KOREA FOCUS

The European Union (EU) consisting of 27 member states with a combined population of 500 million is the world`s largest market boasting a combined gross domestic product of US$17 trillion. The EU is also Korea`s second-largest trading partner after China. The EU`s import tariffs for major Korean export products are generally high. Within three years of the enforcement of a bilateral free trade agreement (FTA), more than 96 percent of the EU`s import tariffs for Korean goods will be eliminated, meaning that a number of Korean enterprises will win economic benefits from the EU-Korea FTA. But considerable parts of the FTA-related economic benefits would be linked to the restructuring our manufacturing sector.

 

FTA-related economic benefits can hardly be expected without smooth industrial restructuring. With the formation of FTAs with mega-economic blocs like the EU in mind, the Korean government enacted the Trade Adjustment Assistance Act (TAA) in 2005 to help Korean firms cope with the increased competition that results from FTAs. The legislation became effective in April 2007. At that time, the Korean government imposed strict standards for TAA beneficiaries due to concerns over budgetary restrictions and moral hazard. For instance, companies are eligible for TAA benefits only when they can prove a sales drop of more than 25 percent in the wake of market opening.

 

Over the past two years, five firms have applied for TAA benefits and four of them have qualified. In this regard, several problems have been raised. Critics say that far fewer companies than expected have sought TAA benefits because of the difficulties in meeting qualification requirements for the special assistance. They also say an extraordinarily long period of time between application and actual provision of assistance has frustrated potential applicants. The reason for the widespread corporate indifference to the TAA program is that the formation of FTAs with the United States, Japan and other mega-economic blocs, which was anticipated in the legislative process, has yet to materialize. Moreover, tariff concessions in FTA deals signed with the Association of Southeast Asian Nations and other economies were not satisfactory, reducing the chances of actual damage to Korean companies. But domestic industrial sectors are still vulnerable to damage, as an FTA with the EU is expected to be concluded ahead of FTAs with the United States and Japan, paving the way for a surge in imports from the 27 EU member states armed with advanced industrial structures.

 

If each of the 27 EU member states has world-class competitiveness in 10 industrial items, for example, Korean firms in at least 270 industrial fields could become eligible for TAA benefits. Following the news of a virtual conclusion of an FTA with the EU, many raised concern about damage to Korean producers of pork and dairy products and called for relevant countermeasures. Most frozen pork bellies consumed in Korea are imported, with European products accounting for more than three-fourths of the inbound supply here. Therefore, the government needs to devise measures to blunt negative effects of a Korea-EU FTA. The government has to entirely review budgetary assistance to agriculture, as well as the TAA programs, while establishing feasible systems to help enterprises and farmers receive compensation for damage caused by free trade deals and speed up restructuring.

 

Above all, the government should rationalize the application and approval procedures for TAA benefits after studying the cases of the United States and other countries. The revisions should be designed to prevent moral hazard and facilitate assistance to firms that suffer damage from free trade deals. The government`s support should be revamped into restructuring consulting services and its support policy towards small and medium-sized businesses should be revised to have FTA-related trade losses included among targets of the small business consulting coupons project. The Korean government has pumped 1.2 trillion won into the agriculture sector, following the implementation of the Korea-Chile FTA. An additional 200 billion won has been spent on various agricultural projects annually, regardless of actual damage. The government needs to revise relevant laws to divert budget leftovers to compensate for agricultural sector damage caused by a Korea-EU FTA. It should also seek ways to utilize budgets earmarked for other agricultural support programs and secure additional budgetary money.

 

[ Korea Economic Daily, July 16, 2009 ]