After the Free Trade Agreement (FTA) with the European Union (EU), Korea has recorded trade deficits for two consecutive years. Since June 2011, when the FTA came into effect, imports have outpaced exports. As tariffs on automobiles, one of the major imported goods, will be additionally downscaled beginning from July 1, the trade deficit amount might become greater.
According to the “Korea-EU FTA 3rd year Trade and Investment Trend” reported by the Ministry of Trade, Industry and Energy on June 29, exports to the EU increased 7.8 percent to US$47.3 billion during the 3rd year of FTA (July 2013 - May 2014), relative to the same period of the previous year. Exports to the EU decreased 12.2 percent and 4.8 percent, during 1st and 2nd year of the FTA, respectively, but increased for the first time during the 3rd year. In particular, exports from small and medium-sized companies, which decreased for the first two years of the FTA, increased 14.1 percent during the 3rd year. This is a very positive signal.
However, imports increased even more. During the 3rd year, imports from the EU increased 12.5 percent to US$54.7 billion compared to the previous year. This created total trade deficits of US$7.4 billion, which is US$2.8 billion more than the 2nd year’s trade deficits of US$4.6 billion.
The Ministry of Trade, Industry and Energy analyzes that demand from Europe has been shrinking due to the European financial crisis. As the employment rate of the entire EU reached 10.4 percent last April and consumer confidence is still below the base standard 0, demand is not reviving. The depreciation of the euro and appreciation of the won can also be a reason for the trade deficit. The won-euro exchange rate dropped 7.2 percent after the Korea-EU FTA. A source at the Ministry of Trade, Industry and Energy explained, “After the FTA, the trade conversion effect in which machinery was originally imported from Japan but now imported from Europe has appeared, and crude oil imports from the North Sea also increased due to Iran sanctions from the U.S.”
The trading industry points out that the trade deficit amount might become greater as additional tariff cuts on European automobiles starting from July 1. Cost effects of a 0 percent tariff on medium and large-sized cars, which is now 1.6 percent, will vary approximately from 600,000 won to 1,200,000 won (US$593 to US$1186) by type of car. The government subsidy on low carbon automobiles starting from next January will also support exports of European cars.
In addition, tariffs on 662 other ex-EU products including glasses, whiskey, and medical products will be lowered, and tariffs on vehicles lower than 1,500 cc, bearings, pure wool fabrics, pork belly, and mackerel will additionally be decreased.
The government analyzes that the FTA effects are gradually appearing in Korea as an increase in Korean exports to the EU outgrows other competing countries such as the U.S., China, Japan, and Taiwan. Looking at the existing EU import trend from July 2013 to March 2014, imports from Korea increased 4.9 percent compared to the previous year, surpassing Japan (-8.0 percent), China (-0.2 percent), and the U.S. (-1.7 percent). Due to the FTA effects, Korea is doing well in the EU market.