EU-Korea Economic and Trade Relations

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EU-Korea Economic and Trade Relations

 

Sep. 2003


The EU and Korea ? Major Economic Partners

The EU as the world's largest trading bloc and South Korea as Asia's fourth largest economy, have developed close trade and investment links in recent years. The EU is now Korea's third largest trading and its largest investment partner. For the EU, Korea is an important export market (18th largest) and its 8th biggest source of imports. Up to 1997, annual growth in bilateral trade was generally steady although understandably subject to fluctuations in both partners' economic cycles.

Korea's economic crisis of 1997/98 brought about a significant change in bilateral economic relations. European exports dropped sharply as a result of Korea's economic downturn. At this critical stage, EU Member States provided ad hoc support through financial contributions to Korea's stand-by arrangement with the IMF. The EU also remained open as an important market for Korean exports. As a result, Korean exports to the EU continued to be relatively stable and helped to get the economy back on track. Since 1999, trade flows have been recovering towards their pre-crisis trend. However, the EU's merchandise trade balance with Korea, which had been positive since the early 1990's, turned negative in 1998 and the picture has not changed fundamentally since then.

Direct investments by each partner in the economy of the other were rather moderate until the 1990's. European company presence in Korea was hampered by Korea's restrictive investment environment and Korean multinationals started to pursue their globalisation on a larger scale only from the late 1980's onwards. Since Korea's economic crisis, European investment into Korea has picked up just as Korean investment into Europe has mostly fallen away. European investors have been benefiting from a more liberalised Korean investment environment and Korean companies' need for injections of capital and know how.

Great potential for further strengthened economic relations provided Korea keeps up reform momentum

Korea's economic turnaround and impressive growth figures show that restructuring efforts may have begun to pay off. However, growth is slowing, mainly due to a deteriorating external economic environment in 2000-01. Sustained economic growth will require continued momentum in economic reforms. Key elements in this context will be the strict application of enhanced, market oriented regulations and standards as well as a market oriented policing function of financial institutions. This is all the more important in view of debt-financed overinvestments by the corporate sector which triggered the crisis. Similarly, the Korean Government's commitment to continued privatisation and to systematic regulatory reform will be an important asset. A liberalised Korean economy will of course boost bilateral trade and investment relations. The massive recent influx of EU investment into Korea signifies a first step in this direction.

Continued co-operation on Multilateral Trade Issues is essential

EU and Korea have co-operated extensively on multilateral trade issues, notably in the context of the World Trade Organisation (WTO), with a view to promoting further trade liberalisation and strengthening the rules-based trading system. In bilateral consultations, both partners have identified many areas of common interest and, together with other like-minded WTO Members of the ¡ì Friends of the Round ¡í supported the launch of the new WTO Round of trade negotiations at Doha in December 2001.

Need to improve market access and trade relations

Although trade expanded rather smoothly until Korea's economic crisis and has been regaining momentum since then, there is still room for improvement in some important bilateral trade areas. The EU ? Korea trade dialogue has played a key role in approaching problematic issues, along with EU recourse to the WTO dispute settlement mechanism when appropriate.

¡¦through bilateral measures.

Among a number of sectoral trade issues, shipbuilding is currently one of the politically most sensitive. Following a debt-financed build up of overcapacities, Korean yards have engaged in major price undercutting operations. Facilitated by Korea's financial sector, these non-market practices have led to distortions on the world market, threatening the existence of the EU's shipbuilding industry. The EU and Korea tried to solve the situation through Agreed Minutes Related to the World Shipbuilding Market which aim at establishing normal competitive conditions on the market. But this failed and the progress at avoiding formal WTO action has proved elusive. In two sectors ? pharmaceuticals and cosmetics ? the EU recently addressed market access obstacles under its Trade Barriers Regulation but these remain unsolved. Long standing, major market access barriers with regard to automobiles, services, agriculture, intellectual property rights and other areas are also high on the agenda of the EU ? Korean trade dialogue.

¡¦ and the use of WTO Mechanisms,

When bilateral trade dialogue did not produce satisfactory results, the EU turned to the WTO in order to protect EU industry interests. In 1999, a WTO Panel ruled in a case brought by the EU that Korea's taxation on alcoholic beverages discriminated against imported alcoholic spirits. In order to comply with the ruling, Korea raised taxes on domestic and lower taxes on imported spirits, which led to substantially improved market access for EU products. In another case brought by the EU, the panel ruled in 2000 that Korea had to abolish its safeguards measures set up in protection of certain dairy products. In line with its WTO obligations, Korea liberalised imports of skimmed milk powder preparations in May 2000.


 

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