The Peninsula

Impact of the U.S. and EU FTAs on Korea

By Troy Stangarone

In recent days there has been significant discussion on the impact of Korea’s FTAs with the United States and the EU. The agreement with the EU has been in place almost a year now after having gone into effect last July 1, while the KORUS FTA has only been in effect since March 15.

While the desire to determine the impact of each agreement is understandable, it is likely far too early to determine what the long-term impacts from the two agreements will be. In the case of the agreement with the United States, a few months’ data are largely insignificant for drawing any hard conclusions, while in the case of the EU; Europe has faced significant economic headwinds from the euro crisis that have affected the prospective gains from the agreement.

Perhaps unsurprisingly given the economic conditions, Korea has seen an increase in exports to the United States and a decrease in its export to the EU. Exports to the U.S. in the first 100 days of the agreement were up 8.4 percent, while exports to the EU from July 1 of 2011 through June 15 of this year were down 12.1 percent. At the same time, EU exports to Korea are up 13.5 percent, while the United States has seen a drop of 6.3 percent in its export to Korea.

The euro crisis has clearly impacted trade with Korea in recent months. Through the first three months of 2012, exports to the EU are were down by 38 percent in January and 20 percent in March from the same months in 2011. While it is not surprising that exports to Greece, Italy, Spain and other countries caught up in the euro crisis are down, even exports to Germany which has been the strongest economy in the euro zone are down 14 percent in March. In 2009, when the global financial crisis was at its height, Korea’s exports to the EU were down by 20 percent.

When it comes to Korea’s increased imports from the EU, there are a couple factors to consider. In the last year, the won has appreciated against the euro by about a 100 won, making imports items from the EU slightly cheaper beyond the tariff cuts that have been in place. Additionally, as Korea sought to diversify its energy imports away from the Middle East, especially with the current stand-off with Iran, oil imports from the EU rose from zero to $1.58 billion.

At the same time, the Korean Fair Trade Commission has been tracking price reductions on goods covered by tariff cuts to see how the savings are being passed along to consumers. In a survey of 22 bestselling imports, the commission found that there have been price reductions on 15 of the 22 items.

Because of the economic uncertainty in Europe and other parts of the world, the EU and US FTAs have likely helped to minimize what might otherwise have been larger reductions in Korea’s broader global export profile. At the same time, it will be difficult to draw any conclusive results from these agreements until the global economic situation stabilizes and they have more time to be put into effect.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

Photo from Ronnie MacDonald’s photo stream on flickr Creative Commons.