European auto makers are condemning a European Union-South Korea free-trade agreement signed today for allowing the Koreans unfair advantage in the region’s markets.

The deal still must be ratified by the EU’s 27 member states and the European Parliament.

The ACEA, the trade association for European auto makers, is concerned with a “duty-drawback” provision that allows South Korean auto makers to reclaim taxes paid on imported car parts sourced from low-cost countries, such as China, while benefiting from the scrapping of EU customs duties for completely built-up imported vehicles.

“In principle, we’re in favor of liberaliztion; it’s a good thing. But in the current conditions, this creates unfair competition that could be very damaging,” Sigrid de Vries, ACEA director of communications, tell’s By Keith Nuthall

The duty-drawback allows South Korean auto makers a E300-E500 ($448-$746) per-vehicle advantage over manufacturers of similar models in Europe, she says.

This is underpinned by the fact the deal allows the percentage of non-domestic components within South Korean vehicles to jump from 40% to 50%, and as much as 55% in some circumstances. “Half of the cars will be Chinese,” De Vries says.

Given the proximity of China to South Korea, the parts-sourcing makes sense. But even though the agreement allows EU auto makers their own duty-drawback rights, this will not help. “It doesn’t make a lot of sense getting a lot of the cars made in China, assembling them in Europe and exporting them again – certainly not to Korea,” she says. “This is unequal.”

The European Commission, which negotiated the trade agreement, dismisses the ACEA’s concerns.

“They are trying to paint this as a new advantage we are giving South Korean manufacturers, but duty-drawback exists in the global trading system unless two partners reach a special agreement (to) get rid of it,” an EC officials tells Ward’s. “The U.S. uses it a lot.”

While he agrees European auto makers source a large percentage of components within the EU, “that’s because they are competitive parts manufacturers,” he says of the suppliers.

The EC official points to safeguards within the deal that allow the reestablishment of tariffs if there were a boom in exports of South Korean vehicles into Europe or a sharp increase in the use of foreign parts by the Korean car makers.

However, vehicle trade between the two regions remains uneven in the new FTA. About 30,000 vehicles – including a greater proportion of high-end models – were exported from Europe to Korea last year, while some 445,000 Korean vehicles were imported by the EU.

The ACEA claims the deal gives the Koreans a continued advantage. But the EC official says while European sales were rising in 2008, South Korean exports were falling (albeit with more Korean companies producing models within Europe).

“There’s massive potential now in the South Korean market,” he says, despite the fact it mostly has been a closed market.

De Vries fears that, despite some pledges within the trade agreement to avoid non-tariff barriers, there “are no guarantees Korea will not introduce new regulations on safety or the environment, which will create barriers to exporting European cars.”

This complaint too is dismissed by the Commission. “What’s to stop anyone introducing new safety rules? You deal with it,” the official says. “We’re in a modern globalized economy.”

De Vries says, for now, EU auto makers will wait and see: “It depends on how the agreement would be implemented, she says, “how its conditions would be enforced. There are so many ways of going around it.”

The ACEA says the duty-drawback explictly incorporating such rights in the Korean trade deal will encourage other European trading partners to demand them in future bilateral agreements. But the EC official reminds they are allowed under World Trade Organization rules.