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Korea-EU FTA and Corporate Response

Korea-EU FTA and Corporate Response

LEE Jong-Kyu

Nov. 23, 2010

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Originally released on October 6, 2010

The Korea-EU Free Trade Agreement was signed on October 6, 2010. If the FTA is ratified by Korea's National Assembly and the European Parliament, it will go into effect on a tentative basis on July 1, 2011, even without being ratified by the parliament of each European Union member. Tentative effectuation has similar effect to official effectuation since it involves most of the FTA agreement, including the provisions on tariff reductions.

The EU overtook the US in importing Korea's manufactured goods in 2005 and is emerging as the biggest export market for Korea's manufacturing sector. Manufactured items account for 94% of Korea's total shipments to the EU, and are expected to increase by 4.2-6.0% thanks to the FTA. Against this backdrop, Korean companies need to thoroughly analyze their prospects and take advantage of export opportunities that the FTA will produce. To this end, Korean manufacturing companies should explore how to respond from the following perspectives.

① Differentiated Response by Business Type

Companies should be ready to adjust according to how the trade pact will affect their current competitiveness and operations. Companies expecting the FTA will boost their competitiveness could take an active approach while those who expect their competitiveness to be hurt by the FTA could explore a survival strategy through government backup or M&A. Companies that are able to divide labor could cut production costs by expanding the scope of cooperation with EU companies and should secure core competitiveness.

② Maximum Leverage of the Tariff Reduction Effect

Companies should maximize use of the cost-saving effects stemming from the absence of tariffs. Preemptive efforts should be made to get acquainted with the schedule of tariff eliminations. Measures should be prepared to increase market share in the EU market on a mid- and long-term basis, i.e., using the saved expenses as marketing expenses or R&D investment.

③ Preparations to Cope with Rules of Origin

To leverage the reduction in tariff rates, companies need to honor rules of origin, which ensure goods are actually made in the EU and Korea. They will need to create a monitoring system to observe the complex rules. Also needed is a review of business feasibility and a secure production system.

④ Overcoming Non-Tariff Barriers through Cooperation With EU Firms

Despite the abolition of tariff, chances are high that EU members will maintain non-tariff barriers such as requirements to use a certain ratio of local parts, environmental regulations and technological standards. Given that the EU is the world's largest market in renewable energy and plays a leading role in technological standards, efforts should be made to overcome non-tariff barriers, as well as, to accumulate know-how through active cooperation with EU firms.

⑤ Deeper Understanding on EU's Business Environment

The EU market features a high level of mutual dependency among member countries plus a diverse range of consumer preferences. Amid sustained low growth, European consumers are become more selective and careful. Companies should employ more flexible business strategy to better meet the change in economic conditions.

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