korean manufacturers, but would also set a precedent for other upcoming agreements with India, the Association of Southeast Asian Nations (ASEAN), and Japan. In the longer term, it has the potential to inhibit investment in Europe.”
Newton noted that despite the very vocal and numerous protests from the European auto industry and ACEA, several key provisions in the FTA were not addressed.
He said the automotive industry is the largest single sector in the South Korean-European Union (EU) trade relationship. Vehicles are the most important export products of the South Korean economy and the country produced 3.8m cars in 2008, around 2.7m (71%) of which were exported.
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By GlobalDataThe EU is already a key target market, with up to 700,000 cars per year exported there from South Korea in the past, representing 20% of all EU car imports.
But, in return, South Korea has the lowest level of import penetration of any developed country.
Newton said the EU exports only around 30,000 vehicles per year to South Korea – a market of over 1m a year.
The key points of the FTA are that import tariffs will be dismantled within three (cars with an engine displacement of over 1.5 litres) to five years (cars with an engine displacement of less than 1.5 litres) compared withthe originally proposed seven years that corresponds with the usual lead time for Organisation for Economic Co-operation and Development (OECD) countries.
A duty drawback clause allows South Korean manufacturers to continue to reclaim import duties on imported vehicle parts from neighbouring countries. European manufacturers pay on average 4% import duty on vehicle parts from countries such as China.
The FTA will also weaken the rules of origin from a minimum of 60% local content in vehicles to 45% to 50%.
South Korea has signed up to the international technical standards for vehicle registration, but will be allowed to continue applying local standards on, among other things, vehicle emissions.
According to Newton, the South Korean automotive industry’s competitiveness is expected to increase as a result of this deal because European tariffs on South Korean cars will drop from 10% to 0% in 3–5 years—an expected cost advantage of 700,000 times EUR1,000.
South Korean imports of car parts from neighbouring low-cost countries will increase significantly with a duty drawback of up to 40% (or EUR320 per car), plus a weakening of the rules of origin to 45%-plus.
The agreement in its current form will significantly boost (competitively priced) South Korean imports in the European car market in the coming years, predominantly of Hyundai and Kia models, helping these affiliated automakers to expand their market shares in Europe. In view of higher expected demand, South Korean vehicle manufacturers’ output levels are set to increase.
However, access to the South Korean market for European manufacturers will remain severely hampered by non-tariff barriers.
South Korean tariffs on European cars will drop from 8% to 0% in 3–5 years.
Newton said the weakening of the rules of origin will allow South Korean manufacturers to optimise their competitiveness via increased imports of low-cost parts from neighbouring countries (especially China), plus the drawback of duties on these parts.
He said South Korea does not fully acknowledge international test cycles and standards and applies its own unique rules. For example, regarding carbon dioxide (CO2) emissions, an approved and tested EU car cannot be sold in South Korea; costly modifications are required.
“The agreement in its current form is unlikely to have a major impact on European vehicle imports into South Korea in the near and medium term,” Newton wrote.
“Imports will remain a tiny fraction of total sales in the South Korean market.
“All in all, the agreement gives South Korean vehicle manufacturers full market access to the European market without a tangible improvement in export conditions to South Korea.
“Thus, in the eyes of many European manufacturers, the current agreement is rather lopsided, handing an unfair competitive advantage to South Korean manufacturers.
“Moreover, such an agreement would set a precedent for EU FTAs with other countries, notably in Asia – the Association of Southeast Asian Nations (ASEAN), India, and Japan – leading to further uneven competition.
“In addition, the provisions on duty drawback and rules of origin have not been granted in trade arrangements with other developed countries (Mexico, South Africa, Chile) and are not covered by World Trade Organisation (WTO) standards.
He said European manufacturers, via ACEA, had previously demanded amendments to the current agreement, including the rationalising of South Korean import rules so that cars that can be sold in the EU must be allowed in the South Korean market; 100% of the tariff and non-tariff barriers need to be resolved.
“The EU member states are yet to ratify the current text. However, the accord is expected to take effect next year. Without careful consideration of the longer-term effects of the FTA, the commission looks set to hobble an industry that in many cases is struggling for its very survival,” Newton concluded.
