Winners in South Korea-EU Trade Deal Hard to Pick

BRUSSELS – Despite a recent European Commission report linking the European Union’s 2011 free-trade agreement with South Korea to a 90% hike in car exports to the Asian nation by July 1, 2014, South Korean automakers consider the agreement beneficial to both parties.

European manufacturers are skeptical about these claims, arguing their vehicles already were desirable to South Korean consumers.

Kim Tae-Nyen, executive director of the Korean Automobile Manufacturers Assn., tells WardsAuto a 2% decrease in value of South Korea’s automobile exports to the EU from 2011 to 2014 would have been far worse without the FTA.

In the long term the “competitiveness of Korean cars will surely be strengthened by the surge of European cars stirring the Korean market,” Kim adds.

When asked what products South Korean automakers are exporting to the EU in greater numbers because of the free-trade agreement, Kim answers, “medium-to large-size cars and SUVs.”

The industry official notes vehicles with engines larger than 1.5L benefited from earlier tariff eliminations in July 2014, while tariffs on vehicles below 1.5L will be lifted fully in July 2016.

Data from the Korea Automobile Importers and Distributors Assn. underpins the claims by the EC, the executive branch of the EU. It shows imported car registrations in South Korea rising from 105,037 units in 2011 to 196,359 in 2014.

That said, Yoon Dae-Sung, executive managing director of the importers and distributors group, says currency depreciation is a bigger factor in the sharp increase in European automobiles sold in South Korea than is the phase-out of the 8% customs duties.

Yoon agrees the free-trade deal has been beneficial, but says measuring the size of its impact is difficult.

As an example, he says, about 80% of vehicles imported to South Korea in 2014 were diesel-powered while Hyundai, the country’s biggest automaker, avoided development of diesel cars because of its focus on exporting cars to the U.S. until 2003. That has given European automakers a competitive advantage in the diesel-vehicle market.

John Schuldt, chief marketing officer for Ford Korea, says the free-trade deal has benefited both the automaker and Korean consumers.

“The FTA between South Korea and the EU has offered Korean consumers a great choice of Ford vehicles at very competitive prices,” he says. “The FTA has allowed Ford Korea to bring in diesel products (the company) thinks will do well (in the South Korean market).”

Korean Automakers Ready to Take on Imports

With imported vehicles holding a 13.9% share of the South Korean market in 2014, KAMA’s Kim says the competitiveness of Korean automobiles, both domestically and overseas, is being challenged. However, with South Korea’s proliferation of free-trade deals (also with the U.S., for instance), he says “new business opportunities and competitiveness will follow.”

The EC report on the EU-South Korea trade agreement’s third year in effect – mid-2013 through mid-2014 – says EU exports of motor vehicles to the Asian country increased 90% compared with the 12-month period before the FTA – mid-2010 through mid-2011. Exports rose from €2 billion ($2.16 billion) and 74,600 units to €3.8 billion ($4.1 billion) and 141,800 units.

At the same time EU imports from South Korea grew 53% from €2.6 billion ($2.8 billion) to €4 billion ($4.3 billion) as the number of units rose 25%, from 300,000 to 375,000. However, most of that increase occurred from July 2010 to June 2011, the yearlong period before the deal came into force. South Korean exports to the EU generally have plateaued since then.

A similar picture emerges on car parts. EU exports to South Korea rose 6% to about €1.1 billion ($1.2 billion) in the trade deal’s third year, compared with the 12 months before it kicked off, but imports of South Korean parts leaped over 20%, from €2.2 billion ($2.4 billion) to €2.6 billion ($2.8 billion) .

The European Automobile Manufacturers’ Assn., responding to the EC report, says the upward trends in EU exports “reflect shifts in consumer tastes that predate the implementation of the FTA” and contends the trade balance “remains strongly favorable to the Asian partner.”

The trade group continues, “longstanding (South) Korean non-tariff barriers remain which are costly and burdensome for European manufacturers, while new barriers have emerged.”

Speaking April 2 at the Seoul Auto Show, Klaus Braunig, managing director of Germany’s Association of the Automotive Industry cited a rise in South Korean imports of German models that was under way before the trade pact took effect mid-2011.

Braunig notes German models dominated South Korean imports, accounting for 73% of all imports and 86% of premium cars. The top three imported models are German: the Volkswagen Tiguan 2.0 TDI BlueMotion, the BMW 520d and the Mercedes-Benz E220 CDI.

“The free-trade agreement has reduced the already relatively low import duties. But that on its own does not explain the impressive success of our manufacturers,” Braunig says. “German exports to Korea were climbing even before the FTA came into force. For example, in 2010 alone the value of exports of German passenger cars more than doubled in comparison with the previous year.”

Despite the trade agreement’s benefits, Braunig says “there are still some areas needing additional work” on reducing non-tariff barriers in South Korea, including “an elaborate certification system for motor-vehicle parts” the Asian country introduced after the agreement’s adoption. EU certification is not accepted in Korea, he says in calling for mutual recognition.

– with Walter Foreman in Seoul