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[Viewpoint] High stakes for Korean firms in EU

Now that Korea and the European Union have officially signed their free trade agreement, there are high expectations for Korean companies. But the absence of tariffs is no guarantee of success. They will need to carefully and quickly strategize their plans as the agreement does not need parliamentary ratification by all 27 EU member states. Provisional enforcement of the deal is set for July 1 next year, which is nearly equivalent to full effectuation.

There is no doubt that the economic effects of the Korea-EU FTA - more than three years in the making - will be substantial. To be sure, they will likely exceed those expected from the Korea-U.S. FTA, which remains in limbo awaiting ratification. The Korea-EU FTA would boost both imports and exports. In particular, it will foster a more advantageous export environment for Korea.

The average tariff rate in the EU is 5.6 percent, while the average in the U.S. is 3.5 percent, meaning the effects of tariff rate reduction can be larger. Korea has maintained a trade surplus with the EU since the latter half of the 1990s. It’s forecasted that Korea’s exports to the EU will reach $6.47 billion due to the FTA, while EU exports are expected to be worth $6.34 billion.

So how will the economic benefits translate on businesses’ balance sheets? The trade deal will lift import tariffs on all industrial products within five years. That will be especially beneficial to Korea’s flagship industries that have high export and import volume, but must cope with lofty tariff rates. In particular, tariffs on cars will be eliminated within three to five years - benefiting auto industries for both sides. The EU’s companies in refined chemicals, parts and materials, and large vehicles, will become the largest beneficiaries.

EU firms will likely make bigger forays into the areas of finance and telecommunications. In the agricultural sector, Korea secured special treatment on sensitive items such as rice and barley. On the other hand, Korean shoppers should expect more pork and wine from the EU.

To take advantage of the changing trade environment, Korean companies will have to anticipate and prepare assiduously. They cannot take a universal approach. They will have to examine their competitiveness and division of labor to devise individualized, strategic approaches. Not everyone will be a winner. Industries that enjoy a higher competitive edge will be positioned to aggressively expand exports. Those hurt by the FTA may need to seek government support or look for mergers and acquisitions to survive.

Awareness is key. Since tariff reductions will provide opportunities to cut costs, companies should note the tariff reduction schedule, allocating beforehand the costs saved on marketing or R&D investments.

Rules on origin will require careful preparation. The regulations are designed to prevent goods from being made elsewhere and simply shipped from Korea or EU countries. Korean companies will need to install a system dedicated to the complex rules. When signing export contracts, they should check these rules, examine business feasibility and secure a sufficient production process.

Another factor is non-tariff barriers. Despite the scope of the FTA, there is the possibility that non-tariff barriers such as rules for the use of components built on European soil, environmental regulations and technology standards will remain entrenched. Strict customs clearance procedures and regulations on companies outside the region can also be obstacles. Cooperation with EU companies will be needed to overcome these obstacles. For example, the EU has the largest renewable energy market in the world and leads the world in technology standards. Given this, Korean companies should collaborate with EU companies to accumulate the know-how to deal with non-tariff barriers.

Finally, Korean companies, whether newcomers to the EU market or established players, need to better understand the business environment. The EU states are highly interdependent and consumer preferences in each member country create a myriad of markets across the region. This means that uniform products probably will fall short of sales targets.

European consumer spending amid the global financial crisis is also to be noted; it is cautious and measured. For example, while high-priced home electronics are on the decline, shoppers are opting for low-priced goods. Sales of energy-saving products and compact cars have also risen. Korean companies will need differentiated and flexible strategies.

The trade deal is the EU’s first FTA with an Asian country. While it is a bridge between Korea and the world’s largest economic bloc, it also has strategic importance in facilitating free trade pacts among Northeast Asian countries.

The deal will not only have a positive impact on Korea’s export-led economy, it will help advance Korea’s economic structure and attract foreign capital. Such momentum should not be wasted.

*The writer is research fellow at Samsung Economic Research Institute. Pleas visit www.seriworld.org for more SERI reports.

by Lee Jong-Kyu