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Ten Years of Korea-EU FTA

#Key Business Issue l 2021-07-05

Business Watch

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On July 1, 2011, the free trade agreement between South Korea and the European Union came into effect, with Korea becoming the first Asian country to implement an FTA with the EU. As an early comer in the FTA with the EU, compared to Japan and other Asian rivals, Korea has enjoyed the effect of preoccupying the EU market over the past ten years. According to a report release by the Institute for International Trade under the Korea International Trade Association, the Korea-EU FTA has benefited Korea in automobile, battery and chemical product exports. 

Here is Hong Jeong-wan, chief researcher at the Korea International Trade Association, to discuss the outcome of the trade pact over the last decade. 

The Korea-EU FTA celebrated its tenth anniversary on July 1. The trade deal is believed to have contributed to promoting the trade of goods and services as well as investment in both sides and also making Korean companies more competitive. 

In the tenth year of the FTA implementation, 98.1 percent of Korean tariffs have been removed. In the first five years of the deal, 99.6 percent of EU tariffs were eliminated. It is regarded as one of the most comprehensive trade agreements with a high degree of market openness. 

The Korea-EU FTA included provisions in areas such as intellectual property rights, trade in services and sustainable development. This is so the EU could take the provisions into consideration at trade negotiations with other countries. Covering a wide range of areas, it is viewed as a sophisticated trade agreement. 

Other Asian countries, unlike Korea, have signed an FTA with the EU only recently. The FTA between Japan and the EU entered into force in February 2019, while the Singapore-EU FTA and the Vietnam-EU FTA went into effect in November 2019 and August 2020, respectively. Korea is almost the only Asian country to have enjoyed tariff-free benefits for the last decade. 

Analysts say that the Korea-EU FTA helped Korea retain its market share in the EU market. Despite the European debt crisis, the EU’s imports from Korea increased an annual average of 0.1 percent for four years since 2010. In contrast, the EU’s imports from Japan decreased an annual average of 4.9 percent during the cited period. Considering that the EU and Japan had not yet concluded an FTA at the time, the Korea-EU FTA did play a certain role. 

By category, the automobile sector is the major beneficiary of the abolition of EU tariffs. 

Korea’s exports of automobiles to the EU amounted to 8.4 billion US dollars in 2019, representing more than a two-fold increase from 3.3 billion dollars in 2010. Outbound shipments of internal combustion engine cars have decreased since 2017, but they have been replaced by electric vehicles. Exports of electric cars to the EU surged from 100 million dollars in 2015 to 4.6 billion dollars in 2020. Among South Korea, the U.S., China and Japan, South Korea is the only country to have exported electric vehicles to the EU without tariffs since 2016. 

Korea’s lithium-ion battery exports to the EU have also been on a steady rise, with 2.7 percent tariffs on the products eliminated upon the implementation of the FTA. 

Korean exports of chemical products to the EU also came to 7.1 billion dollars last year, increasing nearly 20 percent annually from 1.2 billion dollars in 2010. Exports of agricultural products to the EU last year posted a 125 percent increase from the period before the implementation of the FTA, driven by tuna, mushrooms, kimchi, seasoned laver and beverages, although imports from the EU are still far larger. 

In addition, the FTA with the EU has helped Korea diversify its import destinations of materials, parts and equipment and also prompted Korean firms to sharpen their competitiveness. 

Since the FTA came into effect, European premium goods have actively entered Korea. In 2010, before the implementation of the FTA, imported cars with an engine capacity of over 2,000cc accounted for 21.7 percent of the Korean car market. In the fifth year of the FTA implementation, the figure rose to 25.3 percent. But the share of imported vehicles in the Korean market fell to 13.4 percent in 2020, due to local automakers’ new models and premium brands. In contrast, Korean cars’ share in the European market rose to 7.1 percent in 2020 from 4.5 percent before the FTA. 

Home appliances have shown a similar trend. In 2016 and 2017, Dyson vacuum cleaners enjoyed great popularity in Korea, grabbing nearly 80 percent of the domestic market. But local manufacturers of electronic appliances used the occasion to shift to cordless vacuum cleaners. As a result, local brands such as LG and Samsung have reclaimed No.1 and No.2 positions since 2018. Taking a step further, they are tapping into the European market with their premium built-in home appliances. 

On the whole, however, there has been no major change in Korea’s exports to the EU since their FTA went into effect, while the EU’s exports to Korea have risen significantly. Notably, Korea’s investment in the EU has soared since 2015. Researcher Hong explains why. 

We have to consider the characteristics of trade between South Korea and the EU. South Korea has seen a sharp rise in the imports of premium consumer goods, including passenger cars and bags, in line with higher consumption levels in the country and tariff-free benefits from the FTA. 

South Korea’s semiconductor industry has been flourishing, resulting in growing demand for relevant equipment, which it imports from the EU. That is, the more Korea exports semiconductors, the more it imports equipment from the EU. 

Also, Korea has relocated many of its production bases overseas. So, it may seem that direct exports from Korea to the EU haven’t increased much. But we have to note the Eastern European region, where many Korean production corporations are located. Korea exports a considerable amount of intermediary goods and parts to that region to post a trade surplus there. In Western Europe, the amount of Korea’s investment, as well as the number of new Korean corporations, has doubled, compared to the period before the FTA came into effect. Korea’s direct exports to Europe may have fallen, but Korean firms have engaged in brisk business activities in the region. 

The global economy has evolved drastically over the last ten years. The eurozone crisis that erupted right after the Korea-EU FTA and the spread of trade protectionism around the globe dealt a blow to Korean exports. Needless to say, the COVID-19 pandemic is another unfavorable factor that has affected Korean exports. Despite the negative developments, though, the Korea-EU FTA has shown some results for the past decade. Now, it’s time to prepare for the next ten years. 

The FTA shows that Europe is a challenging market. As the first Asian country to conclude an FTA with the EU, Korea has taken advantage of tariff benefits. Even so, its market share in the EU hasn’t increased much. In the initial stage, Korean products had to compete with premium goods in Europe to attract consumers in 28 EU countries, including Britain. Now that Japan, Singapore and Vietnam have also inked FTAs with the EU, Korea may face an even intense competition in the EU market. 

Today, Korea has to deal with various issues in a global trade environment, including the U.S.-China trade dispute and the pandemic—something it never experienced in the process of concluding an FTA with the EU. To keep up with the changing environment, Korea needs to expand cooperation with the EU. 

The EU is reshaping supply chains and strengthening environmental and human rights standards to reduce its dependence on China. This is seen as a positive factor for Korean companies, which should use the FTA in a more strategic way. The government, for its part, will have to carry out more effective trade policies. 

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